This was kind of a no-brainer for the Governor.  While his popularity has stumbled during the budget crisis, the legislature is worse, and the early reviews of the budget are very negative.  By vetoing it, Arnold sets himself apart from the failed budget process and gets to say that “I did all I could” when he is inevitably overridden.  

A budget veto would be a first for California, but legislative leaders in both parties said early this morning that it is likely the Legislature would override it.

“I’m pretty confident we are not going to have any difficulty” overriding a veto, said Assembly Speaker Karen Bass (D-Los Angeles). “We would do it in rapid fire.”

The last bill override was in 1979, when Jerry Brown was governor (the bills concerned state employees and insurance).

That last bit of information should tell you all you need to know about the dysfunctional state political system.  No veto overrides in 30 years?  What a farce.

Now, the flip side to this political move by the Governor is that he will be shown to have essentially no power in Sacramento.  He’s been completely divorced from the Yacht Party, having no ability to move them on any significant issue.  And now the budget will be passed over his veto (I’m guessing this eliminates his ability to blue-pencil anything out of it, too).  Schwarzenegger’s power is at its lowest ebb now.

But he’s playing a post-partisan game, and he’ll hope to regain some of that relevancy with the presumed March ’09 special election.  Wherein there will be no talk of the slashing of the vehicle license fee which contributed mightily to this mess, of course….

…adding, there’s one other wrinkle to this, and that’s this:

If lawmakers vote to override the veto, Schwarzenegger said, he will veto all the bills awaiting action on his desk.

This gives a measure of leverage to the Governor, but it looks to me like he’s learned from his Republican friends how to hijack… amazingly, at his press conference he immediately backed off this “tough guy” tactic when challenged on it, revising that he would “look closely” at those bills which involved spending, and veto an unspecified number of them.  In other words, what he does every year.  What a girlie-man.

UPDATE: Karen Bass’ statement is here.

They were only some of the victims of a chronic budget problem in California that has been going on for decades. Over the past few months it became clear that California’s chronic budget problems couldn’t be resolved in a single session of the legislature. Not when we have a 2/3 requirement to pass a budget and raise revenues – a disastrous tyranny of the minority that other states have sensibly avoided. Not when we have a revenue system based on what made sense in the 1930s – a system that careens from year to year with no long term stability.”

If the people of California are the victims in the chronic budget crisis, the 2/3 vote and the outdated revenue system are the villains. Because of the two thirds vote requirement when legislative Democrats made cuts and supported taxes– and when the governor made cuts and supported taxes-a small Republican minority was still able to hold the budget hostage for almost three months.”

If Governor Schwarzenegger had been able to convince even a handful of legislators from his party to support a budget – AS EVERY OTHER GOVERNOR IN HISTORY HAS BEEN ABLE TO DO – we wouldn’t be in this situation. But Governor Schwarzenegger was not able to produce a single vote — and the people of California were hurting — so we stepped in to pass a compromise budget that, while ugly in many aspects, at least buys us time to make progress on the real reforms we need.

I think she’s interested in changing the 2/3 requirement.

UPDATE by Robert – Garamendi supports the budget veto:

The Governor is correct to veto the proposed budget as it does not meet the minimum investment that California must make to maintain its economic competitiveness. All levels of education remain on a starvation diet that is sapping the strength of tomorrow’s workforce and leaving California employers with insufficient skilled workers, ill-prepared to compete in the world’s economy. Furthermore the most vulnerable in our society, the poor, the aged, the blind and the disabled are denied the basic needs that they deserve. We are the sixth wealthiest economy in the world – we can and we must do better – for our future and our children’s future.

This budget “kicks the can down the road” because it does nothing to solve the structural deficit, nothing to fund or to improve the efficiency and effectiveness of our poorly performing education system, the prison system or address the need for affordable health care. It uses accounting gimmicks and borrowing to plug the hole, a hole that is guaranteed to be only bigger and deeper next fiscal year.

It’s time for Californians to take a stand together. We must modernize our economy, stabilize our budget, reform and fully fund our education programs, establish a universal health care system, address the threat of climate change and adapt our water and transportation systems to the reality of the new and changing environment.

We must reestablish the successful California tradition of investing in both the public and the private sectors. We cannot allow a continuation of the gridlock caused by the Republicans’ refusal to adequately fund those investments that create economic growth and social advancement. The two-thirds vote requirement must end along with the ideology that we can continue to cut essential services and education and end up with a vibrant economy and a peaceful society.

The Legislature should return to serious daily negotiations and adopt a budget that invests in California’s future. The Republican’s have already agreed to a tax hike for every Californian who receives a pay check and for every California Corporation. A 10% increase in tax withholding is nothing more than a tax increase. This flawed budget affects those least able to put food on the table. California’s working families deserve real solutions and vital investments which ensure a better tomorrow.”

A lot of rider bills worked their way into last night’s marathon budget session, some of them pernicious (high-tech workers will be happy to know that the Legislature just cancelled their overtime).  But one of them should at least cause the state to take a minute to rejoice.  The yacht tax loophole is dead and buried.  Well, partially.

In one of the symbolic gestures of Monday night’s budget debate, lawmakers agreed to close the so-called “yacht tax” loophole.

Under current law, owners of luxury vehicles, like yachts or private aircraft, only had to keep their purchases out of California for 90 days after buying them to avoid state taxes.

That has allowed owners of such crafts to escape taxes to the tune of $21 million annually, according to the nonpartisan Legislative Analyst’s Office.

The new proposal, included in a budget trailer bill, would increase to one year the time that a purchase would have to remain out of state lines to escape taxation.

That’s not nearly good enough, actually, there shouldn’t be any amount of time that you could leave a product out of state to avoid sales tax.  If I can’t do it with toothpaste, rich people shouldn’t be able to do it with yachts.

Anyway, they’re still the Yacht Party, as evidenced by their budget vision, which is cruel and unyielding.  And, we will soon have a chance to make this extremely clear by putting the options before the voters.

Not content to see a crappy, kick-the-can budget get enacted without tacking on some pernicious elements of his own, Arnold Schwarzenegger wants additional budget reform in the budget before he’ll sign it.

All three of his demands relate to beefing up the “rainy day” account, known in budget terms as the “budget stabilization fund.”

In their tentative agreement, Democratic and Republican lawmakers had pledged to increase the size of that fund from 5 percent of the state’s General Fund to 10 percent.

But Schwarzenegger demanded the fund be increased to 12.5 percent.

That request appears to have been met. The Senate has distributed a document with highlights of the compromise, which included the 12.5 percent figure.

Schwarzenegger also insisted any transfers out of the rainy day fund could occur when the state’s revenues fall below projected spending. (The governor defines that as “prior year spending with Gann Factor adjustments.”) […]

The last demand is that the Legislature’s 3 percent deposit into the rainy day fund can only be suspended when money is being transferred out of the fund, or when the fund reaches its 12.5 percent cap.

The rainy day fund is one of those ideas that is catnip to reporters and pundits, but in practice just another strain on the overall budget.  It’s another bucket that lawmakers have to fill, without the revenues to fill it.  If we keep going down this road, there will be 0% of the budget that the legislature can actually effect, and then they can all go home and raise money year-round instead of having to head up to Sacramento every week or so.

Well, Sacramento lawmakers miss their homes and they have a couple months of campaigning to do.  So they got together and hammered out a no-taxes, no-borrowing, cuts-and-gimmicks budget that delays for at least a year the great reckoning that California desperately needs if it wants to have a functioning government.  Of course, there are new taxes in the deal, in the form of gimmicks that will eventually force the state to raise taxes higher in the future.  For example, the budget apparently borrows from taxpayers:

A key element of the deal would increase by 10 percent the amount of income taxes withheld from working Californians, and from taxpayers who earn income from investments.

The maneuver would generate about $3.8 billion to ease the budget crunch, but the plan calls for providing future refunds to affected taxpayers.

In other words, we’ll all be giving California immediate cash they then will have to hand back to us later, increasing the need for future revenue adjustments.  In the short term, this literally cuts the wages of workers in the state across the board, particularly those who can least afford it.

In addition, there are new truck-sized loopholes that will be shepherded in here.  This is from the California Tax Reform Association, and if true, it’s a bombshell:

In exchange for a small amount of temporary short-term revenues, the Legislature is poised to open two vast new loopholes in the corporation tax, loopholes which will continue indefinitely.  The impact will be to greatly diminish the corporation tax at future costs to education, health care, and public safety. This is a huge giveaway to multinational corporations.

Those loopholes are:

Net Operating Loss Carrybacks.  In exchange for suspending the ability of corporations to take losses going forward for two years, the budget deal would permit loss carrybacks-the ability to get refunds against prior taxes based on a year’s losses.  

This is nothing but a tax shelter which destabilizes the general fund.  It gives a refund for taxes already paid, with such refunds coming most likely when the economy is in recession. As a result, when we’re making cuts, the state will be cutting refund checks to large corporations. The ability to take losses into the future has been part of tax policy for 20 years, but the legislature has rejected carry-backs for 20 years, because it is nothing but tax manipulation.

Cost:  at least _ billion per year, but likely more because of the second loophole.

Exchanging credits among affiliated corporations.  For state tax credits, the state has always insisted that the credits be taken by the corporation that engaged in the activity which is eligible for a credit.  In exchange for limiting corporation tax credits for two years to get short-term revenue, the budget deal opens up the ability of affiliated corporations or subsidiaries to transfer their credits among other corporations-forever!  

There are many billions in unused credits from companies that have not earned sufficient profit to use them.  This proposal will open the ability of companies to effectively sell these credits-e.g. by allowing ownership by another company-so that the billions in unused credits can now be used by profitable corporations.  

Cost:  this could be billions per year and will total many billions over the years. In combination with loss carry-backs it will open the corporation tax to endless manipulation.

If you’re the state controller, you can say goodbye to collecting one dime of tax revenue from corporations in the foreseeable future.  I guess we’ve finally become a business-friendly state after all.  Thank you, shock doctrine!

And in addition, there will be very real pain from this budget, not just in the future, but right now.  Just in the area of health care, the costs are tremendous.

The immediate cuts in the budget deal are expected to include:

• increased reporting (every six months in Medi-Cal) with the purpose of having over 250,000 children lose coverage.

• increased Healthy Families premiums.

• delayed restoration of the 10 percent Medi-Cal provder rate, leading to a loss of hundreds of millions of federal matching funds.

These are severe cuts that will hurt not just hundreds of thousands of patients, but our state’s health system and our economy.

You read the first one right, the goal is to use “death by paperwork” to kick a quarter of a million children off of Medi-Cal.  This is the honorable, do-no-harm budget our legislative leaders have constructed.

There was no reason to believe that any persuasion would have worked on the Yacht Party from the beginning of this session.  Dragging this out 77 days so we could provide a big ol’ giveaway to corporations while doing nothing to address the long-term structural deficit doesn’t make a lot of sense.  It would have been better to force the issue through ballot initiative right now, and end this madness of a 2/3 requirement for budget and tax matters.  The state is poorly run because so much energy is put into overcoming intractable structural hurdles rather than trying to streamline a bureaucracy that must serve 38 million people.  This starts with injecting minimum accountability for the party in power and allowing lawmakers to do their jobs.  I believe that Karen Bass and Darrell Steinberg know this, and they will be more reluctant to go along with drilling a giant financial hole for future generations.  The question is whether or not they’re too late.

And on the way out the door, he had to twist it one more time.

Legislative Democrats and the governor are backing off their demand that the state budget be balanced with new taxes, according to a confidential e-mail the state Senate leader sent to fellow Democrats and obtained by The Times.

Senate Leader Don Perata (D-Oakland) told his caucus in the e-mail, sent Thursday night, that he informed the governor “we urgently need a budget — let’s see if I can work on a deal with the Reps [Republicans] that is no tax, no borrowing. He agreed.”

I quibble with the words “Legislative Democrats” at the head of the article.  It sounds like Don Perata is backing off his demand.  The Assembly appears to have no say whatsoever.  Later in the email, Perata writes “We then bring in Assembly leaders to show them what we’re sending them,” as if they are supposed to just carry out whatever The Don wishes.  Maybe he’ll force them to contribute to his legal defense fund while he’s at it.

A no tax, no borrowing budget is either cuts-only or the mother of all accounting gimmicks, probably both.  We do urgently need a budget – but we more urgently need Don Perata to extricate himself from this process.  He is nothing but a poison.  At a time when 82% of Californians are extremely worried about the late budget, and large majorities favor a balanced approach over the cruelty of the Yacht Party, NOW he decides to cave in?  If so, why wait 74 days and cripple working Californians everywhere?

Without 2/3, we can’t move forward as a state.  But of course Perata has single-handedly made it impossible to get to 2/3 in the Senate, so he’s been wrong in practically every respect.

Please resign, Don.