LAO: Brown likely under estimates tax revenue this year

LAO: Brown likely under estimates tax revenue this year

(Calif.) The governor’s January budget plan offers $6.3 billion in new Proposition 98 spending over three years, according to a new review from the nonpartisan Legislative Analyst.

The additional funds come from an upward revision of taxes that will be collected this fiscal year and an ongoing surge next year and in 2018-19 probably driven by corporations and big investors adjusting to the new national tax law, the LAO said.

The revenue projections are also probably understated because the Brown administration had to finalize its budget before the deal in Washington on the new tax law was approved.

“Our November estimates for the four largest general fund taxes are a combined $3.4 billion higher than the administration’s new January 2018 revenue estimates,” the LAO said. “Currently, our assessment is that state revenues in 2017-18 and 2018-19 combined will most likely be higher than the administration’s new estimates.”

The LAO noted that late last month and early January produced a multibillion dollar wave of tax collections that could not have been accounted for by Gov. Jerry Brown has he built his spending plan. As a result, Brown’s revised budget that comes out in May will need to reflect the additional income.

The LAO noted that a big chunk of the new money would be used by the governor to fully implement the Local Control Funding Formula, two years ahead of schedule.

They said that while the Legislature has in the past supported LCFF funding, lawmakers might have other spending choices that the governor has not prioritized.

“The Legislature has expressed other priorities too, such as increasing per-student funding for special education services,” the LAO said. “Over the coming months, the Legislature could adopt the Governor’s priorities or establish a somewhat different set of its own priorities.”

Outside of the education arena, Brown has made saving money a major part of this budget plan.

“The Governor proposes an optional deposit into the state’s constitutional rainy day fund of $3.5 billion in 2018-19 (in addition to the $1.5 billion mandatory deposit),” the LAO pointed out. “This increase in rainy day fund reserves would bring that account’s total balance to $13.5 billion, which the administration estimates is equal to the rainy day fund’s current constitutional maximum of 10 percent of General Fund tax revenues.”

The LAO suggested that lawmakers consider other options with the discretionary money.

“As the Legislature crafts the 2018-19 budget, we urge it to first consider its optimal level of reserves,” the LAO said, noting that Brown proposes depositing enough reserves into the state’s rainy day fund that it reaches its constitutional maximum. “We believe the Governor’s continued focus on building more reserves is prudent in light of economic and federal budget uncertainty.

“The Legislature may want to consider whether the proposed level of reserves is its optimal level or if it wishes to have more or less total reserves (including those outside of the rainy day fund) at this point in time,” said the LAO. “While the Governor is correct that filling the rainy day fund now would help the state budget weather the next recession, filling that reserve now involves various trade-offs for the state.”