by Sheila Kuehl
March 21, 2009   

This is the third in a series of essays on the legislature's actions related to California's 08-09 and 09-10 budgets from the time 08-09 was finally adopted in September of 2008 until both were finally modified and adopted in February of 2009. 
My first essay on this subject detailed steps taken in October and early November because of the need to immediately amend the budget adopted in September of last year.  The second essay detailed failed votes and drastic cuts in outlays. This essay sets out the adoption by majority Democrats in both houses, on December 18, 2008, of majority-vote budget amendments, which the Governor refused to sign.

December: Here's a gift! A Majority Vote Budget

On Thursday, Dec. 18, frustrated with their inability to attract any Republican votes through long negotiations, both the State Assembly and the State Senate decided on an entirely different tack.  They would pass a series of majority-vote bills to cut and change the current, 2008-09 budget.  Though such a move would not get the state completely out of the woods, the reductions made in the bills, as well as different kinds of revenues would, at least, be a good and immediate start.  But how could the majority do this without Republican votes?

A Quick Review: What's so Super about the Super Majority?
 
As everyone has heard by now, ad naseum, it takes a two-thirds vote in each house to pass a budget and send it to the Governor for signature (54 in the Assembly, 27 in the Senate). This requirement came into being in 1933, when State Controller Ray Riley and Board of Equalization member Fred Stewart recommended a slew of budget control mechanisms in order to close a whopping $50 million budget gap.  One of the proposed mechanisms was a requirement that two-thirds of the members of both houses must vote to pass a budget, if the total amount of the budget had grown by five percent or more over the budget of the previous year.  Significantly, in the 1960s, the voters dropped this last condition and simply required a 2/3 vote to adopt a state budget.

Then, in 1978, voters, in adopting Prop 13, added the requirement of a two-thirds vote to raise a tax.  They retained, however, the ability of a simple majority of both houses to lower a tax, thus creating a ratchet effect from which we've not recovered.  Somewhat later, an interpretation was placed on the issue of whether a tax was "raised" by adopting the theory that, if tax cuts and tax increases cancel each other out (in the vernacular, are "revenue neutral"), these actions do not require a super-majority vote. 

Building on this theory, on December 18, 2008, the Democratic majorities in the Assembly and the Senate, desperately looking for a way out of the stalemate, adopted a series of amendments to the 08-09 budget consisting of cuts, revenue-neutral tax switches and additional fees, all by majority vote.

Hey!  We're Revenue Neutral AND We Raise Revenues!

Overall, the December 18 budget amendments provided 7.3 billion in additional spending cuts (almost all in education and health and human services, as proposed by the Governor) over the remaining months of the 08-09 budget.  They increased revenues by about 9.3 billion by cutting taxes, substituting other taxes in the same amount and raising fees. These moves fixed about 18 billion of an 18 month (December '08-June '09 and July '09-June '10) 40 billion dollar problem in the General Fund, not even half of the 18-month shortfall, but it was a start.  How did they do it?

Specifics (1) the "Single Flip"

This is a strange and interesting trick stemming from past budget high-wire acts.  When the state decided to sell Economic Recovery Bonds to raise instant money to fill in past deficits, it meant, of course, that money would have to be found to pay them off.  In a move reminiscent of a stunning trapeze move, dubbed the "triple flip", three changes had been adopted in the past to try to keep the same amount of monies flowing to schools: 1) 1/4 cent was added to the state sales tax to pay off the bonds; (2) 1/4 cent was taken away from local sales taxes, vastly hurting local services, but keeping sales tax rates the same; and (3) there was a temporary property tax shift from school funding to local governments to replace the lost sales tax revenues.  The General Fund was then tapped to replace the monies lost to schools, which actually rendered school funding even more vulnerable.

In the December 2008 majority-vote budget changes, the reduction in local sales taxes was ended, returning that 1/4 cent on the dollar to the schools and unburdening the General Fund.  Since the 1/4 cent state sales tax was unchanged, it was a new local tax (or a restored one) but, since those monies went to the schools, it was reflected as a reduction in General Fund spending.  Still, it would count as a tax increase, if it weren't matched by tax reductions.

Specifics (2)  Other tax increases

One bill imposed an oil severance tax of 9.9% of gross value of oil produced in California, effective July 1, 2009.  Currently California is the only oil producing state in the country that doesn't impose some kind of tax on the companies who pump oil here.

Other bills established a 2.5% surcharge on personal income tax liabilities beginning in 2009, and increased the state sales tax by 1/2 cent.

Specifics (3) Tax cuts to match tax increases? Gas taxes become gas fees

To counter the increases outlined above and to render the tax-related portion of the budget amendments revenue-neutral, the bills eliminated both the sales tax and the excise taxes on gasoline sold in the state.  Voila!  The bills could be adopted by a majority because there were no overall tax increases, just a shift.

Oops, that still left the same gaping hole in the budget.  So, taking a page from a Supreme Court decision involving the Sinclair Paint Company, in which the court said revenue enhancements that others call "taxes" could really be called "fees" if they were expended on specifics directly related to those fees, the legislature established a 39 cent on the gallon gasoline fee and a 31 cents on the gallon diesel fee, and indexed the fees to inflation.  They structured the bill so as to have, as they put it, "double barrel" constitutional protections: it was a fee under Sinclair, and, it couldn't be "borrowed" away for any other purposes.  It would be more stable than the taxes on gasoline and diesel because it wouldn't go up and down with the price of gas.  And, it was clearly directed to help build numerous transportation projects.

And, of course, there were lots of cuts

Many transit funds were cut back since the money from the fees would supplant them.  In addition, schools were hit with a reduction in the same amount as proposed by the Governor but with specific, mostly non-classroom, programs targeted.  $132 million was cut from UC and CSU. More painful cuts to health and human services, prisons, and local governments were adopted, as proposed by the Governor.

But, as Usual, Lots of Heat and No Light, Dec.18-Dec.21

The bills passed, the Republicans threatened to sue, the Governor announced he would veto any that reached his desk and everyone went back to square one (and home for the holidays).  On December 19, the Governor ordered all state employees to stay home every other Friday and take an instant 10% pay cut, called yet another special session on the budget and left Sacramento.  On December 21, Democratic leaders met in Sacramento with a video-generated virtual Governor and began again.

Next:  Not so Happy New Year 2009