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Governor Newsom Unveils Revised CA Budget’s $100B Comeback Plan

by Alex Thacher
May 26, 2021

On May 14, Governor Gavin Newsom unveiled his “May Revision” to the proposed budget for California’s upcoming 2021-2022 fiscal year. Newsom’s current proposed budget of approximately $100 billion stands in stark contrast to last year’s projected budget deficit of $54 billion. The proposed 2021-2022 budget is supported by California’s projected $75.7 billion surplus and over $25 billion in federal relief funds, and it includes numerous tax provisions intended to supercharge California’s economic recovery from the COVID-19 pandemic.

Background

Generally, the governor must submit a balanced budget proposal to the Legislature by January 10 of each year, detailing the state’s spending plan for the fiscal year beginning on July 1. The governor’s proposed budget is discussed and amended by the Legislature, and the governor then must revise the proposed budget for the upcoming fiscal year by May 14.

This update, known as the May Revision, is a key part of the annual state budget process that determines policy priorities and resource allocation. Governors use it to unveil new proposals or to amend or withdraw earlier policy recommendations. The May Revision also updates the governor’s revenue forecast, which estimates the amount of funding state leaders will have to achieve their policy priorities.

In Detail

The governor’s May Revision includes some of the following key tax-related provisions:

  1. SALT Cap Work-Around

    1. The creation of an elective tax for pass-through entities to help mitigate the impact on California business owners of the limitation on state and local tax (SALT) deductions established by the federal Tax Cuts and Jobs Act of 2017.
  2. California Tax Credits and Incentives:

    1. Sales Tax Exemption - One-time expansion of the currently oversubscribed California Alternative Energy and Advanced Transportation Financing Authority (AEATFA) sales tax exclusion by $100 million for 2021. Applies to purchases used in an advanced manufacturing process; used to manufacture alternative source products or advanced transportation technologies; used to process recycled feedstock or using recycled feedstock in the production of another product or soil amendment; or purchases made by eligible manufacturing used to construct a new manufacturing facility or expand or upgrade a currently existing manufacturing facility. (See the state’s CAEATFA STE page for details.)
    2. CalCompetes - One-time expansion of the California Competes tax credit allocations by $180 million for 2021-22. Also, creates a one-time $250 million CalCompetes grant program for businesses that promise to meet one of the following four criteria: establish at least 500 net new jobs; make a significant infrastructure investment; commit to a high-need, high-opportunity area of the state; or receive a designation from the Director of the Governor’s Office of Business and Economic Development that the application is a strategic priority of the state.
    3. Main Street Hiring Tax Credit - Expansion of the Main Street hiring tax credit by allocating $147 million to assist firms who made hires during the current fiscal year.
    4. Film Credits - One-time expansion of the film credit program with an additional $30 million focused on relocating productions.
  3. Golden State Stimulus II

    1. Expands the original Golden State Stimulus program by extending the original program's $600 payments to 2020 tax filers with adjusted gross income of up to $75,000 and wages of $75,000 or less who did not receive a payment under the original program. The program also provides a $500 payment to most 2020 tax filers with adjusted gross income up to $75,000 and wages of $75,000 or less who claim at least one dependent on their return (receiving one of these payments would not preclude a household from receiving the other).

What Happens Next

The May Revision gives governors a visible opportunity to influence budget and policy decisions by promoting their own priorities for California just weeks before the Legislature’s June 15 deadline to pass the budget bill. It also sets the stage for budget negotiations in late May and early June between the governor and the leaders of the state Senate and Assembly(known as the “Big 3”), who must reach an agreement on the contours of the final budget.

Each house of the Legislature is expected to finalize its own version of the budget. Following this finalization, a legislative conference committee will likely meet to address any outstanding issues ahead of the June 15 deadline for lawmakers to pass the budget bill. Finally, after the Legislature passes the budget bill, the governor will sign the finalized budget ahead of the beginning of the new fiscal year on July 1, 2021.

If you have any additional questions, contact our experts.

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Author
Alex Thacher - Partner, Tax - San Jose, CA | Armanino
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