Governor Newsom's Budget Revision Debrief

by L.A. Area Chamber

Governor’s Budget – May Revise Debrief

Governor Gavin Newson released a revised budget to his original $203.3 billion budget for fiscal 2020 – 21.  The “May Revise” attempts to close a $54 billion deficit over a period of three years. The Governor highlights his priorities as protecting public health, public safety, public education and aiding small business. He proposes a budget that attempts to provide support to Californians while trying to rebuild the economy.

In January, California had a budget surplus of $5.6 billion that was projected for the 2020-21 fiscal year and revenues in March were $1.3 billion above projections. The COVID-19 pandemic has shattered our economy and created an economic crisis leading to massive job losses. The industries that were more strongly hit were the hospitality, retail and leisure. Revenues are projected to decline by $41 billion. The Governor is projecting an unemployment rate of 24.5 % in the second quarter and a decline in personal income of 9%.

Given that California had a decade of a strong economy and prudently building a reserve for an economic downturn, our State leaders are in a better position to manage the deficits. Governor Newson attempts to balance the budget by cutting new programs and spending from the 2019 budget, draw from reserves, borrow funds and temporarily increase revenue. The budget also assumes significant support from the CARES Act, HEROES Act and support from other federal programs. The federal government’s role is integral to California’s fiscal picture. The deficit is projected to be $16 billion by 2023-24.

Proposals to Balance the Budget

• Cancel $6.1 billion in programs and increases in spending.
• Utilize $16.2 billion from the Rainy Day Reserve over three years.
• Borrow $4.1 billion in special funds.
• Limit tax credits to $5 million per taxpayer will generate $4.4 billion in 2020-21, $3.3 billion 2021-22 and $1.5 billion in 2022-23.
• Support of $8.3 billion from Federal Government.

The May Revise contains tax increases, adjustments and extensions

New Proposed Taxes

• Maintains a new tax on e-cigarettes based on nicotine content and will be deposited in a new special fund.
• Used car dealers must remit sales tax to the Department of Motor Vehicles with the registration fees.
• Use of market value is required for determining price for private auto sales.

Tax Adjustments

• Temporarily Suspends Net Operating Losses and limits business incentive tax credits including the R&D tax credit for 2020-22 for medium and large businesses and limits business incentive tax credits from offsetting more than $5 million of tax liability 2020 – 22.
• Delays cannabis tax collection.

Maintains Three General Fund Tax Offsets

• Extending the sales tax exemption for diapers and menstrual products through the end of 2022-23.
• Extending the carryover period for film credits awarded under Program 2.0 from 6 years to 9 years.
• Extending the current exemption from the minimum tax for first year corporations to first year LLCs, partnerships, and LLPs.

Budget Tax Proposals

• Earned Income Tax Credit- Maintains the proposed expanded levels of the Earned Income Tax Credit consistent with the January budget.
• Minimum Wage- Scheduled increases for minimum wage are preserved.

Small Business and Economic Development

The Governor recognizes the significant value business brings to the economy, four million businesses in the State are responsible for employing approximately half of the private workforce.

• $50 million increase in the California Infrastructure and Economic Development Bank small business finance center to offer guarantee program to be leveraged with banking institutions and philanthropy to provide much needed capital.
• Maintains the small business technical centers at $758,000 that are administered by the Governor’s Office of Business and Economic Development to provide technical assistance to serve the underserved small businesses in the Inland Empire and Northern California.

Next Steps

The Chamber will continue to examine the revisions of the January Budget. Constitutionally, the Legislature must approve the budget by June 15^th, resulting in a potential unknown related to projected revenues due to the delay of the personal income tax filing until July 15^th. .