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Further tax increases unlikely despite California's $19 billion budget deficit

by Greg Lucas, published

With less than three weeks until Gov. Arnold Schwarzenegger unveils his revised budget plan for the fiscal year starting July 1, he and the Democratic majority Legislature have done little to reduce the state’s projected $18.8 billion budget shortfall.

Almost the only thing they have accomplished is agree that increasing taxes won’t be part of whatever solution they stitch together over the next 10 weeks.  “In this budget I refuse to raise taxes because there are so many other areas where Sacramento can be smarter, more efficient and save precious taxpayer dollars,” the GOP governor said January 8 when introducing his spending proposal.

A key reason Democrats – who, generally, would rather increase revenue than cut state spending -- aren’t pursuing a tax increase is it requires a two-thirds vote and that means “aye” votes from two GOP senators and six Republican Assembly members – votes Democrats don’t think they can win.  "I don't plan to put forward a general tax increase because I don't think we'll pass it," Senate president Pro Tempore Darrell Steinberg, a Sacramento Democrat, told The Sacramento Bee in February.

Wooing a Republican to vote in favor of tax increases is far harder in an even-numbered election year. It’s not an attractive vote for Democrats in competitive districts, either.

Nor are tax increases popular with voters. In a January Public Policy Institute of California statewide survey, 41 percent of likely voters said the state’s budget hole should be filled with a mix of spending cuts and tax increases but 40 percent said the mix should be mostly spending cuts.

“A lot of voters feel it's possible to find another solution other than taxes,” said Mark Baldassare the policy institute’s president and pollster. “A lot of people feel there’s waste in government and maybe if you cut that first, tax increase won’t be needed.”

Another reason tax increases aren’t being sought is that the budget signed by Schwarzenegger in February 2009 contained nearly $19 billion in tax increases -- $13.1 billion in the current fiscal year and an additional $5.8 billion for the fiscal year beginning July 1, according to Schwarzenegger’s Department of Finance.

All of the big-ticket increases are temporary, expiring in 2011. Proposition 1A on the May 2009 Special Election ballot would have extended the tax increases up to two more years. Voters rejected the measures by a two-to-one margin.  Among the tax increases:

     A 1 percent increase in the sales tax, an estimated $8.6 billion over two years.

     A  .25 percent personal income tax surcharge, an estimated $3.8 billion over two years.

     An increase from .65 percent of value to 1.15 percent in vehicle license fees, $2.9 billion over two years.

     A reduction in the dependent tax credit from $319 to $102, which saves the state $2.1 billion over two years.

State sales tax, income tax, bank and corporations tax collections are up $1.2 billion through February over the GOP governor’s budget estimates. Through April 21, however, monthly income tax collections have been sluggish -- $3.9 billion so far compared to Schwarzenegger’s estimated monthly total of $10.5 billion -- making it unclear whether the state’s budget mess will worsen or improve.

Republican lawmakers, however, need no further proof.  “We raised taxes a record amount last year and it didn’t work. We’re in a $20 billion hole again,” said Senate GOP leader Dennis Hollingsworth of Murietta.  He went on to add:

     People are paying increased car taxes, increased sales taxes, increased income taxes – they’re paying more and getting less and it's driving jobs out of the state and further compounding our budget problems. We have no choice but to reduce spending.

Along with California, a majority of states included tax increases in the plans they adopted to close their budget gaps. Some increases were temporary, others permanent. Some, such as extending the sales tax to services, are ideas California has flirted with but never enacted.

Thirty states enacted one or more tax increases in 2009, according to a survey by the Washington D.C. based Center on Budget and Policy Priorities. That’s the same number of states who increased taxes after the Dot Com bubble burst at the beginning of this decade, the study says.

The study also notes that 44 states raised taxes during the recession of the early 1990s and, when the economy recovered, 36 states cut taxes between 1994 and 2001.

Like California, 12 states increased their sales tax. Massachusetts boosted its sales tax from 5 percent to 6.25 percent. Nevada temporarily upped its sales tax from 6.5 percent to 6.85 percent.  Maine broadened the application of its sales tax to sporting events, amusement parks, auto repair and dry cleaning, among other services.  California has considered broadening its sales tax base but no legislation to do so has proceeded very far.

Other states expanded their sales tax to “sin.” Kentucky began taxing alcoholic beverages. Colorado, tobacco products. Vermont added liquor and digital downloads.

Again, acting on a proposal California has weighed but never approved, New York expanded the range of Internet companies subject to sales tax. Rhode island passed similar legislation.

California was one of 11 states to increase income tax.  Several states increased their top bracket or created new ones. For the tax years 2009 through 2015, Hawaii added three new brackets:  9 percent on income between $300,000 and $350,000 for couples filing jointly; 10 percent for $350,000 and $400,000 and 11 percent for income over $400,000.

Oregon enacted similar legislation, which expires after 2011, adding a 10.8 percent tax rate on income between $250,00 and $500,000 and 11 percent for anything above that. After 2011, the top rate returns to 9.9 percent for income over $250,000.  Prior to the .25 percent surcharge, California top rate was 9.3 percent and 10.3 percent on taxable income over $1 million.

New York temporarily raised its top bracket from 6.85 percent to 8.97 percent for households with taxable income of $500,000 or more. New Jersey increased its rates for top earners for one year.   New York also took aim at its millionaires, limiting their itemized deductions.

Popular targets for tax increases were alcohol and tobacco products that, from a political standpoint, tend to be easier to pass – although in California, Republicans have traditionally refused to back them.  Rhode Island more than tripled its $1 per-pack tax to $3.46. Kentucky doubled its cigarette tax from 30 cents per pack to 60 cents. So did Arkansas, going from 56 cents to $1.15. Mississippi climbed from 18 cents to 68 cents a pack – an increase expected to raise $100 million in its 2010 fiscal year.

New Jersey increased taxes on alcohol – except beer – by 25 percent and increased it’s per pack cigarette tax by 12.5 cents to $2.70. New York raised $14 million by upping its excise tax on wine and beer.

More likely candidates for increases in California are fees, which require only a majority vote but must also show a “nexus” between the charge and a service being provided.  Florida increased vehicle registration and license fees in 2009, raising over $1 billion. Idaho added fees to driver’s licenses and other vehicle transactions. Colorado boosted fees, fines and surcharges. South Dakota added $1 to its vehicle license fees. Utah added $20 to various vehicle fees.

Other states increased court fees – something California has already done.

What’s most likely to occur after Schwarzenegger releases his May Revision budget is that Democrats will seek to postpone the operative dates of several tax breaks contained in the February 2009 budget to win enough GOP votes for passage.     Schwarzenegger listed the tax credits in his January budget plan, saying if revenues didn’t materialize as hoped, he would postpone their implementation for one year.

The two biggest ones -- $1.7 billion and $504 million respectively are suspending the ability of businesses to reduce their taxable income by applying net operating losses and keeping the dependent tax credit at $102.

Although doing so while still require GOP support.

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