Gov. Gavin Newsom has proposed new taxes and fees to fund health care subsidies, clean drinking water and tax credits for low-income families. But state revenue outpacing even his most optimistic predictions could present a challenge for him as he attempts to raise taxes.
Last month, corporate taxes came in at $3.4 billion, much higher than the Newsom administration’s estimated $2.6 billion. Income taxes also came in ahead of projections, making up for a shortfall earlier in the year, according to the Legislative Analyst’s Office.
If the trend continues, the state is looking at another big surplus this year.
In his $209 billion January budget proposal, Newsom called for several new fees on Californians:
- A penalty for people who don’t buy insurance called the individual mandate to help pay for insurance for middle-income Californians
- A tax on businesses to fund a big increase to the earned income tax credit for low-income families
- Taxes on water, fertilizer and dairy to clean up drinking water
He’s also endorsed two other expensive proposals that could require additional revenue:
- A revamp of the state’s 911 system that would be funded by a phone tax
- Six months of paid family leave for newborns, an expansion to a program currently funded by a payroll tax
Newsom this week is expected to release an updated budget proposal, the May revision. Lawmakers must send him a final budget to sign by June 15.
At least two of Newsom’s tax proposals would require approval from two-thirds of the Legislature. Theoretically, Democrats have the votes to enact new taxes, with supermajorities in both chambers.
But voting for tax increases has hurt vulnerable Democrats at the ballot box in the past, most recently with the 2018 recall of Sen. Josh Newman after he voted to increase gas taxes.
“You have a newly elected class of Democrats from very moderate districts who are going to be hesitant to go up on a tax vote,” said Steve Maviglio, a Democratic strategist working with supporters of the water tax. “The ghost of Josh Newman still looms pretty large over the Legislature.”
The recent gas tax increase and the budget surplus could be used to attack lawmakers who vote to raise taxes even higher, said Democratic strategist Andrew Acosta.
Those in vulnerable seats will likely be wary of supporting tax increases that might fail in the opposite chamber or be vetoed by Newsom, he said. They’ll probably want assurances tax increases will pass the Legislature and be approved by the governor before they vote for them, he said.
Newsom has made it clear he wants to raise taxes on water, fertilizer and dairy products to clean up drinking water for roughly 1 million Californians.
He’s also called for expanding the state’s earned income tax credit for low-income families by $1 billion by raising business taxes.
It would represent a significant ongoing cost to the state, said Assembly Budget Committee Chairman Phil Ting. Ting has advocated for expansions of the earned income tax credit, but acknowledged it could be a difficult vote, particularly in combination with other tax and fee proposals.
“There’s a lot of issues at play,” said Ting, a San Francisco Democrat.
Newsom says his proposal to reinstate the individual mandate needs only a simple majority because it’s a penalty previously approved by Congress.
Lawmakers will likely also consider tax proposals from their colleagues when deciding which to support, Acosta said. Lawmakers have proposed several new taxes on goods from guns to tires.
“There’s quite a few of those that are rolling around in the Legislature,” Acosta said. “If you’re in a targeted seat, you’re maybe a little wary of voting for all of those.”
Newsom has already indicated he won’t approve all of lawmakers spending asks. After Democrats had already proposed billions in new spending in the first 24 hours of the legislative session, Newsom said the state wouldn’t be able to fund all the requests.
“All of this will be whittled down and we all will live within our means,” he told The Sacramento Bee in December. “We’re not going to deviate from being fiscally prudent.”
The governor’s updated budget proposal will likely clarify which proposed taxes he’ll push for hardest.
“It’s unclear how many of those are true priorities,” Acosta said. “We’ll see when the May Revise comes out which of those are real priorities for him.”
Lawmakers, too, will likely have to pick and choose which taxes to support.
“It’s going to be a balance between courage and political risk on all of these taxes,” Maviglio said. “It depends how much weight the governor puts behind the ones he wants to see the most.”