The Issue: The Legislative leadership of the California government announced that plans are underway for a special session of the California Legislature to consider the revenue shortfall that has been projected for the 2008-2009 California budget.  The budget gap, previously projected at $3 billion is now expected to be closer to $10 billion, the legislative leadership said today.  Other issues that will be discussed are the mortgage system, a state economic stimulus package and an extension of unemployment benefits.

The recent economic downturn has had negative effects on the California economy.  These effects have translated in lower-than-projected state tax revenues for the early quarters and lower tax revenue projections for later quarters.  It seems that California’s leadership needs to find $10 billion and they don’t have 85 extra days to do it.

How should the Legislature fix the Budget?

There are various ideas on how to solve the revenue shortfall in the budget:

1. Schwarzenegger proposes that we reform the California Tax Code.
2. Democrats want to increase taxes on services.
3. Republicans want tax credits for employers and tax reductions for capital gains.

The Democrat’s notion of passing a tax increase will be harder now more than ever.  GOP members will not move on their no tax position, especially without the hurry caused by the shutdown of major government functions that occurs at the end of the fiscal year.  Normally, the efforts to pass tax increases are fueled by Special Interest organizing, but most Unions and other Democratic Special Interests have spent large sums of money and spare volunteer time on the November election.

Arnold’s idea is great for the next session.  I know Assembly Speaker Karen Bass has been discussing the development of a commission on the budget for some time now.

It seems the best solution will probably be a combination of both the GOP idea of tax credits to spur the lagging economy paired with some across the board spending cuts.  I say across the board because the time it would take to review every state department and determine a cut based on merit will take longer than a 4 week special session.

Other Special Session Issues:

The mortgage system and the stimulus package are going to have to wait until the budget is completed.  That is the highest priority.  We cannot reform the mortgage system of a government in bankruptcy and cannot stimulate an economy when we do not know how much money we are working with.