California lawmakers hit their budget deadline — or did they?

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California lawmakers spent the week plowing through a pile of trailer bills, including two tax increases, that have to be passed to avoid blowing a hole in the budget they approved last week.

Lawmakers approved the $214.8 billion budget June 13, hitting the statutory deadline to avoid having their paychecks withheld.

They have several more budget trailer bills to finalize over the next two weeks, including some that have yet to be made public and others that are still under negotiation between the governor and Democratic legislative leaders.

Typically, the governor signs budget trailer bills on July 1, concurrently with the state budget.

The trailer bills include two tax increases: one that would impose an 80 cents a month fee on phone bills to upgrade the state’s aging 911 system and another that raises taxes on businesses by closing loopholes to conform with the 2017 federal tax overhaul bill.

The 911 tax passed the Assembly on Monday. It faces opposition in the Senate where a similar bill failed by one vote last year.

The Senate handled tax conformity in a budget trailer bill, approving Assembly Bill 91 on Monday in a 12-5 vote. The bill adds more than $1.5 billion a year to state coffers, most of which would fund an expansion of the state's Earned Income Tax Credit for low-income, working Californians. The Assembly is taking the issue up through Assembly Bill 217, a policy bill, and has yet to vote.

While the state is in a good place fiscally, Senate President pro Tempore Toni Atkins, D-San Diego, said during a budget hearing, there are people living in the state who are not benefiting from the prosperity.

“We tried to put money in the budget to help our lower- and middle-class people to feel like they are living in the state that has the fifth-largest economy in the world,” Atkins said.

The revenue-raisers in the tax conforming bills place limitations on corporate deductions for executive bonuses, limit like-kind exchanges to real property for people with incomes above $250,000 and limit the use of net operating loss carrybacks for individual taxpayers.

Some members of the Assembly have expressed reluctance to cast votes that could be labeled tax increases. Other Democrats, who strongly opposed the 2017 federal tax bill that capped state and local deductions and weighed heavily on coastal blue states, oppose the state’s tax conforming bill.

SALT may weigh heavily on individual taxpayers, but it has been a boon to the state's bonds helping issuers realize interest rate savings. "For top-bracket California buyers, the effects of lower SALT deductions has brought a hotly-traded market," wrote Kimberly Olsan, a senior vice president with FTN Financial, in a Monday market report.

Olsan compared yields in a recent Los Angeles International Airport deal subject to alternative minimum tax to a non-AMT Michican hospital deal. LAX saw final yields in 5% coupons subject to AMT at parity or below the non-AMT Michigan hospital deal in both 10- and 20-year maturities. In fact, the 2039 LAX yield was 12 basis points lower than the Michigan deal, she wrote.

Assemblyman Jay Olbernolte, R-Big Bear Lake, said during an Assembly budget committee hearing that his “frustration with the state’s tax conformity bill is that we are cherry picking. We are only taking what increases state revenue and not the things that would decrease state revenue.”

He noted when the federal government eliminated like-kind exchanges in the tax bill, it also added a bonus for depreciation.

“It will hurt businesses, because under the old rule if you purchased a new piece of equipment to replace an old piece of equipment you didn’t have to pay taxes on it,” he said.

The tax conforming bill has support from four Democratic Party leaders who formed a coalition and sent a letter in May signed by 26 social justice groups and two unions.

The Legislature already approved spending $1.2 billion in the budget to make an additional 1 million low-income working parents eligible for the earned income tax credit. But they have yet to approve the trailer bill eliminating the business tax loopholes that legislative analyst’s office estimates would raise $1.8 billion, of which the majority would go to fund the EITC increases.

The legislative leaders who formed the coalition in support are Atkins, Assembly Speaker Anthony Rendon (D-Lakewood), Sen. Holly Mitchell, chair of the Sen. Budget and Finance Committee (D-Los Angeles) and Assemblyman Phil Ting (D-San Francisco), chair of the Assembly Budget Committee.

Gov. Gavin Newsom had also proposed tax conformity with federal opportunity zone investments in affordable housing and green technology, but he wasn’t able to reach an agreement with the Legislature in time for it to be approved as part of budget discussions, said Vivek Viswanathan, chief deputy director for budget at the state’s Department of Finance, during an Assembly Budget Committee hearing.

“We hope to reach an agreement by the end of the year,” Viswanathan said.

Negotiations are continuing on housing trailer bills aimed at alleviating the state’s housing shortage and homelessness crisis.

In both the Senate and the Assembly, the budget was approved on a party line vote with Republican opposition. Democrats have a supermajority in the Legislature and the governor is a democrat.

One thing all agree on is the extent of the state’s housing crisis.

Despite efforts to build affordable housing using a combined $2.1 billion from bond measures approved by voters for the city and county of Los Angeles, the city’s homeless population continues to grow.

Sen. Jeff Stone, R-Temecula, opposed expanding Medi-Cal to undocumented immigrants under the age of 25, saying that money could go to helping the state solve its homeless problem.

“Los Angeles’ homeless population increased by 16% this year — and it has become a health crisis with diseases like typhoid fever coming back,” Stone said. “When you come through the airport you see people living in tents. Why aren’t these people our highest priority?”

The Legislature agreed to $2.4 billion to provide emergency homeless shelters, supportive services to combat mental illness and drug addiction, and to encourage affordable housing in the budget bill approved last week. But $750 million intended to increase housing production and provide technical assistance to local governments is still being negotiated in the Legislature through an implementation trailer bill.

Another $1 billion would help spur affordable housing construction by providing $500 million in subsidies through the California Housing Finance Agency and $500 million in housing tax credits for developers.

The budget also includes $650 million for local governments for emergency shelters, navigation centers and supportive housing. That comes on top of the $500 million included in last year’s budget.

The Legislature is expected to include $250 million for cities and regional planning organizations for housing-related planning.

Lawmakers rejected the governor’s efforts to hold up transportation funds from Senate Bill 1 from cities that fail to build the required number of affordable housing under the state’s Regional Housing Needs Assessment. The legislature approved SB1 in 2017, a gas tax that is expected to raise $5.4 billion for road improvements.

Newsom threatened to cut off highway funds to cities not encouraging affordable housing construction. He singled out Huntington Beach earlier in the year, but said many other cities would get similar treatment.

Carolyn Coleman, executive director of the League of California Cities, lauded the Legislature in a statement for “negotiating a budget that provides billions of dollars to help cities address the homeless crisis, plan for housing, invest in infrastructure to support housing and fund affordable housing.”

The Administration and Legislature traveled the state listening to locals and approved a budget that provides expanded resources for California cities, Coleman said.

Though some controversial budget items are being handled through trailer bills, the Legislature accomplished some heavy lifting by the regular budget deadline, according to Senate comments during a budget hearing last week.

The California Senate titled its version of the budget “The Bold and Responsible Budget Plan.”

Sen. Mitchell took umbrage at news reports referring to funding targeting some localities as “pork.”

Money requested by localities in the budget helps rebuild from last year’s fires, Mitchell said.

“There is no pork in this budget,” Mitchell said. “It contains investment in infrastructure and services and one-time spending to help your constituents.”

The budget proposal includes more than $53 million in direct funding for communities hurt by recent disasters. The Legislature approved legislation earlier this year that allocated $64.3 million in property tax backfill for cities, counties and special districts affected by the 2017 and 2018 fires. Of that amount, $31.1 million will be used to backfill property tax losses in Butte, Lake, Los Angeles, Orange, Riverside, Shasta and Siskiyou counties, as well as estimated losses in 2019-20 and 2020-21 for Butte and Lake counties. The totals also included $800,000 for environmental document preparation in Paradise, a town destroyed by last year’s fires, and $10 million to support communities recovering from the Camp Fire.

The governor agreed to scrap his idea for a water bill tax to provide clean drinking water through water system improvements in areas of the state that don’t have it. Instead, the Legislature agreed to use $100 million in cap-and-trade funds and $30 million from the general fund.

Atkins said it was a luxury that the state was able to set aside $19 billion in reserves and restore some social programs.

Fiscal responsibility was something the Legislature aspired to a decade ago, Atkins said, and now the budget includes a rainy day fund, a safety fund and an education fund.

California has gone from being compared to Greece in 2008 to boasting of a $21 billion budget surplus.

Atkins acknowledged during last week's Senate budget passage hearing that there was a lot more work ahead to get the trailer bills passed.

She called the $650 million aimed at homelessness programs a “start” toward resolving the issue.

“We have a housing crisis. We won’t be solving these problems overnight, but we need to be making progress toward solving them,” Atkins said.

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Affordable housing bonds Property taxes Like-kind exchange Tax reform Natural disasters California
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