Gov. Gavin Newsom’s revised budget proposal, which he is expected to introduce Friday, sets the stage for a month of bitter debates over how to fill a multi-billion-dollar budget deficit in the upcoming fiscal year.
Options on the table could include more delayed funding or outright cuts to programs, borrowing money internally or closing prisons. Some lawmakers are also pushing a plan to raise corporate taxes — a prospect that Newsom has already said he won’t support.
“I think one of the most important things to understand is there is no silver budget,” said Scott Graves, director of research at the California Budget & Policy Center. “There are lots of ways of solving a shortfall. It doesn’t have to be cuts.”
Newsom in January released his $297 billion spending plan for 2023-24 and projected the state would face a $22.5 billion deficit.
But state revenue collected since then has lagged behind projections. And financial issues at the national level, including an unresolved standoff over the federal debt limit, rising interest rates and banking instability, stand to grow the state’s shortfall.
The Legislature must approve a new budget by mid-June.
How will Gavin Newsom fix California’s budget problem?
Newsom’s original 2023-24 budget proposal called for cuts in transportation and climate initiatives, deferred spending on capital improvements and a series of “trigger reductions” that could be restored if economic conditions improve. The governor refrained from tapping into state reserves in case a recession hit and the state’s fiscal position worsened.
Consistent with his January proposal, Newsom is unlikely in his May revision to propose any drastic cuts to social services or some of the state’s largest priorities, including health care, education and homelessness.
Democrats in the state Senate last week released their own detailed proposal for addressing the deficit. The 38-page plan, titled Protect our Progress, included a bold proposition to cut taxes on small businesses and raise the state tax rate on major corporations, such as Coca Cola and Walmart.
Senate Budget Chair Nancy Skinner, D-Berkeley, said during an April budget press call the tax increase would affect only the biggest corporations, or 2,500 total companies.
She framed the corporate tax hike as a partial reversal of federal cuts former President Donald Trump signed into law in 2017. Skinner said the increases represented a chance for California to take the lead on rolling back those tax breaks, as national leaders refuse to do so.
“Back in D.C., we’ve got House Speaker Kevin McCarthy blocking President Biden’s efforts to partially reverse those Trump tax cuts,” Skinner said. “And, meanwhile, McCarthy and others are holding the nation and world economies hostage demanding economy-killing cuts to recently-enacted climate, safety net and infrastructure investments.”
The Senate Democrats’ plan, which would raise billions of dollars annually for the state, sets the stage for a robust debate over the next month over the merits of using taxes as an avenue for helping to fix the state’s budget problems.
The Newsom administration has already rejected the idea.
Anthony York, a spokesperson for the governor, said Newsom would not support any new tax increases or “massive ongoing spending.”
“It would be irresponsible to jeopardize the progress we’ve all made together over the last decade to protect the most vulnerable while putting our state on sound fiscal footing,” York said in a statement.
Democrats divided over tax hikes
Publicly, the Assembly Democratic caucus has remained silent on the matter, refraining from comment on the Senate’s proposal. The caucus has not offered its own plan, aside from a budget blueprint members put forward in December.
Privately, however, moderate and progressive Democrats are split over the corporate tax cuts. The Sacramento Bee obtained letters moderate Assemblywoman Jacqui Irwin, D-Thousand Oaks, and progressive Assemblyman Alex Lee, D-San Jose, sent to Assembly Budget Chair Phil Ting, D-San Francisco, outlining both sides of the debate.
Lee’s letter suggests the Assembly “mirror or adopt a similar approach to the Senate Budget Proposal,” including corporate tax hikes, tax breaks for small businesses and “working class Californians” and restored funding for “critical investments.”
Irwin’s letter criticized the Senate’s plan to raise taxes, saying it would “jeopardize our state’s long-term economic stability.”
“We aren’t currently in a recession, but we certainly could be headed into one,” Irwin said in an interview. “And I think we have to be really insistent in living within our means.”
“If we expect businesses to invest in California, we need to provide more stability, not less,” she added.
A battle to reverse proposed climate and transportation cuts
To fill the projected $22.5 billion deficit anticipated in January, Newsom proposed significant cuts to climate initiatives and transportation projects. That included a $1.1 billion reduction in funding for zero-emission vehicle programs over five years and paring back $2 billion for future transit construction projects.
Asked then why he targeted these two sectors, the governor cited the magnitude of the budgets, calling them “unprecedented.”
Transit and climate advocates have spent the past four months lobbying legislators and the Newsom administration to reallocate funds so that transit agencies, struggling with declining ridership since the pandemic, can operate.
“Ending subsidies for the oil and gas industry is consistent with the state’s climate goals and could provide an important alternate source of revenue to continue to ensure California leads the way in staving off the worst impacts of climate change,” leaders from more than two dozen environmental groups wrote in a letter to the governor on Tuesday.
The Senate Democrat’s budget plan adopted several of the advocates’ recommendations. It included rejection of proposed cuts and delays in funding for the climate and transportation sectors and allowing transit agencies to use funds for operations as a bridge until a permanent fix is identified.
Michael Pimentel, executive director of the California Transit Association, a nonprofit trade organization representing California’s transit industry, called the Senate’s support “the clearest sign of progress.”
Although Pimentel doesn’t know what the governor’s revised budget will entail, the administration is hosting two listening sessions with transit agencies this week to explore proposals for addressing their near-term problems. While it’s unlikely those proposals would be reflected in this week’s proposed budget plan, the conversations could shape the final budget that must be passed next month.
