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Flush With Cash, California Set to Send Billions in Rebates to Taxpayers

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Gavin Newsom speaking
Gov. Gavin Newsom speaks during a press conference in March 2020. (Beth LaBerge/KQED)

Buoyed by a historic influx of tax revenue, Gov. Gavin Newsom on Monday announced a massive expansion of a state economic stimulus plan.

The announcement, framed by the governor as part of his "California Comeback Plan," is a major expansion of a stimulus package Newsom signed into law in February that sent one-time payments of $600 to nearly 6 million low-income Californians.

According to the California Department of Finance, households earning up to $75,000 in adjusted gross income will be eligible for the new round of stimulus checks, with an extra $500 for families with children.

"The middle class has been hurt hard by this pandemic," Newsom said at a press conference in Oakland. "They’ve been squeezed across the spectrum."

The spending is made possible by a historic windfall in tax revenue: Newsom revealed on Monday that his administration is projecting a $75.7 billion budget surplus.

Cash from the surging U.S. stock market, along with the $26 billion the state recently received from the $1.9 trillion federal American Rescue Plan, have flooded California's coffers to a point that could not have been imagined when the COVID-19 pandemic began last year and the stock market tanked.

The announcement marks a stunning budgetary turnaround that comes as Newsom faces a statewide recall over criticism of his handling of the pandemic and as the pandemic-delayed deadline for filing income taxes approaches.

At this time last year, lawmakers faced a $54 billion shortfall as they crafted the state's spending plan, thanks to the soaring costs of the pandemic and sinking revenues as unemployment spiked and businesses closed.

Since then, the stock market has risen faster than an Elon Musk spaceship, with companies like Apple, Facebook and Tesla pumping out huge profits.

"It's a remarkable turnaround," Newsom added.

In addition, hundreds of companies have used the Wall Street surge to make initial public offerings (IPOs) of their stock in hopes of riding the wave of investor optimism, minting hundreds of new millionaires in the process.

“Because of California’s very progressive tax structure, and because most of our revenue comes from the wealthiest ... we have money," said state Sen. Nancy Skinner, D-Berkeley, the Senate's budget chair. "Now, unlike other states, we are using the money to support the many Californians who’ve been hurt during this pandemic."

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Such a windfall would traditionally lead to skirmishes between the governor and Legislature over spending priorities. But Skinner and Assembly Budget Chair Phil Ting, D-San Francisco, appeared alongside Newsom in Oakland, presenting a united Democratic front in support of the stimulus plan as the governor and his allies try to cast the recall against him as a partisan pursuit.

"I’m mindful that our values are aligned and that’s been demonstrable over the course of the last number of months," Newsom said.

The governor and legislators also unveiled a plan to spend $2.6 billion to help renters pay unpaid rent going back to the beginning of the pandemic. Another $2 billion will be directed to help residents with utility expenses, such as water and electricity.

Despite the rising economic tide, not all boats have been lifted. In March, the state's unemployment rate was pegged at a stubbornly high 8.3%, considerably north of the national rate, which now stands at 6.1%.

For a state like California, which gets half of its income tax revenue from the top 1% of earners, the upswing has created a sea of state revenue, which Newsom is embracing this week to announce a series of cash refunds and investments in programs like health care and education, as well as plans to address perennial issues like wildfire prevention and economic inequities.

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Newsom's office said the governor will be holding daily press conferences up and down the state all week to announce details of his new spending plan. The media offensive is essentially a slow reveal of this Friday's planned release of the "May Revise," an annual update on the state revenue and spending plan.

Newsom said the proposals to be unveiled this week would total more than $38 billion. A roughly equal amount of cash would be earmarked for the state's K-12 schools and community colleges, as well as reserve funds.

The tsunami of tax revenue could also trigger a spending cap enacted by voters more than four decades ago. The so-called 1979 Gann Limit, named for the Proposition 13-era anti-tax crusader Paul Gann, capped state spending at 1978-79 levels with adjustments for population growth and growth in personal income taxes. It was last triggered in 1986.

State revenues are now $16 billion over the Gann Limit, according to the state Department of Finance. By law, if that threshold is exceeded for two consecutive budget years, half of the money must be refunded to taxpayers and the rest to schools. Details on additional spending proposals will come later this week.

Two of the Republicans running for governor in the recall, former San Diego Mayor Kevin Faulconer and businessman John Cox, released statements in response to Newsom’s proposal calling on the governor to make permanent tax cuts in addition to the one-time relief payments.

As signs of soaring revenue have become clearer in recent weeks, some liberal policy advocates have been pushing Newsom to use the funds to fulfill liberal priorities such as expanding health care access.

But after months of unrelenting criticism by Republicans seeking to replace him in the recall, the economic turnaround gives Newsom an extraordinary opportunity to make the claim that his stewardship of the state has helped it emerge from the pandemic stronger than could ever have been imagined a year ago.

KQED's Guy Marzorati contributed to this report.

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