Calif. Updated Budget Shows $41.2B Tax Loss Amid COVID-19

By Maria Koklanaris
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Law360 (May 14, 2020, 7:25 PM EDT) -- California's governor on Thursday confirmed a grim fiscal picture for the nation's most populous state, saying the abrupt recession brought on by the novel coronavirus will lead to a $41.2 billion drop in tax revenue.

California Gov. Gavin Newsom now projects a state deficit of $54.3 billion. (AP)

Giving California's traditional May budget update, Gov. Gavin Newsom, a Democrat, offered a far different scenario from an initial projection he made in January, when the state enjoyed an estimated $5.6 billion surplus and a record $21 billion in reserve.

In early March, revenues for California were running $1.35 billion above the January estimate. Then came the coronavirus and a precipitous economic collapse, as Newsom's Department of Finance first revealed May 7, and the governor formally outlined Thursday. Before transfers are taken into account, the drop in tax revenue would be more than $43 billion.

"No longer a projected surplus north of $6 billion," Newsom said of the fiscal 2020-21 budget outlook. "Now a projected deficit of $54.3 billion."

He said the budget would come down to about $203 billion from the $222 billion he estimated in January.

The governor provided numbers for the state's three biggest revenue-raisers: the personal income tax, the sales and use tax and the corporate income tax. For the personal income tax, he said there would be a decline of nearly $33 billion, or 25.5%. The hardest hit are wage income, proprietorship income and capital gains.

For the sales and use tax, there would be a decline of nearly $10 billion, or 27.2%. For the corporate income tax, there would be a decline of more than $5 billion, or 22.7%.

"Not surprisingly, our sales and use projections are taking the biggest hit," Newsom said. "People are tightening their belts."

The governor's budget summary outlined some tax measures the state would take to raise revenue over a period of three years. The summary said the tax measures would raise about $4.4 billion in the first year, $3.3 billion in the second year and $1.4 billion in the third.

These measures include suspending net operating losses for 2020, 2021 and 2022 for medium and large businesses, limiting incentives that offset more than $5 million in tax liability for the same three years and delaying changes in the way the state collects tax revenue on cannabis.

The governor would keep tax measures including a sales tax exemption for diapers and feminine hygiene products through 2023, an extension of a carryover period for film credits, and an exemption from the $800 minimum tax for limited liability companies, partnerships and limited liability partnerships in their first year of business.

Newsom's plan for a new tax on vaping, at $2 per 40 milligrams of nicotine in the product, would also stay and is estimated to raise about $33 million in 2020-21 that would be deposited in a special fund.

Otherwise, the state would bring out various tools, in addition to using reserves, to close the budget gap. 

"There's no printing press here in the state of California," Newsom said, referring to the fact that states, unlike the federal government, must balance their budgets.

California would take advantage of the rainy-day fund it built, drawing down more than $8 billion for the next fiscal year. It would get rid of more than $8 billion in expansions and one-time expenditures, borrow and defer more than $10 billion and make up the rest in cuts, unless additional federal aid comes through.

To that end, Newsom implored Congress and President Donald Trump to enact a House bill, the HEROES Act, which would provide state and local governments with $900 billion, but Republican senators have expressed reluctance to pass additional coronavirus relief legislation.

"To the federal government: We need you," Newsom said. "These cuts can be negated; they can be dismissed with your support. The HEROES Act is the best approach."

--Editing by Vincent Sherry. 

For a reprint of this article, please contact reprints@law360.com.

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