Executive Director, Bruce Iwasaki

January 24, 2003

The first few weeks of 2003 have already demonstrated the great challenges ahead. Shortly after President Bush unveiled his $674 billion tax cut package, Governor Davis announced proposed program cuts to deal with California's unprecedented budget shortfall. In two years the federal budget has crashed from a $236 billion surplus in 2000 to a $157 billion deficit last year. In response, the President proposes cutting taxes, with most of the benefit going to higher-income taxpayers. On the other hand, because California, unlike the federal government, cannot run a deficit, Gov. Davis is calling for some tax hikes * though not any change in corporate income taxes * and, as described below, severe budget cuts that will reduce the incomes of the poorest Californians.

Skepticism on Bush Plan

The most interesting response to the President's tax package is real doubt that it will stimulate the economy. Kevin Hassett of the conservative American Enterprise Institute said, "This is not an economic stimulus." William Dudley, chief U.S. economist at Goldman Sachs asked, "What does this have to do with fiscal stimulus?" He commented: "I agree with the Democratic plan much more than the president's." "It is not at all clear how the plan is going to stimulate the economy in the near term," echoed Diane Swonk, chief economist at Bank One Corporation.

This is mild compared to the scorn heaped on Bush's proposal by Kevin Phillips, former Republican strategist, who remarked that "compassionate conservatism' just took off its mask. Reviewing, in Sunday's L.A. Times Bush's lineage of investors going back to his great-grandfather, Phillips described the tax plan as "not only unfair but the policy equivalent of self-dealing."

Misleading numbers

As it turns out, many of the purported benefits from the proposed tax cuts turn out to be, on closer inspection, illusory. For example, the total costs of the President's stimulus package will exceed $900 billion, not the $674 billion over ten years that is often quoted. That is because the increase in the national debt will result in increased interest costs of at least $250 billion. The Administration also claimed that "92 million taxpayers would receive, on average, a tax cut of $1,093 in 2003." In fact, nearly 80 percent of tax filers would receive less than that. How? Because the average tax cut is much larger than the typical household would receive because of the huge tax reductions for the wealthy. The average tax cut for the middle fifth of the population would be $265. And nearly half of all tax filers would receive less than $100.

These proposals come amid chilling news about the economy. The U.S. economy lost 101,000 jobs in December. And while the unemployment rate hovered at 6 percent -- an eight-year high -- even this is misleading because it excludes 398,000 jobless people who simply stopped looking for work and therefore are not counted in the unemployment statistics. Last month capped a two-year period in which 1.6 million jobs were lost, the first back-to-back years of job losses since the Eisenhower Administration.

State Budget Woes

All of this sets the stage for California's budget problems. To plug a $35 billion gap in the 2003-2004 state budget, Gov. Davis has proposed severe new reductions in benefits and services to the poor. Casey McKeever of the Western Center on Law and Poverty Sacramento office offers this summary of major new proposed cuts in Governor Davis' budget proposal:

Public Assistance Reductions

After proposing freezes on CalWORKs and SSP payments in his Mid-Year Reductions, the Governor cuts deeper and proposes a 6% cut in benefit levels for both programs.

SSI/SSP Benefit Reduction.

The Governor proposes to reduce the costs of the State Supplementary Payment to the Supplemental Security Income payment by 24.2%, cutting the SSP on July 1, 2003 to the minimum amount allowed by federal law. The current $205 per month for a single aged/disabled individual to would drop to $156, cutting the total grant by 6.5% from $757 to $708. For couples the SSP would decrease from $515 to $396, reducing the combined SSI/SSP grant from $1344 to $1225.

Under the proposal, the state would pass-through the federal SSI COLA on Jan. 1, 2004, increasing the combined grant for a single person from $708 to $722, and for couples from $1225 to $1244.

The SSP for a single aged or disabled person has declined from $244 per month in 1990 to $205 now. The Governor's proposal, reducing the SSP to $156, would result in a 57.3% loss in value since 1990.

CalWORKs Benefit Reduction.

The Budget proposes to make a percentage reduction in CalWORKs grants roughly equal to that proposed for SSI/SSP -- 6.2%. This would drop the MAP for a family of three on July 1, 2003, from $679 to $637 in Region I (which includes Los Angeles) and from $647 to $607 in Region II. Projected "savings" from this cut are $238 million.

The Administration is proposing to increase CalWORKs Employment Services by $241.5 million as a one-time augmentation. Included in this figure is $114 million in unspent TANF funds from the 2002-03 budget. The budget also includes a TANF reserve of $200 million "to be available for unanticipated needs." The Governor's Budget Summary mentions pending TANF reauthorization and the potential need to use the reserve to comply with significantly increased participation rates.

CalWORKs benefits have lost 32.3% of their value since 1989, when the Maximum Aid Payment for a family of three was $694 per month. If the Governor's proposal is enacted, the loss would be 38% as of July 1.

Realignment

A major structural change is "realignment," the shifting of state programs to county responsibility. The Governor proposes to increase revenues in three areas, and dedicate the funding to a variety of programs whose responsibility would be shifted to local government. The three taxes -- adding two upper brackets to the income tax rate, affecting taxpayers with incomes over $130,000 single/$260,000 joint; a 1 cent sales tax increase; and a $1.10 per pack cigarette tax increase -- would generate some $8.3 billion in revenue. The direction of these revenues to local governments is in part intended to avoid the impact of Proposition 98, which otherwise would require 50% of new taxes to be used for public education.

Among the programs to be shifted to local governments and funded by these new taxes under the Governor's proposal are the following:

Food Stamp administration. The $268.1 million cost of the state share of county administration would be shifted to counties.

California Food Assistance Program (CFAP). $14.5 million in costs of the replacement program for legal immigrants ineligible for federal Food Stamps, a declining population after the Farm Bill made more immigrants eligible for federal assistance, are realigned to counties.

Cash Assistance Program for Immigrants (CAPI). The $95.3 million costs of the replacement program for legal immigrants ineligible for SSI would be shifted to counties.

CalWORKs single allocation. The $543.7 million General Fund cost of CalWORKs employment services and administration is realigned to counties under the proposal.

In-Home Supportive Services. The budget proposes to save $1.2 billion in General Fund costs by realigning all of these nonfederal costs to counties.

Child Welfare Services. $596.3 million in costs to counties for operation of the CWS program would be realigned to counties.

Foster Care. State savings include $460.1 million from realigning the state share of Foster Care grant payments, and $34.1 million from the from shifting the State share of administration.

Child Care

Stage 3 elimination and realignment of child care to counties. The Governor continues his proposal to eliminate Stage 3 child care funding, a reduction of $108.8 million. In addition, the Governor proposes that all child care and development programs, except for the State Preschool and the After School Education and Safety Programs, be transferred from the State Department of Education administration to counties under his realignment proposal. This is includes $967.6 million in funds now contained in base Proposition 98 general fund, and $863 million in federal Child Care and Development Funds.

Legal Services funding

The latest information I have is that so far, the Equal Access Funding that LAFLA and a hundred other legal services programs receive, has not been targeted for reduction or elimination. This miraculous situation appears to reflect the protection by the Chief Justice even though other parts of the judiciary's budget are being slashed. Everything is on the table, however, and it is a long time until the state budget crisis is resolved. I'll let you know of any new developments.

BGI