Tax Increases Then and Now

Loren Kaye
President of the California Foundation for Commerce and Education

The Governor
announces his May Revision of the budget today. Early indications are
that the Governor will hold the line on tax increases and instead
propose a budget heavy on expenditure cuts and other non-revenue
solutions.

The Governor has probably learned that raising taxes during a recession is tricky business.

The hard fought and politically-damaging battle to increase taxes in
February of 2009 has been the equivalent of dumping rip-rap into a
burst levy – for every ton that’s dumped in, hundreds of pounds wash
away.

When the four major tax increases were approved last year, legislators
were told they would raise almost $13 billion to solve the two-year
budget deficit they faced then. But every subsequent estimate has
downgraded the value of these tax increases. So by the time the
Governor introduced his budget last January, the value of the tax
increases – on an annual basis – had dropped by more than $1.6 billion,
or 14% of its total value. It’s a certainty that the value of these tax
increases will have diminished even further in the estimates released
by the Governor today.

Since advocates for higher taxes will undoubtedly be using the occasion
of the May Revision to pound home the need for new taxes, it’s useful
to remember the rest of the story. Higher taxes and tax gimmicks have
been a feature of budget balancing efforts for the past two budgets
now, and may well be part of next year’s (these numbers were
contemporaneous; their value has undoubtedly eroded since they have
taken effect):

2008-09 budget – $7.6 billion tax increases or accelerations over two years

  • Strict liability penalty for underreporting tax liabilities: $2.5 billion
  • 50 percent limit on R&D and Enterprise Zone tax credits: $900 million
  • Full suspension of net operating loss deduction: $1.6 billion
  • Accelerated estimated tax payments: $2.3 billion
  • Accelerated limited liability company fees and penalties: $360 million

February 2009 budget – $18.7 billion tax increases over two years

  • Sales and use tax rate increase of 1 percent: $8.6 billion ($3.5 billion from employers)
  • Vehicle license fee increase: $2.9 billion ($800 million from employers)
  • Personal income tax increase of .25 percent: $5.5 billion ($2 billion from employers)

July 2009 budget amendments – $2.7 billion tax accelerations over two years

  • Accelerated estimated tax payments: $700 million
  • Increase PIT withholding by 10 percent: $1.8 billion
  • Backup withholding mandate: $64 million
  • Use tax registration: $149 million

Some will argue that the Legislature added some offsetting improvements
and incentives, which they did. They include enacting a two-year carry
back of NOLs (federal conformity), credit sharing for unitary
companies, an elective single sales factor, and temporary film
production and small business tax credits. However, except for the
latter two, these have not yet taken effect, and are the subject of a
ballot measure that proposes to repeal them.

 

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