Taxable Talk

On Wednesday the California legislature rejected a proposed budget with $11 billion of cuts. California faces a $24 billion deficit.

Democrats say they won’t vote for a budget which “cuts the safety net.” Republicans won’t vote for a budget with tax increases. A budget requires a 2/3 vote; a few Republicans must vote for it. Governor Schwarzenegger has said he won’t sign a budget with any tax increases.

Welcome to the unstoppable force meeting the immovable object.

The people of California spoke in May: No more tax increases, no more gimmicks, just give us a budget which lives within our means. California’s controller has said that IOUs will be issued beginning next week unless a compromise is reached. I don’t think one will come quickly.

See no evil, hear no evil, speak no evil is how one cliche goes. Well, in Sacramento it can be changed to don’t cut programs, increase taxes, and who cares what the voters, the Governor, or the Republicans say.

Democrats in the state legislature have refused to implement the Governor’s plans to cut state workers salaries, and are proposing tax increases. Republicans in the legislature will not support tax increases. And Governor Schwarzenegger said, “I will, without any doubt, veto it. I’m very, very much against any tax increase whatsoever.”

And the Democrats’ budget is more of the usual accounting gimicks according to this article in the San Jose Mercury.

In any case, this budget—which Democrats in the legislature vow to bring to a vote next week—won’t become law. Sometime in late June we’ll find out if Democrats have discovered the fiscal and political reality or if California’s fiscal troubles will turn into the usual political stalemate.

The headline says it all. Democrats in the state legislature are telling California voters that it doesn’t matter that you turned down the budget initiatives last May, we know better and the solution must include tax increases. That’s the only possible meaning of the Democrats’ proposal for eliminating the $24 billion deficit.

While the full Democratic proposal hasn’t been released, key elements have been. Here are some of the features:

– A 9.9% oil extraction tax;
– An increase in tobacco taxes. Cigarette taxes would increase from $0.87 to $2.37 a pack;
– Reversal of two corporate tax relief measures passed last September to allow passage of the 2008-09 budget; and
– A new $15 additional vehicle license fee tax to fund state parks.

Additionally, Democrats rejected Governor Schwarzenegger’s proposed 5% cut in the pay of state workers.

Two quotes from the story in the San Francisco Chronicle tell the full picture. First, Republican Assemblyman Jim Nielsen noted that the proposal was “…the most massive and quickest tax increase ever imposed in the history of California.” Given that tax increases require a 2/3 vote for approval, this measure may be d.o.a. However, I suspect Democrats will call the tax increases “user fees” in order to sidestep the measure. No matter, Governor Schwarzenegger has said that he will veto any measure with tax increases.

Meanwhile, Democratic State Senator Alan Lowenthal noted, “I’m really concerned when we put up any taxes as Californians are struggling to pay their mortgage, their rent and to put food on the table. The perception of the Legislature is we can’t live within our means. We have to realize we will pay a price for doing this.”

Apparently, Democrats believe that the price they’ll pay from the voters is less than the price they’ll pay from the unions if they pass pay cuts.

Here’s the reality: This proposal will not become law. Sooner or later California will have to learn to live within its means. I suspect we will see yet another budget stalemate, with California running out of money in July. Democrats in the legislature believe that they can print money. Only the federal government can do that. The day of reckoning for California has been postponed many, many times. It’s here.

The only solution is massive budget cuts. Governor Schwarzenegger’s budget (in general) spends what California will bring in. I suspect it might be late August or September before we see a budget where spending matches revenues.

Today is June 16th. The California budget still hasn’t passed.

Of course, this isn’t a surprise. Democrats in the Legislature are looking at tax increases. Specifically, an oil extraction tax and an increase in the tobacco tax.

Wait, Russ, wasn’t there a measure on an oil extraction tax just a couple of years ago? And didn’t it fail?

Sure, but that hasn’t stopped Democrats from proposing the same tax increases over and over.

But Russ, hasn’t Governor Schwarzenegger vowed to veto any new tax increases? And aren’t Republicans united in vowing to not pass any new taxes?

Well, yes. But Democrats figure that Republicans that have been united in the past have seen that united stand falter. Furthermore, the Democrats largest sponsor—organizer labor (unions)—adamantly oppose the current spending cuts.

Given all of this there’s no chance of a budget deal in the next few days. My expectation is that California government will screech to a halt sometime in July.