A Spending Cap for California Government?  Voters Say “No” at a Special Election on May 19

After months of debate, the State Legislature and Governor Schwarzenegger reached agreement in February on a package of 33 bills that, taken together, comprised a new state budget for California through June 30, 2010. Designed to meet a projected $42 billion budget shortfall, the budget compromise includes $14.9 billion in spending cuts (including $230 million for public transit), $13.4 billion in tax increases, and $11.4 billion in new borrowing.

But voters had the final say on much of this - including how long the tax increases would stay in effect - at a special election on May 19 and voted down all but one of the ballot measures.

All of the major tax increases included in the budget deal were considered “temporary.” The length of time that these tax increases would be in effect depended on voter approval of Proposition 1A. It would have amended the state constitution by capping the growth rate in state spending during years with ample revenues and creating a “rainy-day fund” for severe economic downturns.

Under the budget deal, the state sales tax was increased by 1% on April 1 and will continue at the higher level until June 30, 2011 - increasing the total cost of a $30,000 car by $300. The vehicle license fee (VLF) jumped up from .65% to 1.15% of a vehicle’s value starting in May and lasting through June 2011. In addition, the personal income tax was increased by .25% for calendar years 2009 and 2010.

If Proposition 1A would have been approved by voters in May, the increased sales tax would have been extended another year, to June 30, 2012; the increased VLF would have stayed in place two years longer, through June 30, 2013; and the income tax surcharge would have continued for two more years, through calendar year 2012.

Due to revenue declines since February, the state was already looking at a painful new round of negotiations regarding more tax hikes or spending cuts. Since Proposition 1F was the only measure to pass, the budget situation is now even more difficult with current budget shortfall estimates at $24 billion. The Auto Club did not take a position on the ballot measures, but provided information to help members be prepared to vote.

Impacts of the Budget Agreement on Transportation and Motorists

Many of the tax increases and other provisions of the February state budget deal have a direct or indirect impact on motorists and the state’s ability to implement transportation improvements. Some of the key points were:

• Proposition 42 (sales tax on gasoline) - The 1% sales tax increase applies to motor vehicle fuels and is expected to increase transportation revenues by $250 million per year. In past years, Proposition 42 funds were borrowed to shore up the General Fund. In 2006, voters approved Proposition 1A to restrict such borrowing. The General Fund still owes $587 million to the Proposition 42 account from prior year loans.

• Proposition 1B (2006 voter-approved transportation bonds) - Proposition 1B funded projects narrowly escaped being shut down earlier this year due to the state’s inability to sell bonds. While adoption of the new state budget allows the State Treasurer to issue bonds to pay for current projects, some uncertainty still remains regarding the state’s ability to meet the cash flow needs of all of Proposition 1B commitments, which could result in delays to some key projects.

• Vehicle License Fee (VLF) - Starting in 1998, the VLF was gradually reduced from 2% of a vehicle’s depreciated value to 0.65%. Governor Davis increased the VLF back to 2% in 2003 to address a looming deficit; however, it was quickly lowered again by Governor Schwarzenegger following Davis’ recall. The new budget increases the VLF to 1.15% generating an extra $2.1 billion a year.

• “Economic Stimulus” - The Governor insisted that the budget agreement include a number of provisions designed to speed up the completion and reduce the costs of selected transportation projects and open up new ways of developing and funding transportation in the future, including joint public-private efforts and limited exemptions from environmental review requirements, among other strategies.

The new budget was based on the assumption that, at a special election on May 19, voters would approve the following ballot measures:

• Proposition 1A - Would establish a cap on overall state spending and create a rainy day fund in an attempt to smooth out the state’s boom-and-bust revenue cycles. With the failure to pass this ballot measure, many of the tax increases in the budget deal will sunset early, resulting in a loss of anticipated revenues.

• Proposition 1B - Would modify spending provisions for schools resulting in $9.3 billion being directed to schools to make up for recent budget cuts if Prop. 1A is passed. With the failure of this measure, these education funding cuts would have to be addressed in other ways,

• Proposition 1C - Would change the state lottery’s games and prizes and allows for borrowing of $5 billion against future state lottery revenues to help balance the current budget. With the failure of this measure, no additional revenues will be provided to help balance the budget.

• Proposition 1D - Would authorize the state to redirect a portion of the tobacco tax revenues from children’s programs to the general fund to help balance the budget. With the failure of this measure, no additional revenues will be provided to help balance the budget.

• Proposition 1E - Would authorize the state to redirect a portion of the revenues from the surtax on millionaires from mental health programs to the general fund to help balance the budget. With the failure of this measure, no additional revenues will be provided to help balance the budget.

• Proposition 1F - Would bar state elected officials from receiving raises when the state is in a budget deficit situation. This measure is the only one to pass at the May 19 Special Election.

Now that the Governor and the Legislature have been sent back to the drawing board by the voters, the Auto Club will continue to follow the ongoing discussions related to the state budget and will strive to protect motorist’s interests as additional tax increases and budget cuts are debated.