There were no signs this week that a budget compromise is near, and the state went another week into the new fiscal year without a complete budget being introduced in legislative form, let alone being voted on.

Meanwhile, Controller John Chiang reported August 10 that time is not healing the state’s budget wounds, as July’s revenues were below the governor’s May Revision estimates by $91 million (1.9 percent), while expenditures were running $963 million ahead of estimates through July 31.

The state ended the 2009-10 fiscal year with a $9.9 billion deficit, the controller added.

“While July’s numbers do not radically change our cash position, the failure to pass a timely budget remains the biggest threat to California’s finances,” Controller Chiang said.

The controller noted that the Legislature and governor approved a series of scheduled payment deferrals earlier this year. That legislation calls for an October education deferral to be accelerated into September if necessary to maintain the state’s cash flow. When that payment is deferred in September, the state is projected to maintain safe cash levels into October.

“Yet without a balanced budget that allows the State to begin its regular cash-flow borrowing, the State may still have to take extreme measures to manage cash, including IOUs, by late August or early September,” according to a news release from the Controller’s Office. The state’s $13.7 billion cash deficit is being covered entirely by internal borrowing.

In July, personal income tax revenues were $210 million below estimates (6.6 percent), corporate taxes were up $86 million (37.4 percent), and sales taxes came in $69 million above estimates (6.6 percent).

Compared to July 2009, total general fund revenue this July was up $99 million (2.2 percent). Personal income tax revenue was 4.7 percent higher, sales tax revenue was 4 percent higher, and corporate taxes were 5.9 percent lower than the same month last year.

In other budget-related news:

Senate Leader Says Cuts to Education and Welfare Are Off the Table.

Senate President Pro Tem Darrell Steinberg held a press conference August 12 to announce that budget cuts to education and welfare-to-work programs are off the table for Democrats. The Sacramento Bee noted that Democrats and Republicans use a different definition of what constitutes a “cut” in spending: “Senate Republican Leader Dennis Hollingsworth, R-Murrieta, said California can’t ask taxpayers for more money after raising taxes on sales, vehicles and income last year. He said Schwarzenegger’s budget would provide schools with the same dollar amount they received last year. Democrats consider that equivalent to a $3 billion cut because the state has to spend more money to sustain the same level of programs as last year, in part because the state now has to pay off past costs that were deferred.” (Source: The Sacramento Bee, August 13.)

Legislative Analyst Says Democratic Budget Has Tax Hike on Middle Class.

During a two-hour discussion of some of the tax provisions of the Democratic leadership’s budget proposal, a representative of the non-partisan Legislative Analyst’s Office (LAO) testified that the proposal would result in a net state and federal tax increase for Californians in every income group from $20,000 to $200,000 a year.

The analysis from Jason Sisney, state finance director for the LAO, came during the Senate Revenue and Taxation Committee’s August 11 no-vote hearing on the portions of the Democratic leadership’s tax proposal that would reduce the state sales tax rate while increasing the state’s income tax and car tax. By increasing taxes that are deductible from federal income tax, and decreasing a tax that is not deductible, the proposal attempts to lessen the impact on California taxpayers and shift some of the state’s tax burden to the federal government. The hearing did not go into other provisions of the plan, such as the proposed oil production tax or tax enforcement provisions.

Senator Elaine Alquist noted that under the plan, California taxpayers could be hurt if the federal government changes its deductibility laws. Senate President Pro Tem Darrell Steinberg, who presented the Democratic leadership’s plan to the committee, said the Legislature can come back and “refine” the state tax changes if the feds change deductibility laws.

Senator Steinberg praised Senator Rod Wright, saying he was a key voice in the Democratic caucus for this approach to altering the tax code. Senator Wright explained his views on tax policy, saying a “fundamental element” is that all Californians pay taxes. “Everybody should put something in the plate and have some skin in the game, whether you’re a welfare mother in Watts or (live in) a palace,” he said.

Senator Wright also voiced support for tax incentives to stimulate job creation, and for avoiding tax increases that would stifle the economy and lead to a net reduction in revenue. He said the state should exempt manufacturing equipment from sales tax. This is not a “giveaway,” he said, because it would help the state. He said a car manufacturer would pay $50 million in sales taxes to start a production line in California, but would pay nothing in Texas.

The senator said “people will adjust … to account for (taxes),” and cited the federal yacht tax and state tobacco tax as two taxes that have led to major changes in behavior.

Senator Roy Ashburn said he doesn’t support the Democratic tax plan, but he praised Democrats for proposing major changes to reduce volatility by reducing the state’s reliance on income taxes on high earners. “This plan isn’t the total answer, but this conversation today is an important step,” he said, toward tax reform that would establish a more stable revenue system for financing state government.

Robert Ingenito, from the Board of Equalization, cautioned lawmakers to allow for enough time for the state and businesses to implement any changes in the sales tax. He said the BOE needs approximately one month to train staff and notify retailers of any change in the rate. He also noted that the Democratic leadership’s budget estimates assume that their proposed sales tax change would be in effect for the entire fiscal year, which does not account for the lead time or the nearly two months that already have gone by.

Professor Joe Bankman, of the Stanford Law School, said he likes the Democratic proposal because he thinks it is a very good idea for states to use more taxes that are deductible from federal taxes. However he criticized some existing elements of the state’s tax policy, saying, “We’re taxing business inputs – that’s just stupid.” The professor called for a sale tax on services, and recommended a higher gas tax to discourage driving, and reductions in other taxes if the cuts would encourage more productive economic activity.

Jean Ross of the California Budget Project and Lenny Goldberg of the union-affiliated California Tax Reform Association testified in favor of taxing services, and suggested modifying the Democratic tax plan to increase taxes on those with higher incomes and reduce the plan’s impact on those with lower incomes.

Governor Says Tax Increases Appropriate Every 20 Years.

Governor Arnold Schwarzenegger said during an August 10 speech to San Jose Silicon Valley Chamber of Commerce that he is done raising taxes. “Every 20 years we can go there,” he said, referring to tax hikes. He noted that Governors Ronald Reagan and Pete Wilson both raised taxes, as he himself did in 2009.

Governor Schwarzenegger said the state now is benefitting from the revenue from the 2009 tax increases, and added, “Why would I go and increase it again?”

As he has done in several recent speeches, the governor said the state needs to stimulate the economy to bring in extra revenue. “Let’s give incentives to businesses – tax incentives, new hire tax incentives – so that you inspire businesses to hire more people,” he said.

Discussing Democrats in the Legislature, he said: “They want to take away from business the incentives. They call it ‘loopholes.’ … So, it’s an ideologic difference, a philosophic difference that we have, and we’re going to work through that and come out with some kind of a compromise.”

Californians’ Income Down $40 Billion From Last Year.

The federal Bureau of Economic Analysis reported this week that personal incomes of California workers fell by $40 billion in 2009 compared with the previous year – the state’s first year-to-year decline since World War II. The bureau said 2009 income statewide totaled $1.56 trillion, down about 2.5 percent from $1.6 trillion in 2008. The 2009 level also came in just under the 2007 total.

California’s decline was a third more than the national 1.8 percent personal income drop, reflecting the relative intensity of the state’s recession. (Source: The Sacramento Bee, August 11.)

Feds Approve $2.5 Billion for California Teachers and State Government Programs.

The U.S. House of Representatives voted August 10 to approve a $26 billion jobs bill that will send at least $2.5 billion to California “to help balance the state budget and pay the salaries of its schoolteachers,” The Sacramento Bee reported. President Barack Obama immediately signed the measure.

“We can’t stand by and do nothing while pink slips are given to the men and women who educate our children or keep our communities safe,” the president said earlier in the day, exhorting the House to send him the measure.

Congressman Tom McClintock of Elk Grove, who voted against the plan, said the aid package will cost the average family $330 per year. He said states should deal with their budget woes on their own, adding that “bailing out bad management doesn’t improve it.”

H.D. Palmer of the California Department of Finance said the bill will send $1.2 billion directly to the schools and another $1.3 billion can be used to help plug the state’s budget hole. The amount is about $500 million less than the governor’s budget proposal assumes.

Democrats said the money will keep approximately 16,500 California teachers from being laid off. (Source: The Sacramento Bee, August 11.)

Courts Block Governor’s Furlough Order.

The First District Court of Appeal decided Thursday to let stand a trial court judge’s order that blocks furloughs for state employees. Governor Arnold Schwarzenegger, who ordered furloughs as a cost-cutting measure to avoid the need for state employee lay-offs, indicated that he will appeal to the California Supreme Court. (Source: The Sacramento Bee, August 12.)