The leaks on the budget deal are flowing out of the Capitol, but without a view of the whole package it’s impossible to make intelligent comment on any trade-offs that make up the deal. Numbers were attached to the tax side of the proposal, but without knowing about spending cuts, economic stimulus, or spending restraints we are looking at only one side of the painting.
According to reports, the tax increases are temporary, although there may be one–a 12-cent increase per gallon of gasoline–that could be permanent. Other tax increases reported: The sales tax will increase one-cent, the vehicle license fee will jump from .65% to 1.15%, not back to the 2% level where it stood when Governor Schwarzenegger cut it in 2003, and a surcharge will be placed on income taxes. It is unclear if that increase applies only on taxable income over one-million dollars or to other income taxpayers as well.
None of this is acceptable without counterbalancing methods to restrict spending and juice the economy so we’ll have to see what the whole package looks like. Even without knowing the spending side measures, it is safe to say these tax increases will put a strain on California’s economic activity and attempts to recover.
Once again, it appears the state will rely on high-end taxpayers to bring in more revenue, a formula that has caused ups and downs in budget revenues in recent years. With a sales tax that hovers around 10% in some counties, sales could be hurt and avoidance through Internet purchases would increase. With the price of gasoline going up, consumers will not welcome the 12-cents a gallon tax increase. The vehicle license fee, while not at the 2% level it was previously, still would be above the 1% rate that would be appropriate, for the VLF is a fee in lieu of the property tax, and California has well established the property tax rate at 1%.
The breadth of these tax increases is extraordinary and potentially debilitating to the economy and to struggling taxpayers. But these are extraordinary times and now the focus turns to the spending side.
A spending restraint of undetermined structure would be placed on a special election ballot this year we are told. If voters back the spending limit, the temporary taxes last five years. If the voters say no they disappear after two years.
I have written previously that a sunset provision would be necessary to prohibit spending interests from going after a spending limit. This proposal seems to do the trick. However, those spending interests may decide to gamble anyway. Live with two-year taxes and oppose the spending limit with the thought that they can convince the voters to support permanent tax increases for their popular missions through an initiative in a future election.
If that is the gamble of spending interests, they may want re-think things when they hear the reaction of voters to the tax increase proposals. I expect the voters will be extremely displeased. In the end, they may accept some taxes if they think a fair deal is in place, but if there is an attempt to undercut the deal by opposing a spending limit, no tax increases will be passed for a long while.
We can just make conjectures or open fire on the plan now, but it is fruitless until we see the whole program.