Governor Arnold Schwarzenegger declared California has a revenue problem and he plans to fix it by increasing taxes. But his tax increase proposals raise a number of questions.
The tax increases will come most notably in the form of a temporary sales tax of 1.5 percent for three years and adding sales taxes to certain services such as appliance and furniture repair, vehicle repair, veterinarian services, amusement parks and sporting events. In addition, an oil severance tax placed upon oil producers in the state; and increased taxes on alcohol at a nickel-a-drink.
Few should be surprised that the governor proposed a sales tax increase. After all, he pushed a sales tax proposal during the prolonged budget negotiations over the summer. However, he’s upped the ante this time—a 1.5-cent increase for three years. His office says that will bring in $3.5 billion for the 2008-2009 General Fund by the time it is implemented.
But that leads me to the first question: What kind of money would a 1.5-cent bring in for a full calendar year? The answer: Approximately $9 billion a year depending how much consumers spend in this economy. That’s a big chunk of change.
The other tax increase measures are not temporary. The service tax will bring in $357 million in 2008-9; the oil severance tax $528 million; and the alcohol tax $293 million. Each will bring in even more revenue over a full calendar year.
By my calculations, the proposed tax increases taken together will bring in enough revenue to cover the expected deficit projected for next year’s budget and maybe more. But spending cuts also offered by the governor in the $4.5 billion range are supposed to help relieve the projected deficit.
What’s going on here?
Program needs are projected to grow, of course. But, part of the budget solution should be to look for savings in these programs and eliminate the automatic increases they receive each year.
Here’s another question about the sales tax. If the government relies on this $9 billion dollars each of three years to balance the books, what happens when it disappears after the three years are up? Will the economy grow fast enough that we won’t need any of that $9 billion? Or will new programs grow along with the infusion of new money. When its time to end the tax after three years will the bureaucrats and legislators cling to it like a life preserver in a turbulent sea?
And, of course the big question: Won’t these many tax increases dampen the economy, resulting in less revenue than expected?
The administration chose the sales tax as a way to spread the pain. Those who consume more pay more. But, some consumers will be paying a lot more. Consider citizens in Los Angeles and other parts of the state who could be paying more than ten cents tax on every dollar of purchases if the temporary sales tax takes effect. Ouch!
Then there is the oil severance tax. Just two years ago, voters in the state chose not to place a severance tax on oil producers. Proposition 87 was defeated 55% to 45%. Now it’s back. Small oil producers, and there are a number, will feel the burden most immediately. Undoubtedly, the tax will find its way to consumers at the gas pump.
Why are the oil and alcohol industries singled out to help close the revenue gap?
The tax on services raises other questions. No service tax on lawyers or accountants or drycleaners — at least not yet. The service tax is designated for only a handful of services. Why? The administration says that certain services, such as auto repair, are used to charging sales tax on products they sell so it would not be difficult for them to apply the tax to services.
Or is this just a trial run for a wider service tax? Many in state government want to see a tax levied on most, if not all, services. A tax on a handful of services specified by the governor will open the door for the broader application of the service tax down the road.
The reason services might be taxed is that we are told that our economy has changed. It relies much more on selling services than selling goods so the sales and use tax should be expanded to cover services we are told. Usually, when that argument is made, it is suggested that at the same time the tax is broadened to cover services, the tax rate will be lowered. Not in this case. The plan is to tax some services and actually increase the tax rate at the same time.
The service tax, as drawn up, is a killjoy–extending the service tax to amusement parks and sporting events. An adult one-day park hopper ticket for both Disneyland and Disney’s California Adventure will go from $94 to $102.70 with tax. Ouch again! I don’t even want to think about taking a family of four.
Loren Kaye has previously opined here on Fox and Hounds Daily that the service tax would be bad for business. Small businesses are particularly concerned because they usually contract out for services while larger businesses can bring them in-house.
So many taxes, so many questions, so little time to get answers.