The executive branch has made a good faith effort to implement California Competes, but the problems described above are largely unavoidable. We recommend that the Legislature end California Competes. In general, broad‑based tax relief—for all businesses—is preferable to targeted tax incentives.
Senate Bill 617 enhanced guidance and oversight of agency analysis of major regulations in California. However, based on our review of the analyses of major regulations conducted so far, the analyses still do not consistently follow best practices. These limitations make it difficult to understand trade‑offs associated with different regulatory options and determine which options are most cost‑effective. In addition, certain analytical requirements appear to provide limited value and there is no statewide requirement for agencies to conduct retrospective reviews.
The evidence in this report suggests that Californian children have higher rates of income mobility because of their parents’ and their own characteristics, not because growing up in California results in more mobility. On average, growing up in California results in somewhat lower adult earnings for children compared to living elsewhere in the United States. . . According to the Chetty and Hendren estimates, had these children grown up somewhere else, they would have experienced slightly greater upward income mobility. . . While growing up in California results in lower future earnings for low–income children on average, there is a great deal of variation in these outcomes at a local level. Within California, growing up in a particular county can increase or decrease a child’s future annual income by a couple of thousand dollars.
We also suggest the Legislature consider some modifications to strengthen and expand the Governor’s proposal. Most notably, we suggest the Legislature expand the number of housing projects eligible for streamlined approval by lowering the affordability requirements developers must meet. We also recommend changes to guard against possible actions some communities may take to hinder the use of streamlined approval.
This letter to Honorable Tom Lackey, Assembly Member, 36th District, estimates the effects of including transportation fuels in California’s cap-and-trade program on: (1) the retail price of gasoline and diesel fuel and (2) the additional amount motorists are spending on gasoline and diesel fuel as a result of the program.
In this follow up to California’s High Housing Costs, we offer additional evidence that facilitating more private housing development in the state’s coastal urban communities would help make housing more affordable for low–income Californians. Existing affordable housing programs assist only a small proportion of low–income Californians. Most low–income Californians receive little or no assistance. Expanding affordable housing programs to help these households likely would be extremely challenging and prohibitively expensive. It may be best to focus these programs on Californians with more specialized housing needs—such as homeless individuals and families or persons with significant physical and mental health challenges.
The administration’s revenue estimates for 2015–16 and 2016–17 are billions of dollars higher than they were in last year’s budget act. Higher revenues generate significant increases in Proposition 98 funding—$4.3 billion over the 2014–15 through 2016–17 period. After satisfying Proposition 98 and Proposition 2 requirements and funding adjustments to existing programs, the Governor’s plan allocates about $7 billion in discretionary General Fund resources.
The state’s 2015-16 budget plan—approved by the Legislature and the Governor in June 2015—was premised upon the administration’s May 2015 (“May Revision”) revenue projections. As shown below, for the state’s key taxes, the administration has lowered the budget act revenue assumptions slightly by $124 million for 2014-15 (the fiscal year that ended on June 30, 2015), while increasing key tax projections by $3.6 billion for 2015-16 and $2.2 billion for 2016-17.
Under the LAO outlook, the balance in the Special Fund for Economic Uncertainties (SFEU), the state’s traditional reserve account, is $2.258 billion at the end of 2015-16 under the Governor’s policies, compared to the $1.113 billion under the administration’s estimates. This means that, under the LAO estimates, there would be $1.1 billion more of discretionary resources available for the 2015-16 state budget than indicated under the May Revision estimates.
“Early next week, we plan to release our multiyear budget outlook that will include our assessment of the Governor’s revenue and spending estimates. Tentatively, our revenue estimates are a few billion dollars higher than the administration’s new estimates for the 2015-16 fiscal year. Our initial calculations suggest that most of these higher revenues will be consumed by higher spending requirements for schools and community colleges under Proposition 98 and higher budget reserve and debt payment requirements under Proposition 2. Our revenue estimates would, however, leave the Legislature with more money for additional reserves, debt payments, or new budget commitments. . . . We are clearly on the upward slope of the state’s revenue roller coaster. But just as the state’s revenue picture has improved significantly over just a few months, it can just as easily reverse course with a stock market or economic downturn. There is little indication that such a downturn will occur soon, but as we discussed in our November Fiscal Outlook, such slumps can occur with little warning. Restraint in approving new ongoing programs is key to preventing an unsustainable spending base. . . . If the Legislature adopts our revenue estimates, we advise caution in committing to new ongoing spending programs or tax reductions.”
As measured by PIT levied per capita (per person), the Bay Area (specifically, the San Francisco/Oakland and San Jose MSAs) and Orange County are above the statewide average, while nearly every other part of the state is below. Outside of Orange County and those two Bay Area MSAs, only Napa County (grouped in the table above with two adjacent jurisdictions) has per capita PIT assessed ($1,856) at a level above the statewide average.
Our short answer is this: while the drought is affecting many Californians and communities in different ways, we currently do not expect the drought to have a significant effect on statewide economic activity or state government revenues. A recent Wall Street Journal survey reportedly showed that the vast majority of economists agree that the economic effects of the drought will either be “too small to show up” in economic data or be “small but measurable in the data.”
Living in decent, affordable, and reasonably located housing is vitally important to every Californian. Unfortunately, housing in California is extremely expensive and, as a result, many households are forced to make serious trade-offs in order to live here. While many factors have a role in driving California’s high housing costs, the most important is the significant shortage of housing in the state’s highly coveted coastal communities. We advise the Legislature to address this housing shortfall by changing policies to facilitate significantly more private home and apartment building in California’s coastal urban communities.
The General Fund has different responsibilities today than it did in 2007 and, therefore, the level of General Fund spending today is not easily comparable to that discussed in our November 2007 Fiscal Outlook. In several key areas of public services, the state has shifted funding responsibilities from the General Fund to (1) other state and local government accounts or (2) individuals and families. Because of these shifts, current General Fund spending arguably is understated relative to what might have been expected prior to the recession. . . In a hypothetical world in which none of the shifts above occurred and the General Fund still paid for all of these expenses, General Fund spending in 2015-16 might be somewhere between $125 billion and $130 billion, much higher than the $113 billion reflected in the Governor’s recent spending proposal.
In the Governor’s 2015-16 budget proposal, the administration raises its revenue estimates, and this results in a multibillion-dollar influx of new funds for schools and community colleges under the Proposition 98 minimum funding guarantee. The Governor’s plan identifies cost pressures and budget risks in health and human services programs, and new program commitments outside of Proposition 98 are limited. The Governor’s proposal to pay off the state’s retiree health liabilities over the next few decades would, if funded, address the last of state government’s large unaddressed liabilities. We conclude the state likely will collect more tax revenue in 2014-15 than the administration now estimates. Barring a sustained stock market drop, an additional 2014-15 revenue gain of $1 billion to $2 billion seems likely in addition to the Governor’s budget projection. Even bigger gains of a few billion dollars more are possible in 2014-15. These additional 2014-15 revenues will go largely or entirely to schools and community colleges and could result in a few billion dollars of higher ongoing state payments to schools. Whether tax revenues grow further, stagnate, or, in the worst case, decline in 2015-16 will depend in large part on trends in volatile capital gains and business income.