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Schwarzenegger threatens to suspend tax breaks to help close the budget gap

by Mytheos Holt, published

Governor Schwarzenegger’s independent streak, celebrated by some as a sign of his nonpartisan and judicious political philosophy, and lamented by others as an inability to deal harshly with people outside his own party, has once more begun to reappear. In his most recent budget plan, the Governor warns that, if federal bailouts are not forthcoming, he will intentionally delay the implementation of several tax breaks/credits which California has otherwise promised to extend, to the dismay of all voters for whom tax hikes are seen as correlating with economic downturn. In other words, the Governor has abandoned his party’s traditional base once more, and as always, his motives are elusive.

The hard facts, however, are not. It is surely true that, whatever Schwarzenegger’s wisdom in suggesting what amounts to a tax hike during fragile economic times, desperate times call for desperate measures, and something must be done to soothe the State’s unsustainable financial course. Unfortunately, it is also surely true that Schwarzenegger is ignoring options, though whether he is doing this purely because of outside political pressure, or because of a genuine ideological commitment to ignoring those options is up for debate.

Long-time readers of this site will recall that the California budget is dominated by education spending – a full 40% of the budget goes to K-12 education, and 13% goes to higher education. What these readers may not know is that the first of those alarming facts – the 40% budgetary allocation – is required as a matter of law. This is an unfortunate omission, for just as liberal voices in California politics have made the destruction of Proposition 13 a personal goal for a long time, then it is only right that conservative voices have their own fiscal bogeyman. Proposition 98, which guarantees a 40% budgetary entitlement to education, could easily fill such a role and, if nothing else, having conservative voices take this law to the cleaners as thoroughly as liberals have attacked Proposition 13 would spark a much-needed discussion about the bill.

And that discussion is intimately tied to Schwarzenegger’s warnings of tax hikes, for along with the standard economic arguments about needing to pay the piper, the Governor enjoys a powerful political incentive to dismiss tax relief: The California Teachers’ Association (CTA), one of the most vocal and influential education lobbying groups in the State, has bankrolled several initiatives intended to flat-out eliminate existing tax-breaks. Schwarzenegger, by suspending these breaks, even temporarily, would thus place himself in comity with the CTA, a very powerful ally.

But why should the CTA oppose tax breaks? Simple – Proposition 98 guarantees that 40 cents out of every dollar collected by the state will be automatically devoted to education funding, and it doesn’t take a math teacher to tell you that the more dollars come into the state, the more those 40 cents start to add up. Of course, tax hikes are not the only way to increase state revenue – economic growth would do just as nicely – but they’re certainly a more obvious and more easily attainable way to do it, especially for a lobbying group with copious amounts of funding and political capital to throw around.

As such, it should surprise no one that Schwarzenegger’s threats are not the only indicators of a pro-tax sentiment among California’s political class. Indeed, many tax-friendly ballot initiatives have qualified for the November ballot, some incremental and some genuinely radical. On the incremental side, one finds initiative 1375, which “repeals recent legislation that would allow businesses to carry back losses, share tax credits, and use a sales-based income calculation,” whereas on the radical side there is a bill drafted by the noted progressive linguist George Lakoff which proposes to repeal Proposition 13 altogether. These and other proposals can and should be examined in greater detail, but it is worth noting them in passing, if only to foreshadow the fiscal struggle to which California will soon bear witness.

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