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Wednesday, May 19, 2010

California The 2010-11 Budget: Overview of the May Revision

In the May Revision, the administration identifies a $17.9 billion gap between current-law resources and expenditures in California's 2010-11 General Fund budget. This estimate is reasonable.

In addressing the shortfall, the Legislature should reject the Governor's most drastic spending cuts, especially his proposed elimination of CalWORKs and child care funding. Alternative spending reductions could help sustain critical components of these core programs for the state's neediest families, and some of the Governor's most severe cuts could be avoided by adopting selected revenue increases.

The report also describes the Legislature's options in deciding how much education spending the state can afford in this difficult budget year, when elected leaders also need to focus on longer-term policy changes that will better prepare California to cope with future economic downturns.

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  • Targeted Tax Rate Increases. Finally, we have suggested the Legislature could consider targeted tax rate increases. Given the fragile state of the economy and the level of these taxes relative to other states, we discourage increasing the state’s broad–based big three taxes (personal income, sales and use, and corporation taxes) above their current levels. We have, however, suggested two proposals that would raise other tax rates while adhering to sound tax policy principles. First, many economists believe that taxes on alcohol do not fully compensate for the societal costs associated with drinking. Since alcohol tax rates have not been updated for inflation since 1991, such an adjustment could produce over $200 million of General Fund benefit. In addition, we suggest permanently aligning the VLF—currently increased temporarily under provisions of the February 2009 budget package—with local property tax rates, as it represents a tax on property.

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