May 10, 2011 / 12:40 AM / in 7 years

Revised California budget in works as revenue rises

SAN FRANCISCO (Reuters) - California Governor Jerry Brown next week unveils a revised budget, and an unexpected jump in tax receipts may ease the state’s financial pain but throw a wrench into his plan for extending tax increases.

Brown will lay out his new plan to close a roughly $15 billion shortfall on May 16, and part of the solution will be a stronger tax collection forecast than in his original budget in January, based on strong April collections.

The recession, double-digit unemployment and the housing and stock market slumps sent personal income taxes, California’s key budget source, tumbling. Now those receipts are recovering.

“At this point almost everybody is assuming there will be a better revenue number,” said Mike Genest, a fiscal consultant and former director of finance for California’s government.

The good news won’t end California’s traditionally chaotic budget politics, however.

Brown and fellow Democrats who control the legislature had been planning to use the prospect of more spending cuts, especially to schools, to rally voters to demand Republicans support extensions of tax increases that expire by summer.

Republicans have enough votes to block tax measures and have been opposing tax extensions. They now say better-than-expected revenue should be put toward schools.

“By dedicating this new revenue to the classroom, there’s no need for the draconian education cuts that Democrats have proposed to justify massive tax hikes,” Assembly Republican Leader Connie Conway said in a statement.

The 325,000-member California Teachers Association, one of the state’s most powerful public employee unions, will hold rallies this week to guard school spending. The effort may help convince lawmakers from both parties to put new revenue toward schools and fight instead over other areas of state spending.

Steven Frates, research director at the Davenport Institute at Pepperdine University’s School of Public Policy, sees a partisan brawl resuming after Brown’s revised budget plan even if lawmakers agree to use new revenue for education.

“Improving revenue will take a bite out of the deficit,” he said. “How big will it have to be so people would come together and cool down? That would have to be quite a bit of revenue.”

Some analysts see the potential for a budget agreement involving a short-term extension of tax increases along with a spending cap and changes to public pensions urged by Republicans.

MORE MONEY BUT NOT ENOUGH

The state capital of Sacramento has been abuzz in recent days over an estimate by a budget watchdog agency that revenue may run more than $2 billion ahead of the annual plan Brown presented in January.

On Friday, the state controller said California’s revenue from the fiscal year’s start in July through April was $1.3 billion, or 1.9 percent, above the estimate in Brown’s budget plan, and the state’s fiscal year-to-date revenue increased by $4.9 billion, or 7.1 percent, over the year-earlier period.

Growing strength in California’s main revenue source propelled the upswing. “Personal income taxes continue to lead the charge -- rising 8 percent over estimates and 13 percent over last fiscal year,” the controller said in a statement.

The state’s revenue should gain added momentum from the stock market rally and expected initial public offerings, such as the one seen looming for California-based networking site LinkedIn Corp.

“That sort of thing can make a big difference,” said Genest, adding, however, that California’s economy faces headwinds that could hold back its revenue gains.

H.D. Palmer, Brown’s spokesman for state finance matters, said that even if revenue is picking up, the governor and lawmakers face the hard task of balancing the state’s books.

Spending cuts and other moves have narrowed the state’s deficit by some $11 billion. Several more billions of dollars in solutions to the remaining $15 billion deficit call for “a number of difficult but very necessary decisions,” Palmer said.

Editing by Eric Beech

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