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California's budget plan balanced with risky assumptions

The budget signed by Gov. Jerry Brown assumes that California will take in revenue from the federal estate tax and that voters will approve $8 billion in tax hikes in the fall.

July 02, 2012|By Chris Megerian, Los Angeles Times
  • Gov. Jerry Brown and Democratic lawmakers see a budget surplus for California in three years.
Gov. Jerry Brown and Democratic lawmakers see a budget surplus for California… (Rich Pedroncelli, Associated…)

SACRAMENTO — Gov. Jerry Brown has bet a portion of California's financial health on the expectation that a hyperpartisan Congress will change course on a hotly debated tax policy this year.

The budget Brown signed last week assumes that over the next four years the state will reap almost $2.3 billion from the federal estate tax, a levy on wealth inheritance. California hasn't collected any revenue from the tax since 2004, and if Congress sticks with current policy it won't in the coming years, either.

"It seems most likely the state will see no such revenues," said Jason Sisney, a deputy at the nonpartisan Legislative Analyst's Office, which advises lawmakers on financial matters. A report from that office last fall warned that California should not anticipate otherwise.

The Brown administration estimates a relatively small amount of revenue, $45 million, in the budget year that began this week. But by the 2015-16 fiscal year, officials are counting on $1.2 billion. That assumption has helped Brown and Democratic lawmakers insist that California will emerge from its financial turmoil with a budget surplus three years from now.

"I believe that if we continue on this path, this era of unending deficits will be behind us," Senate President Pro Tem Darrell Steinberg (D-Sacramento) told reporters after the Legislature finalized its budget bills last week.

But the bet on estate taxes is one of several risky ones they made this year, not the least of which is the expectation that voters will approve more than $8 billion in higher taxes in November. Another assumption is already faltering: Facebook stock is trading at lower levels than expected, casting doubt on hopes that the company's initial public offering would generate $1.9 billion in tax receipts.

In addition, the analyst's office said the state may collect $900 million less than anticipated from defunct local redevelopment agencies.

If the forecasts don't pan out, state leaders could be scrambling to keep their heads above water, said Christopher Thornberg, a financial consultant who advises the state controller. That's what happened earlier this year when tax revenue fell $3.5 billion short, widening the budget deficit to $15.7 billion.

"There's all sorts of uncertainty," he said.

Administration officials acknowledged in January that the estate-tax money was unlikely to materialize. The governor's January budget proposal said there was "only a narrow range of federal law under which California would receive any revenue" from the levy.

State Sen. Bill Emmerson (R-Hemet), who sits on the Senate's budget committee, suggested the new spending plan would more likely result in a deficit than a surplus.

"The governor and legislative Democrats are desperate to claim they have solved the budget problem," Emmerson said in a statement. "It is a shame they cannot be honest with the people of California."

H.D. Palmer, a spokesman for Brown's Department of Finance, said it's not that simple. If the state pulls in less revenue, it won't be required to spend as much on public schools under California's voter-approved funding formula. That would ease the burden on the budget.

Palmer said the administration included the estate tax money because the existing federal policy, passed in 2001 under PresidentGeorge W. Bush, is set to expire at the end of the year. That would allow the state to start collecting those funds again.

But the analyst's office said in a report last November: "Most observers believe that, no matter what Congress does to the estate tax in 2012," California won't be able to collect money from it. The report cautioned lawmakers not to incorporate any such revenue into the budget "unless there is a clear indication from Congress" that it will be available.

That indication hasn't come. President Obama did not propose that states receive estate-tax revenue in his most recent federal budget plan, according to the U.S. Treasury.

"It's very hard to bring a tax back that's been gone for several years," said Tracy Gordon, who studies state and local finances at the Brookings Institution, a Washington think tank.

chris.megerian@latimes.com

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