California nightmare: Spending cuts vs. tax extension

California Governor Jerry Brown signs bills that cut spending by $8.2 billion.California Governor Jerry Brown signs bills that cut spending by $8.2 billion. By Tami Luhby, senior writer


NEW YORK (CNNMoney) -- Keep paying higher taxes or face deep, painful cuts in services. Those are the options Californians are faced with.

But if the Democratic governor and Republican lawmakers can't reach a compromise, the people of California might not have a choice in the matter.

To help close the $26.6 billion budget shortfall the state is facing, Governor Jerry Brown wants to let residents vote on extending a tax hike in effect since 2009. But a month ago, he broke off talks with Republican lawmakers who blocked his push to put the tax measure on the ballot in June.

While the governor says he is still committed to letting the voters decide, he's likely to reveal a much more draconian spending plan, which won't factor in additional revenue from the tax extension, on May 16. That's when the state unveils its revised revenue and expenditure projections.

That budget will be balanced, Brown said in April.

In the meantime, he's still trying to drum up support for a tax vote by meeting with business, labor and community groups around the state.

"He still believes it's time for a check-in with the people," said H.D. Palmer, spokesman for the state Department of Finance.

At issue is tackling the Golden State's giant budget gap. Brown, who took office in January, offered a proposal that mixed major spending cuts to higher education, Medicaid and social service programs with $12 billion in additional tax revenue.

The tax measure included renewing a quarter-percentage point increase in personal income tax rates, which expired at the end of 2010, and maintaining a 1 percentage point bump in the sales tax, which lapses at the end of June. Under Brown's proposal, the higher rates would remain in effect for five years.

The legislature approved a portion of the governor's plan in March, reducing the budget deficit by $14 billion through spending cuts and fund transfers. The package whacked $1.7 billion from Medi-Cal, the state's Medicaid program, and $1.1 billion from the state's university systems.

On the tax side, Brown needed at least four Republican lawmakers and all their Democratic peers to go along with his plan to call a special election in June. But negotiations fell apart after Republicans demanded concessions, including pension and regulatory reform and a spending cap.

The governor was hoping to have the matter settled by the end of the fiscal year on June 30, though it's not uncommon for California to start a new year without a budget in place. The last one wasn't passed until October.

Brown, however, has the people's support for a special election. Recent polls show that a majority of Californians approve of the governor's plan to address the budget through both spending cuts and tax increases. They also want a say in extending the tax hikes, though they are mixed about actually approving them.

"It's a war of public opinion now," said Jean Ross, executive director of the California Budget Project, a non-partisan fiscal reform group focused on low- and moderate-income residents.

Even if the tax measure makes it onto the ballot, voters may not support it, said Daniel J.B. Mitchell, professor of public policy at UCLA. That's because residents don't want to see cuts in government services, but they also don't want to pay more in taxes.

While Brown has refrained from issuing a dire "all-cuts" budget plan, others have offered insight into what would happen if tax hikes aren't extended.

Under one scenario outlined by the non-partisan Legislative Analyst's Office, California's schools could lose $4.8 billion in funding. That could mean that class sizes would rise above 20 kids in the early grades and kindergarten would be restricted to those who are age 5, closing the door to 135,000 children.

Also, tuition at the California State University's schools could rise 10% and at the University of California campuses by 7%. And the teaching staff could be hit with $408 million in personnel reductions.

And state employees could suffer a 9.24% reduction in pay, equivalent to two furlough days per month, while seeing a 30% drop in state contributions to health care costs.

"[An] all-cuts [budget] is going to be an irreversible path forward that will leave a lot of tears in its wake," said Brown, when he signed the initial spending reduction bills in March. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,514.37 65.12 0.40%
Nasdaq 4,161.46 39.91 0.97%
S&P 500 1,879.55 7.66 0.41%
Treasuries 2.73 0.01 0.18%
Data as of 2:45am ET
Company Price Change % Change
Bank of America Corp... 16.29 0.20 1.24%
Facebook Inc 63.03 1.79 2.92%
Micron Technology In... 26.18 0.86 3.40%
Comcast Corp 50.83 0.95 1.90%
Allergan Inc 163.65 21.65 15.25%
Data as of Apr 22
Sponsors

Sections

Alibaba's shopping sites account for 80% of online retail in China. Meet four successful merchants. More

The IRS is in damage control mode Tuesday after an audit revealed that it paid bonuses to employees who were in trouble over tax issues themselves. More

Upstart Aereo goes before Supreme Court justices in challenge by broadcasters who say TV streaming services violates copyrights. More

Schwinn, Trek and Cannondale are all iconic American bicycle brands. But none of them are made in the United States. More

Student loan borrowers are suddenly being thrown into default when the co-signer on their loan -- often a parent or grandparent -- dies or files for bankruptcy. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.