Democrats in the California legislature announced that they would vote this morning on a budget plan that would balance the budget by hiking taxes but doesn’t need a ⅔ vote to pass. (The state constitution requires a ⅔ vote for all new taxes.) They would cut gasoline taxes while increasing other taxes and then impose a gasoline “user fee.” Republicans in the legislature believe the plan is, as Assemblyman Chuck DeVore (R-Irvine) said, “unconstitutional on its face.” I agree.
Ignoring that for the moment, here is what the plan would do:
- Increase sales taxes by ¾¢ (0.75%);
- Increase income taxes by a 2.5% surcharge (for 2009);
- Add a 39¢ per gallon gasoline “user fee”;
- Eliminate the 26¢ per gallon gasoline tax;
- Require state income tax withholding at 3% on payments of $600 or more to independent contractors;
- 9.9% levy on oil extracted in California; and
- $7.3 billion in spending cuts (what’s being cut is not listed anywhere that I can find)
How can this package not be considered a tax increase? The Howard Jarvis Taxpayers Association plans on challenging the legality of the plan, and I suspect that they will win the legal battle. As Assemblyman DeVore told the Orange County Register, this is “a crass and craven attempt to violate the will of the people.”
It’s also bad economics. The tax increases will raise nowhere near the projected amounts. When tax rates go up tax collections go down; that’s a consequence of the Laffer Curve. California already is ranked as having the third worst business climate in the country. With these tax increases I suspect that the Tax Foundation will soon rank California as having the worst taxes in the country.
Jon Coupal, President of the Howard Jarvis Taxpayers Association, told the Los Angeles Times, “If they proceed with this proposal to raise taxes with a simple majority vote, they will be sued and they will lose…So we’re very confident this is more of a ploy than anything else.”
Meanwhile, the Pooled Money Investment Board shut down all infrastructure projects in California because no one wants to buy California bonds. There’s an obvious danger of insolvency, and assuming the courts throw out this budget (the vote will happen shortly) where will that leave the legislature? Republicans are demanding deep spending cuts and some permanency in how spending happens in California. Democrats are beholden to special interest groups and unions which don’t want spending stopped.
The reality is that deep spending cuts are coming to California. Sooner or later this reality will be forced on Sacramento. Democrats are punting today. When this is thrown back at them—and I think it will be as the gasoline “user fee” is a farce on its face—they will be forced to confront reality.
Even should the plan be found constitutional the reality is that California still will face a large budget deficit for the 2009-2010 fiscal year. Will Democrats propose to increase Californians’ taxes even further? Why not a 5% surcharge on taxes? How about an 11% sales tax rate? Shouldn’t we drive any business that can move out of California to do so? At least neighboring states can look forward to some help with their budget crises as I do see a new wave of California expatriates on the horizon.
News Stories: Los Angeles Times, San Jose Mercury, Orange County Register
The “user fee” thing is pretty nutty, but California has a very interesting dynamic. The very liberal politics tend to attract some very high-value workers (the state would be in a much worse budgetary situation if the technology industry didn’t have such fat profit margins and lavish compensation).
So there’s an odd push-and-pull: technology companies spring up there because it’s the best place to get the workers they need — but the new taxes they pay eat up most of that benefit.