Prop. 39 revenues disappoint after loophole closed

Prop. 39 revenues disappoint after loophole closed

(Calif.) Grand plans that closure of a corporate tax loophole would fund a broad array of energy projects for schools and spike the state’s general fund may be fizzling.

According to figures released this month by Gov. Jerry Brown’s Department of Finance, the state is expecting to receive about $700 million annually from the Proposition 39 initiative – far less than the $1 billion-a-year anticipated when the measure was sold to voters last November.

“We do a terrible job in all of our estimating of doing any kind of dynamic analysis that takes into consideration what the behavior of a taxpayer’s going to be,” said George Runner, a member of the Board of Equalization and former Republican lawmaker from Antelope Valley.

“One of the issues I always keep telling people is that tax policy changes behavior, and as a result of that, often times you’ll find government over estimates what it is that revenues are going to be because they forgot to or they can’t, sometimes, take into consideration the behavior of the taxpayer,” Runner said.

Proposition 39 or the California Clean Energy Jobs Act changed a corporate tax law to require multi-state or out-of-state businesses to source their sales of services and intangibles to the state where they were sold, rather than the state where the majority of work to produce them was performed. As a result, supporters of the plan expected that California – the nation’s biggest consumer – would see a big uptick in revenues.

The initiative directed that half the expected windfall go into the state’s general fund and that half be used to fund a program helping mostly K-12 school districts pay for energy-saving facilities upgrades and construction.

Anti-tax advocates have long argued that imposing new taxes on businesses and higher wage earners hurts California in the long run because those targeted adjust their practices or relocate to avoid paying more.

Professional golfer Phil Mickleson generated national headlines last summer after suggesting he might move out of his home state due to ever increasing taxes on higher earners. It is an issue that the Brown administration is reportedly keeping a close eye on because of the income tax hike another November measure – Proposition 30 – imposed on the state’s top earners.

Proposition 39 was aimed at corporate taxes, but some of the same issues are at work.

Based on 2010 income tax data, the Brown administration estimated that Proposition 39 would bring in $928 million in 2013-14 and nearly $1 billion annually the next four years. But 2011 data showing a drop in those revenues forced the governor to revise Prop. 39 figures downward to $675 million in the current year and $726 million in 2014-15 budget.

Based on pre-election estimates by proponents of the initiative, the loss of income to the state could be even greater since the school construction projects were expected to create hundreds if not thousands of jobs, helping spur the economy further.

The revised estimates, according to the state’s Legislative Analyst, mean a reduction in the 2014-15 budget of about $101 million for the energy program – $70 million of which was to have gone toward K-12 school facility projects.

That’s an overall 17 percent decrease in K-12 funding but because of the way the money is being distributed, some districts could see as much as 20 to 25 percent less than originally predicted, said Eric Bakke, a legislative facilities advocate for Los Angeles Unified School District.

The good news, however, is that the regulations for the energy program – rules for what schools must do in order to receive the funding – were just adopted in December by the California Energy Commission and schools are only just now beginning to formulate plans for moving forward.

“In terms of the impact to schools, I would say it’s minimal,” said Bakke, “because no one has even applied for any significant planning dollars; no one’s submitted any applications for construction yet.

“So, from that standpoint, as they go through and submit their planning and their schedules, I think they were able to, early in the process, see that there is a reduction, and that to assume the first-year allocation would remain consistent – they now know is a false assumption.”

The LAO reports that the energy program will still receive the $464 million originally set aside in this year’s budget. That’s $381 million for K-12 projects, $47 million for Community College projects, $28 million for a low-cost revolving energy loan account through the CEC, $5 million for the California Conservation Corps and $3 million for the Workforce Investment Board.

But the amount being directed to the energy program in next year’s budget drops to $363 million under the new estimates, reducing the K-12 take to $316 million. Community Colleges will get $39 million; the CCC and Workforce Investment receive the same – $5 million and $3 million, respectively.

No additional funds are set aside for the revolving loan program.

Smaller school districts won’t see a reduction in their energy-efficiency grants under the program because they are receiving a flat-rate allocation of $15,000, $50,000 or $100,000 depending upon where their enrollment size falls between 1 and 2,000 students.

Districts with student populations of 2,001 or more will receive funding based upon their average daily attendance, with eligible numbers of free and reduced-priced lunch students factored in.

The California Department of Education has already awarded $106 million in planning grants from 2013-14 Prop. 39 revenues, and the application period for a second round of planning grants closes Jan. 31.