California faces budget gap amid uncertainty over Obamacare

California faces budget gap amid uncertainty over Obamacare

SACRAMENTO, Calif. — California Gov. Jerry Brown (D) on Tuesday proposed billions of dollars in cuts to state programs as falling revenue growth drives tax collections hundreds of millions of dollars under projections.

The cuts are aimed at eliminating a $2 billion budget gap. That's a far smaller deficit than the $27 billion hole Brown inherited when he took office in 2011, but it represents a reversal of fortune after years of revenue growth fueled by a booming stock market.

"California has the most progressive tax system in the United States. We do ask those who make the most money to pay the highest percentage of taxes. But as a corollary, we have one of the most unreliable revenue bases in the entire country," Brown said Tuesday. "It requires we keep a very close eye on the balance of our budget. And while we have sometimes the highs, they are followed always by the lows."

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Personal and corporate income taxes and sales taxes have all fallen short of budget projections, said Michael Cohen, Brown's finance director. California relies disproportionately on capital gains tax revenue, meaning the state is unusually dependent on the performance of the stock market.

The budget proposal anticipates spending $122.5 billion over the next year, slightly below the $122.7 billion California spent last year. 

California's revenue forecasts have fallen short of projections in five of the last seven months. At the same time, Brown said, state budget projections could be thrown into chaos if Republicans in Congress roll back the Affordable Care Act, which provides billions of dollars to California's Medicaid programs.

"I know the Republicans are on that track [to repeal the ACA], but the reality is going to be far more difficult and far more disruptive than they're expecting," Brown said. "If they do go down that road, it will be extremely painful for California."

Medi-Cal, the state's Medicaid program, anticipates spending $102 billion over the next year. The federal government covers most of those costs under Obamacare's Medicaid expansion program, money that could be at risk if Congress makes significant changes to existing law.

Some Republicans applauded Brown's cautious approach, but they warned that changes to the Affordable Care Act at the federal level were likely to cost California more than Brown's budget anticipates.

"If ObamaCare blows up, we're going to have real trouble," said state Sen. John Moorlach (R), who represents Orange County. "Maybe the play is, let's try to unwind this in a humane way."

Brown's budget proposal, which now goes to the Democratic-controlled legislature for months of negotiations, calls for cutting back projected growth of some state programs. It also adjusts money that would go to public schools under Proposition 98, a voter-passed measure in 1988.

Brown will ask legislators to implement some new taxes and fees, including a gas tax hike that would bring in $5 billion over a decade and a $65 fee on new vehicle purchases. Voters in November approved other new revenues, including a $2 per pack increase in cigarette taxes and an extension of tax hikes on the wealthiest Californians first passed several years ago.

And Brown plans to ask the legislature to extend California's cap-and-trade program beyond its current 2020 sunset date. The program has raised billions of dollars in auction proceeds to reduce greenhouse gases, and Brown's budget anticipates another $2.2 billion in sales.

The proposal also plans to set aside more than $1.1 billion for California's rainy day fund. By the end of the budget cycle, Brown's budget anticipates having set aside $7.9 billion for the next economic downturn, about 6 percent of the entire state budget.

State budget analysts anticipate continued growth in coming years, though at a slower rate than in the best years of the current economic recovery.

"California is growing, but less than we expected," Brown said. But, he warned: "We're now in almost the third-longest recovery" in post-war history. "So a downturn is inevitable."

"We're on the cusp of a financial calamity, and the governor senses it," Moorlach said.

Brown said even a modest downturn could cost the state $18 billion in lower tax receipts.