Assembly Democrats issued a budget plan today that borrows nearly $9 billion from Wall Street this year and essentially pays that back over 20 years with revenues from a new tax on oil production.
The $9 billion loan, plus about $900 million in new oil production tax revenues, $2.1 billion in suspended corporate tax breaks and a $500 million loan from the Disability Insurance Fund, would help avoid most of Gov. Arnold Schwarzenegger's $12.4 billion in proposed spending cuts. Assembly Democrats called it their "California Jobs Budget" because they say it would preserve an estimated 430,000 jobs compared to Schwarzenegger's budget.
This being the California Legislature, the loan maneuver isn't that simple.
First, the state would ostensibly pay off investors with roughly $600 million annually from the state's Beverage Recycling Fund, which takes in money on every redemption deposit consumers pay on beverage containers.
But wait, you say. How can the Beverage Recycling Fund afford $600 million a year? To solve this, Democrats want to approve a new tax on oil production in California, raising about $1.2 billion annually. Half of this money would go toward making the Beverage Recycling Fund whole.
So, essentially, the state would take out a $9 billion bond and repay it with oil tax revenues. Assembly budget aides say investors prefer the money be backed by container deposits rather than oil tax dollars because oil production is more volatile than our thirst for beverages.
There's another twist. Assembly Democrats have fashioned this in a way that requires only a majority vote, cutting Republicans, who have been adamant in opposing the oil severance tax, out of the process.
This involves another tax-dollar swap that -- from the state perspective -- makes it "revenue neutral," even though the state would take in an additional $1.2 billion each year from oil taxes.
The state would lower its state sales tax by one-quarter cent but receive the equivalent amount of money in oil tax dollars. Meanwhile, local governments would raise their sales tax by one-quarter cent and pass that money on to local schools. The state would then reduce its payment to local schools by a like amount. Consumers would still pay the same sales tax rate.
"First and foremost, this is a paradigm shift, it is not just a budget proposal," said Assemblyman Bob Blumenfield, D-Woodland Hills. "Prior to this budget proposal, conventional wisdom was, in order to get us out of a budget mess like this, we either had to raise across-the-board taxes, we had to make draconian cuts or we had to make serious borrowing. ... We couldn't rely on any of those three factors because it would have had this negative effect, and we had to think of this creative approach."
Gov. Arnold Schwarzenegger's office immediately denounced the plan.
"The Assembly Democrats' budget proposal includes no real spending cuts and no real reforms -- only legal gymnastics for majority vote tax increases," Schwarzenegger spokesman Aaron McLear said in a statement. "This practice of punishing taxpayers for Sacramento's failure to live within its means must stop. That's why the governor will not sign a budget unless it includes budget and pension reforms without further increasing taxes."
In some ways, the Assembly Democratic plan might be considered a cute political maneuver that cobbles together past Schwarzenegger proposals. Assembly leaders noted that Schwarzenegger himself proposed a similar idea last year when he asked the Legislature to borrow $5 billion against the California Lottery to solve the budget (an idea voters rejected). They also noted that Schwarzenegger had proposed an oil severance tax in his November 2008 budget.
As with the governor's budget and the Senate Democrats' $4.9 billion in additional taxes, the Assembly Democratic plan should be seen as a starting point for negotiations. Assembly Speaker John A. Pérez called it "the beginning of a process."
Assembly Democrats did not have estimates for what happens after 2010-11, but their proposal presumably would put the state in a difficult bind in 2011-12. That's because their plan would sustain spending at a higher level, including the Proposition 98 guarantee for schools. Meanwhile, there would no revenue source next year to provide the same influx of money unless the economy does substantially better.