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Thursday, Mar 28, 2024

Responsible State Deficit Reduction

It’s budget time again for California and, once again, the budget is late. The issue is that we are facing another big deficit year and, in order for the legislature to pass a balanced budget, as required by Proposition 58 (officially called The California Balanced Budget Act) passed on March 2, 2004, some very difficult decisions need to be made. These decisions are being impeded, as usual, by partisan politics. The Republicans are opposed to raising taxes and the Democrats are opposed to cutting services and social programs. Both of these alternatives can have significant negative impact on our already anemic economy. Because California is already one of the most expensive states in which to do business, raising taxes will make us even less competitive with other states thereby potentially causing more businesses to either move, cut back or outsource their labor thus creating significant job losses. Additionally it will keep new businesses from moving in. Alternatively, cutting services and social programs will not fare well in attracting new businesses nor will it be acceptable to those businesses that are here and are paying substantial dollars for the privilege of receiving those services and whose employees are benefitting from some of those social programs. Probably the best way to reduce or eliminate a deficit is to create revenue by stimulating the economy. As business activity increases, more jobs are created. In turn, profits from the increased business activity and salaries from the additional jobs generate more tax revenues for the state and the deficits reduce (provided, of course, that state spending doesn’t increase significantly). Although there are a number of ways to potentially stimulate the economy, they all take time and we are out of time for this budget cycle. As a matter of fact, we haven’t reduced deficits in many years by stimulating the economy. Instead, we have been balancing the budgets by borrowing and by cutting services and programs. This year we seem to have hit the inevitable brick wall. Out of options It appears that we can no longer fix the problem by simply borrowing and cutting. To do so would exacerbate the economic problems that already exist. We need to raise revenues and utilize responsible means to reduce our deficits. Currently some of the proposed solutions to resolve the most recent estimated deficit of approximately $17 billion include increasing revenues by modernizing and securitizing the lottery, placing sales taxes on personal services and by the elimination of tax credits and loss carryovers. Since the increased revenues from these measures will not solve the entire problem the revenue enhancements will be accompanied by additional cost reductions consisting of cuts including services, social programs. Although there appears to be some room for cuts I believe that there are significant cuts included in the proposals that will be harmful to our economy. I also believe that placing sales taxes on personal services and eliminating tax credits and loss carryovers will have a similar harmful effect. I suggest that we avoid the cuts having the most severe negative impact and forego the elimination of tax benefits and, instead, provide additional revenues by implementing a temporary (2-year) surcharge of 10% on state income taxes that would be exempt from current mandates and would apply to all taxpayers. The revenues generated by the surcharge would therefore be available strictly to protect the more important current discretionary services and social programs and to save existing tax benefits from elimination. Currently, personal and corporate income taxes amount to approximately $70 billion, thus the surcharge would protect approximately $7 billion of these services, social program costs and tax benefits. To allow the surcharge to achieve full impact, no new discretionary items or increases in existing discretionary items would be allowed during the surcharge period. To attract new businesses to California, and, therefore create an additional (over and above that provided by tax credits) economic stimulus, the newly attracted businesses could be exempt from the surcharge. As the economy strengthens and more tax revenues are generated the surcharge will no longer be needed. If revenues have not adequately increased by the expiration of the surcharge period, consideration could be given to extending the surcharge for an additional two years under the same restrictive conditions. Gregory N. Lippe, CPA, is Managing Partner of the Woodland Hills-based CPA Firm of Lippe, Hellie, Hoffer & Allison, LLP, Chairman of the Valley Industry and Commerce Association (VICA) and a Director of First Commerce Bank.

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