Newsom’s Plan: California’s Middle-Class Taxpayers Could Get a Rebate Under Proposal

Faced with a massive state surplus and a looming recall election, Gov. Gavin Newsom has proposed giving two-thirds of Californians some of their tax money back.

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SACRAMENTO — Riding a breathtaking and exquisitely timed $75.7 billion surplus, Gov. Gavin Newsom on Monday proposed putting $600 in the pockets of two-thirds of California taxpayers in a state rebate that if approved would be the largest in U.S. history.

The proposal, one in a series the governor plans to make this week in his annual budget revision, takes advantage of a remarkable turnaround in the state’s financial picture that comes not only as California emerges from the coronavirus pandemic, but also as Mr. Newsom works to defuse an expected recall election.

Other plans for the windfall — all requiring legislative approval — include a large expansion in an innovative state program to house homeless people, aid to low-income Californians who are behind on their utility bills and rental payments, expanded child care subsidies, drought and wildfire mitigation and more.

In less than a year, the state’s financial picture has swung from bust to boom, thanks largely to California’s tax system, which relies heavily on the kind of higher-income workers who were able to work from home and thus keep their jobs during the pandemic.

The state cashed in not only on income taxes but on taxes on capital gains from the booming stock market as investments made affluent Californians wealthier and as a number of California-based start-ups went public.

That rebound, along with a $26 billion infusion of federal stimulus money, sent the state budget soaring even though a year ago at this time, California was projecting a $54 billion shortfall. Even after fulfilling legal obligations to fund public schools, pay down debt and put money into the state’s rainy day fund, the leftover discretionary surplus is still more than twice as large as earlier estimates.

“California is not just back — California is roaring back,” Mr. Newsom, a Democrat, said on Monday in a news conference in Oakland, where he appeared with the chairs of the state budget committees and ignored questions about the recall.

His rebate plan would send state stimulus checks of at least $600 to about 11 million middle-class taxpayers with adjusted gross incomes of less than $75,000, with an extra $500 to those with dependent children; the income threshold and benefit would be halved for married couples filing separately. The proposal would cover eligible taxpayers, regardless of immigration status, who did not get a $600 state stimulus check under an earlier program that targeted more than four million low-income Californians.

The rebate checks, totaling nearly $11 billion, would return money to two in three of the state’s tax filers, according to Mr. Newsom. And they are sure to please voters as challengers gear up their campaigns to replace Mr. Newsom in the unlikely event that the state’s heavily Democratic electorate decides to recall him.

But Mr. Newsom’s motivation is not entirely political: The rebate payments are required by May 2023 under the provisions of a 1979 state spending limit. That law, passed by voters as part of a tax revolt that swept the state, calls for a taxpayer rebate if per capita spending, adjusted to account for growth, exceeds a certain level for two consecutive years.

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The proposal takes advantage of a remarkable turnaround in the state’s financial picture at the same time Mr. Newsom is preparing for an expected recall election.Credit…David Mcnew/Agence France-Presse — Getty Images

Raphael Sonenshein, the executive director of the Pat Brown Institute for Public Affairs at California State University, Los Angeles, said it was unlikely that an extra $600 would soften hard-line opposition to Mr. Newsom among the state’s minority of Republican voters.

“I think it’s awfully hard to convince people of anything these days,” Mr. Sonenshein said. “The real audience is more likely to be Democrats and independents who now have a stronger reason to stay with the governor and the governor’s party.”

Mr. Newsom’s proposal was immediate grist for conservative recall candidates.

“Californians need permanent, real tax relief, not just one-time stimulus checks,” Kevin Faulconer, the Republican former mayor of San Diego, wrote on Twitter.

While many states, including California, initially were predicting that the pandemic would be catastrophic for budgets, many of those projections have become less dire in recent months. A report by the National Conference of State Legislatures found that more than 30 states have revised their revenue forecasts upward from the start of the pandemic, allowing some to revisit cuts they previously made.

A handful, including Idaho, have proposed their own form of stimulus or tax relief, but none approximating the scope and scale of Mr. Newsom’s plan. Still, experts emphasized that many states — particularly those that rely heavily on tourism and sales tax revenue, like Hawaii and Nevada — have struggled financially.

“The inequality of the pain in the current downturn is striking,” said Richard Auxier, a researcher with the Tax Policy Center.

In addition to the proposed rebate checks in California, Mr. Newsom’s office said on Monday that it would ask the Legislature to approve $12 billion in new spending on homelessness over the next two years. If passed, that amount would be the most the state has ever committed to homelessness — 10 times greater than last year and more than the federal government allocated for homelessness in the American Rescue Plan.

“Nothing of this scale has ever been proposed in California history,” Jason Elliott, a senior counselor to the governor, said. “We can’t manage this problem any longer. We need to start solving this problem.”

Most of the money is intended to expand the state’s supply of housing through new construction or converting existing real estate for people living on the streets. In an indication of how homelessness has permeated almost every aspect of the state’s business, it would be parsed through a dozen departments.

California’s spiraling homeless problem has become a crisis up and down the state. It is most severe in coastal centers like Los Angeles and San Francisco, where the sight of sidewalk tents and freeway-side shanties are now an accepted part of the landscape, but has also exploded in smaller interior cities like Fresno and Bakersfield.

On any given evening, more than 100,000 people in the state sleep outside, accounting for about half of the nation’s unsheltered homeless count, even though the state accounts for 12 percent of the United States’ population.

Last year, with the pandemic raging and armed with billions in federal disaster and stimulus funds, Mr. Newsom’s office created a novel program to buy distressed hotels and repurpose them as permanent supportive housing, or housing that is paired with on-site social services. The program, called Homekey, used about $800 million to acquire some 6,000 new supportive units and has since inspired other cities and states to create their own hotel-buying programs.

Mr. Newsom’s new budget aims to vastly expand the Homekey concept, allocating $7 billion in grants that local governments could use to buy and rehabilitate existing buildings.

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