Sacramento vs. 1,000-pound Gorilla: budget woes bring more cuts, tax increases.

• Author: McCrary, Deanna
• Position: Federal Tax - Franchise Tax Board, California

"This past year was one of the ugliest budget sessions in my memory," said FTB Executive Director Gerald Goldberg at this year's annual State Committee on Taxation meeting with the FTB in October. "The budget was the 1,000-pound gorilla last year and will be again this year."

The state recently experienced a two-year budget shortfall of $23.6 billion.

"We came in with a balanced budget and are now, again, looking at a $15 billion to $25 billion shortfall through this current and next budget year," said Goldberg. "So we haven't made a lot of progress, and we have used up the easy ways of closing the shortfall."

California's general fund is roughly $80 billion.

To put things in perspective, Goldberg said that even if every state government employee under the direct control of the administration were laid off, California would still end up with a budget shortfall. The state has more than 188,600 authorized positions.

"We're going to have to be creative," he said. "This [shortfall] won't be easy to close."

20-Percent Drill

Although the budget wasn't signed until September--two months after the constitutional deadline--there is no penalty for failing to meet the deadline.

"But it does create a certain amount of chaos," said Goldberg.

The FTB is undergoing a series of drills, such as the "20-percent drill," in which officials play out what would happen if the agency's budget were cut by 20 percent.

"You can imagine that a 20-percent cut to our budget would have a draconian effect--and it does," says Goldberg. "The irony is that there is no way to do this except to cut into our revenue production capabilities."

Ways to Save

Revenue increases, expenditure reductions and restructuring will have to be considered to save money, said Goldberg, adding a prediction that California will end up with its own tax shelter program.

A restructuring proposal under consideration--a result of the 20-percent drill--would combine the FTB and state Board of Equalization, saving the state an unknown amount.

Goldberg said a better idea is to combine the FTB with the Employment Development Department's tax branch.

Combining the FTB with the EDD is something the governor could do via executive order, subject to ratification by the Legislature, whereas joining the BOE and FTB would require a constitutional amendment.

"They've been talking about this for years," said Stuart R. Josephs, chair of the Federal Subcommittee of the Committee on Taxation. "The budget crisis might...