California Lawmakers Send Brown Budget With No Tax Extension

California’s Democrat-controlled Legislature sent Governor Jerry Brown a spending plan without extending tax increases, meeting the legal deadline to pass a budget for only the second time in 25 years.

The plan approved yesterday covers a $10 billion deficit with $4 billion siphoned from schools and children’s programs, optimistic revenue projections and the sale of state office buildings that Brown previously rejected. It calls for online retailers such as Inc. to collect $200 million in sales taxes and boosts auto registration fees by $12.

California, the largest U.S. borrower in the municipal bond market, has the lowest credit rating for any state from Standard & Poor’s after years of late budgets and gaping deficits. Brown, a 73-year-old Democrat, has vowed to fix that. He asked lawmakers for a statewide vote to extend more than $9 billion of expiring tax and fee increases to fill the gap. The referendum needed the approval of two-thirds of lawmakers, more than Democrats could muster.

“This budget is not our preference,” Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento, said prior to the vote. “The governor has pushed for another plan and we support that plan, and maybe and hopefully that can still get done.”

Brown, who has railed against similar techniques used to paper over deficits in the past, hasn’t said whether he will sign the package. He began the year facing a $26 billion deficit through June 2012. Spending cuts passed in March and better-than-expected revenue narrowed the deficit.

Simple Majority

Democrats in the most-populous U.S. state were able to pass their plan with a simple majority, thanks to a voter initiative that lowered the threshold from two-thirds. Voters also stripped lawmakers of salary and per-diem pay for every day they failed to meet the June 15 deadline for passing a spending plan for the year beginning July 1.

The budget delays $3 billion in school funding from next March until July. It also collects $1.2 billion by selling state office buildings and leasing the property back.

It also raises about $300 million by adding $12 to the cost of vehicle registration, and gets $900 million by adjusting the local sales-tax rate, which is scheduled to drop by 1 percentage point, to retain a quarter of that amount.

The notion of selling state office buildings revives a plan approved by lawmakers and Governor Arnold Schwarzenegger in October. Brown canceled the sale in February, saying it was an example of the budget gimmicks he intended to end.

Redevelopment Agencies

The Democrats turned down Brown’s plan to close more than 400 redevelopment agencies and divert $3 billion a year to schools and local governments. While the budget allows the anti-blight agencies to remain open, it requires them to turn over about $1.7 billion next year and about $400 million annually thereafter. Courts have ruled similar raids aren’t permitted under the state constitution.

The budget plan also counts on sales-tax collections by online retailers including Amazon on Internet purchases by state residents. Amazon, the world’s largest online retailer, has threatened to sever ties with more than 10,000 affiliates in California over threats to impose the levies.

“Another sham budget was foisted upon the people of California, this time by a simple majority vote,” said Senator Doug LaMalfa, a Richvale Republican. “Make no mistake, this budget increases taxes without a vote of the people, increases spending beyond our income and plays games to fake being balanced.”

Governor’s Plan

Brown sought voter approval to retain a 1 percentage-point boost in the retail-sales levy, to 8.25 percent, and a 0.5 percentage-point increase in vehicle-registration fees to 1.15 percent of value. Brown also wanted to extend a reduction of the annual child tax credit to $99 from $309. All were put in place in 2009 and are set to expire by July 1.

Negotiations with Republicans over a June ballot faltered in March. Brown then asked lawmakers to directly extend the taxes until voters are given a chance to decide, possibly as soon as September.

“We’re really not seeing any structural changes, it’s kind of status quo,” said Konstantine “Dino” Mallas, manager of the T. Rowe Price California Tax-Free Bond Fund, in a telephone interview from Baltimore yesterday. “We’d like to see more substantive changes to the budget.”

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