Nov 19, 7:53 PM EST

Analyst: No 'fiscal cliff' when tax hikes end

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AP Photo/Rich Pedroncelli

SACRAMENTO, Calif. (AP) -- A steadily improving economy will buffer California's budget from a drop in revenue expected when temporary tax hikes begin to expire in the coming years, the state's nonpartisan Legislative Analyst's Office said Wednesday.

The report from Legislative Analyst Mac Taylor examined state revenue trends through 2019, the first year after the Proposition 30 tax hikes expire.

The expiring tax increases "will not necessarily cause a sudden revenue drop off - a `fiscal cliff' - for the annual state budget process," Taylor said.

In 2012, voters approved Gov. Jerry Brown's proposal to raise an additional $6 billion a year through higher taxes. The statewide sales tax was raised to 7.5 percent, an increase that will expire at the end of 2016. An increase in income taxes on the wealthy will expire at the end of 2018.

Some Democratic lawmakers have suggested extending the tax hikes. But Brown promised a temporary hike when he persuaded voters to approve them, and Republicans oppose an extension.

When Proposition 30 passed, Brown said it made California's tax system fairer and would help prevent budget cuts to schools, colleges and universities.

"The governor has made it clear that Proposition 30 was a temporary measure," said H.D. Palmer, the governor's finance spokesman.

Senate President Pro Tem Kevin de Leon, D-Los Angeles, said he looks forward to working with the governor and lawmakers on a balanced approach between being fiscally prudent and improving lives.

"First and foremost, we need to be careful stewards of the state's budget and take advantage of California's continued economic growth and revenue stability by allocating resources where they are going to make the most difference for Californians, such as education, health care and infrastructure," de Leon said in a statement.

The analyst's report also projects a $4.2 billion reserve for the fiscal year that will start next July. That includes a $2 billion deposit into the state's rainy-day fund, which was modified when voters approved Proposition 2 earlier this month.

Much of the extra money will go to public education, making the near-term outlook for schools and community colleges especially favorable, the report said.

Taylor, however, cautioned that the surplus depends on lawmakers and the governor proposing no new spending plans.

"The positive financial outlook will give us the opportunity to fund our education priorities and craft a budget that will begin to pay down unfunded pensions, grow the economy and save for a rainy day," said Assembly Republican Leader Kristin Olsen of Modesto.

The report is projecting state revenue of $111.4 billion for the 2015-16 fiscal year, a 3.7 percent increase over this year's $107.4 billion general fund budget.

In the 2019-20 fiscal year, the first one without all the extra Proposition 30 tax-hike money, the analyst projects California will collect $127.4 billion in general fund revenue.

Taylor said because the tax increase phases out over a four-year period, it will only reduce annual growth in revenue. Correspondingly, growth in school funding is smaller in future years.

"I think it was very smart in the sense that you don't have that cliff effect," Taylor said Wednesday. "It gives time for you to adjust your budget as the revenues fall away."

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