Top California Democrats drafting next year’s state budget are vowing not to raise taxes on middle and lower income Californians, setting up a conflict over fees supported by lawmakers and Gov. Gavin Newsom.
In a summary of the state Senate’s budget priorities released Thursday, Senate President pro tem Toni Atkins, D-San Diego, announced there would be “no new taxes on middle and lower income Californians.”
That could signal a disagreement between senior Democratic lawmakers and the governor over Newsom’s proposal to provide ongoing funding for drinking water improvements in communities with unhealthy water.
Critics have called the plan a “water tax,” and a Senate committee earlier this month advanced a proposal that would pay for the water system upgrades without a new fee.
The Assembly’s top budget writer, Assemblyman Phil Ting, D-San Francisco, said the two chambers will spend the next few weeks working with Newsom’s administration to decide how to best fund the proposal.
“The whole issue of taxes and fees needs to be discussed,” Ting said. “There hasn’t been much discussion between the three parties.”
He added, “Water’s not really a tax; It’s a fee. The challenge is how much to charge the people who polluted the water.”
Budget Committee Chairwoman Sen. Holly Mitchell, D-Los Angeles, agreed with Ting’s characterization of the water fund as a “fee.”
Newsom’s budget included two other items that could be considered as raising taxes and fees. One restores the requirement for residents to buy health insurance and imposes a penalty on those who don’t. The so-called individual mandate was part of the federal Affordable Care Act until Congress revoked it in 2017.
Separately, Newsom’s budget would raise taxes on some businesses by reducing some of their opportunities to write off losses. He’d use money raised from that change in the state tax code to put more money in the pockets of lower-income Californians by giving them expanded tax credits.
Despite the “no new taxes” promise in the Senate version of the budget, Mitchell acknowledged there are bills under consideration outside the budget that could raise taxes.
“There are a number of vehicles out there, and we’ll see happens,” Mitchell said.
By law, the Legislature must send a budget for Newsom to sign by June 15.
Outside of the budget, at least four bills are still in play that could raise taxes and fees. Among the few surviving bills are ones that would raise revenue by imposing agricultural and tire fees and eliminating some of the state’s tax exemptions.
“The Senate plan shows that California’s economy is strong, and the existing tax structure has generated a large operating surplus, healthy reserves and revenue to fund education at a record high,” California Taxpayers Association President Robert Gutierrez said. “The governor and Legislature should be mindful of any legislation that would jeopardize the economic growth that has been pumping revenue into the state treasury.”
The Assembly’s budget proposal released Wednesday includes a notable break from Newsom and the Senate. It would boost the state’s reserves to $20.8 billion — $1.3 billion more than the updated budget Newsom unveiled in May and the newly announced proposal from the Senate.
“Reserves are important,” Mitchell said of the Senate’s version. “We support what the new governor put forward. We wanted to in California as well. It’s as if we made a decision not to add reserves.”
The Assembly’s version allows the state to save more money to address a future recession. The nonpartisan Legislative Analyst’s Office urges lawmakers to build up more in reserves than the $19.5 billion Newsom proposed.
“The state’s plan for responding to a recession should focus — first and foremost — on building budget reserves,” the office wrote in its latest report. “Building reserves is the most reliable and effective method for preparing the budget for a downturn. As such, we recommend the Legislature dedicate a larger portion of the surplus to discretionary reserves, as it has done in recent budgets.”
Ann Hollingshead, who wrote the report, said California would need $20 billion to $40 billion to prepare for a mild to moderate recession. The LAO does not recommend a specific level of reserves.
“Given the extraordinary scale of the surplus currently available, we think the state should seize this unique opportunity to robustly prepare for a recession now,” she wrote in a budget analysis earlier this month.
On Friday, Democratic leaders named 10 members onto a conference committee to square differences between the budgets from Newsom, the Senate and the Assembly. Mitchell said the $19.5 billion the Senate and Newsom proposed for reserves “could be open to negotiations.”
Despite recession fears, Ting believes California is on much safer ground.
“We’re much better prepared than the last recession,” Ting said. “It’s difficult to prepare for the unknown, but we’re doing everything we can.”