Californian Lawmakers Close To Resolving Budget Impasse

by Mike Godfrey, Tax-News.com, Washington

15 September 2008

The state of California may finally have a budget for the 2008/9 fiscal year after it came to light on Sunday that legislators have agreed a compromise deal that would ease the USD15.2bn budget deficit without raising taxes.

While the finer details of plan remain scant, lawmakers from both sides of the aisle emerged from talks over the weekend to announce that they could sign off on the budget in the next few days after agreeing to narrow the deficit through a combination of spending cuts, borrowing, and the one-off use of reserve funds.

The legislature's failure to agree a budget means that the state is now eleven weeks into the fiscal year without a spending plan. Tax has been the main sticking point, with Democrats arguing that the only way to solve the deficit crisis is by getting more money into the state coffers through higher rates of income tax or sales tax. However, Republicans have been steadfast in their refusal to countenance any form of tax increase, and with a constitutional clause stipulating that a two-thirds 'supermajorty' is needed for a budget to pass into law, neither side has had enough support to force through their own proposals.

For his part, state Governor Arnold Schwarzenegger has proposed a temporary 1% increase in sales tax, for a period of three years, to be followed by a permanent decrease in the level of sales tax. He has also proposed a two-year suspension of the Net Operating Loss (NOL) tax deduction, which would suspend for two years the ability of corporations to reduce their tax liability based on prior losses, alongside USD2bn in expenditure cuts.

However, Schwarzenegger has been unable to win over his Republican colleagues, and his plea for lawmakers to put aside their political differences in the interests of "fiscal sanity" seem to have fallen on deaf ears. It remains to be seen in the days ahead just how the elected politicians intend to solve the crisis.

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