Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

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

Search for Jobs

Index Last Change % Change
Dow 20,975.09 -21.03 -0.10%
Nasdaq 6,025.23 -0.27 -0.00%
S&P 500 2,387.45 -1.16 -0.05%
Treasuries 2.31 -0.02 -0.69%
Data as of 7:34am ET
Company Price Change % Change
Bank of America Corp... 23.89 -0.09 -0.38%
Ford Motor Co 11.60 0.12 1.05%
Chesapeake Energy Co... 5.47 -0.04 -0.73%
General Electric Co 29.26 -0.19 -0.65%
Advanced Micro Devic... 13.41 -0.08 -0.59%
Data as of Apr 26
Sponsors

Sections

Trump campaigned as the champion of the 'little guy.' 100 days into his presidency, Trump is doing a little for the middle class, but he could be doing a lot more. More

Chris Sacca, an investor known for his early bets on Uber and Twitter announced Wednesday that he will stop investing in startups. More

Homeowners who sold their home in the first three months of this year saw an average price gain of $44,000 from purchase, according to a new report. More