Budget Plan: Fiscal Stability Now, Future Search for New Funds

In his recently released state budget proposal, Governor Gavin Newsom made two important and supportive statements on California’s business and economic climate.

First, he reinforced the need for state fiscal stability. While enjoying the benefit of more than $20 billion in surplus revenues, he chose to direct most of the surplus either to bolstering the Rainy Day reserve, paying down debts, or spending on one-time programs or capital projects. In times of manifest economic uncertainty, the Governor’s prudent allocation of tax revenues will pay off during the inevitable downturn, minimizing the need to increase taxes or cut education or safety net spending.

Second, he underlined his commitment to producing more housing for all income levels. The undersupply of housing is the biggest driver of California’s high cost of living, and therefore the state’s high poverty rate. Housing affordability also discourages in-state business growth and punishes workers with long commutes.

The Governor’s consistent commitment to fiscal prudence and housing production will strengthen the state’s economic foundation.

Several other budget proposals are noteworthy because their ultimate shape may directly affect the ability of businesses to grow in California.

Working Families Tax Credit

Known now as the state Earned Income Tax Credit (EITC), this tax break is aimed at working families near the poverty line. Modeled on a federal credit, the EITC helps reduce pressure to mandate higher wages and benefits for private sector workers.

The Governor proposes, not just a name change, but to increase the credit for young families and to expand the reach to more full-time workers. The cost would increase from about $400 million to $1 billion annually. The Governor proposes paying for the increased cost of the Working Families Tax Credit by eliminating several tax deductions allowed corporations by state law that were recently eliminated in the federal tax reform bill.

Expanded Paid Family Leave

As part of his focus on early childhood success, the Governor has set a goal of “ensuring that all newborns and newly adopted babies can be cared for by a parent or a close family member for the first six months.”

The current program allows workers to take up to six weeks paid leave, financed by the State Disability Insurance (SDI) program, which is funded by a payroll tax on workers. The administration proposes an initial small expansion in the leave program, paid from surplus SDI funds. The path to a full six-month expansion of paid leave, and how that would be financed, will be examined by a yet-to-be appointed task force.

No General Tax Increases

The Governor’s budget does not depend on any general tax increases, or taxes targeted at businesses (other than the elimination of several tax deductions, referenced above).

However, the budget does identify the need to increase revenues to pay for the long-term expansion of several priority programs highlighted by the Governor.

Universal Preschool

The Governor has proposed universal pre-school as a top policy priority, “that all children have access to a high-quality preschool program before they begin kindergarten.” As a first step, he has proposed $125 million to provide access to preschool for all low-income four-year-olds.

Looking ahead, the administration will develop a plan to achieve universal preschool, tackling facilities, workforce, and “to identify revenue options to support universal access.” These options are left unidentified for now, but based on prior proposals, the price tag would be steep and would likely require substantial tax increases or changes in budget priorities.

Expanded Child Care

Similarly, the Governor has proposed to increase the quality and availability of child care by providing a substantial investment of one-time money to upgrade subsidized child care facilities and child care infrastructure at state colleges.

Looking ahead, the Governor has ordered a long-term plan to “provide a framework, including options to generate needed revenues, to implement a comprehensive, high-quality child care system in California … [that] reflect the principle of shared responsibility and outline the appropriate role for government, businesses, and parents in meeting child care needs.”

Government surpluses and prudent budgeting obviate the need for tax increases in the short term, but the administration’s ambition to expand child-centered services will apparently motivate future discussion over new taxes or other revenues.

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