CSP Legislative Report

November 19, 2009

The California Legislature is once again looking at a massive budget deficit in the coming fiscal year according to the just released Fiscal Outlook from the non-partisan Legislative Analyst Office (LAO). The LAO is the entity responsible for advising the Legislature on the State Budget. According to the LAO, the total budget deficit the Legislature would need to address before July 2010 is projected to be close to $21 billion. This deficit is made up of a $7 billion structural deficit that was built into the 2009-10 State Budget which, if unaddressed, would grow to $14 billion in the 2010-11 State Budget. Added to that is an additional $6.3 billion that is a result of faulty budget assumptions made in the 2009-10 State Budget.

For many, it is easy to ignore another story about California's ongoing budget problems. There have been consecutive multi-billion dollar budget deficits dating back to 2002 and another report or news story is so common that it is hard for many to care. However, members of the California Staffing Professionals (CSP) should pay close attention to this issue in the coming months because how it is resolved will affect the bottom line of their business.

As stated above, the non-partisan LAO advises the Legislature on the State Budget, which means the LAO is required to identify and recommend solutions for closing the budget deficit. The just-released Fiscal Outlook provides preliminary recommendations that will be unpopular with Republicans and Democrats. For example, the LAO acknowledges that difficult cuts in spending were made in the 2009 State Budget but that it was not enough. The LAO says that the Legislature must re-prioritize spending and that "significant cuts in all major state programs" are needed. The LAO argues that the same re-prioritization must be done on the revenue side as well. The LAO recommends continuing the temporary tax increase to the Vehicle License Fee and the Dependent Exemption credit, which were adopted in previous years and set to expire. The LAO also recommends closing certain tax exemptions and tax credits in order to avoid a general increase in marginal tax rates.

The idea of an increase in tax rates usually ends right where it begins. Because of the 2/3 vote requirement for legislation imposing a tax increase, bills proposing such an increase fail or are simply introduced for political reasons. However, given the dire situation described above and the comment by the LAO that revenue increases should be considered, members of CSP and the business community in general should be very concerned.

As we have previously reported, the Governor's Tax Commission, known as the Commission on 21st Century Economy (COTCE), has proposed a sweeping change in tax policy in California. The Commission adopted a package of tax proposals that include a "value added tax" called the Business Net Receipts Tax (BNRT) that would tax the provision of services as well as goods. Under this new tax, net receipts would be determined by aggregating gross receipts from sales of products, services, or use of property and then subtracting all purchases. While we think the BNRT idea would have a tough time passing the Legislature, it is possible that this idea could be packaged with some tax relief and presented to the Legislature as a "revenue-neutral" proposal and could possibly be passed on a majority vote.

Unemployment Insurance (UI) program. As members of CSP know from previous reports, the UI program is a Federal-State program providing weekly UI payments to eligible workers who have lost their jobs through no fault of their own. It is a program entirely financed by a tax on employers. According to the LAO, the UI fund is insolvent with a current deficit of $7.4 billion that is forecast to grow to $18.4 billion in 2010. The State is borrowing from the Federal Government to meet its obligations to UI claimants, however this borrowing comes with interest.

There has been legislation introduced to address the insolvency, but there hasn't been any hearings nor negotiations toward a solution. As stated above, the UI fund is supported entirely by a tax on employers. Therefore, it is likely that a proposal to make the fund solvent will include a tax increase on employers. The level of the tax increase will hinge on the negotiations to reduce benefits and eligibility. CSP has a major stake in the UI fund and will be part of any negotiations on UI reform.