There’s a Hole in the Budget Bucket

Uh-oh. It looks like there’s a hole in the bucket Governor Brown is using to bail out the state. After Republicans refused to let voters decide on tax extensions, the legislature scrambled to put together a budget that avoided cutting essential services like education and public safety. In the end, Governor Brown signed a budget into law that depended on $4 billion in projected new revenues to close the gap.

That seems almost too good to be true—just promise to find an extra $4 billion in the couch and the state avoids painful cuts. Well, it is turning out to be too good to be true. If the state doesn’t get $4 billion in revenue, then “trigger” cuts go into effect. Depending on how short the state is, those cuts include more reductions to higher education, increased community college fees, slashing child care and deep cuts to public education. The cuts to K-12 could reduce the school year by 7 days and eliminating school bus service.

Unless someone has an extra $4 billion they can donate to the state coffers, the state may pull the trigger on those painful cuts. State Controller John Chiang just announced that July revenues fell short of projections by 10 percent—$538.8 million shorter than anticipated. 

So why is the state coming up short of cash already? Was it the stock market crash? Maybe, but the Controller’s report shows that personal income tax revenues came in higher than predicted by 2.9 percent. Sales and use tax revenue were low, which could be expected given the sluggish economy.

Corporate income tax, on the other hand, came in well below expectations by almost 20 percent. You would think the low corporate tax revenue is because companies are hurting just like the rest of us from the down economy. Well, you would be wrong. A recent article from Slate.com details the how corporate profits are skyrocketing:

Indeed, during 2010 and 2011, America's companies have made out like bandits. In the first three months of this year—the last quarter for which we have official statistics—profits from current production increased by nearly $50 billion. Both nonfinancial and financial firms have expanded their earnings year-on-year. The bounce-back for corporations has proved so robust that their profits accounted for the highest proportion of national income ever recorded in 2010. 

So how is it possible for corporations to be sitting on $1 trillion in cash yet California’s collection of corporate income tax plummets pushing us toward deeper budget cuts? Corporations use a number of methods to worm their way out of paying their fair share, all the while moaning about the heavy state tax burden. A recent report found that one-third of the largest California companies paid well below the corporate tax rate. And some of the state’s biggest and most famous companies such as Google, Oracle and Hewlett-Packard, were named the top “Tax Escape Artists” by the Daily Beast because of their skill at making money while avoiding paying taxes like the rest of us

Governor Brown came out strong against the worst corporate tax giveaways in his original budget. He proposed eliminating the failed Enterprise Zone (EZ) program and the elective single sales factor which allowed out-of-state corporations to choose how to calculate their taxes in California. The EZ tax breaks cost taxpayers millions of dollars each year with the benefits accruing to the largest corporations in the state. 

An army of tax consultants jack up the cost of the program by advising companies on how to exploit the program, and then taking a cut of the tax savings. The tax consultants and lobbyists who make their money off the Enterprise Zones and other tax break programs fought hard to keep the program in place. Given that it takes a two-thirds vote to eliminate, or even reduce, a tax break, the Governor was forced to back away from eliminating EZs and instead had to look to deeper cuts to UC, CSU, health care, child care and state parks.

As Californians face possible trigger cuts that would further shorten the school year, make higher education unaffordable for middle class kids and shred the safety net, EZ consultants continue to rake in millions in taxpayer dollars. And corporations in California funnel millions through tax loopholes and end up paying next to nothing in taxes.

Governor Brown had the right idea. It’s time to eliminate failed tax breaks that are bleeding our state dry. Those tax breaks will pull the trigger on more cuts in December unless we take action now.

Learn more about Enterprise Zones.