Taxable Talk

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.

The California budget fiasco continues. In theory, the state must have a new budget in place by June 15th—tomorrow—in order for short-term loans to be taken out in July.

There’s no chance of that.

It’s not that Democrats and Republicans disagree on there being a major problem. There’s no doubt that California faces a $24 billion budget deficit (and growing). Unfortunately, that’s about all they agree on.

Democrats still hope to be able to pass legislation that increases revenues, probably through “user fees.” There’s a danger here, though; courts have struck down “user fees” that were disguised taxes.

Republicans vow to block all new taxes. It does appear that California voters don’t want any more taxes. The last time that California faced a budget fiasco (February) new taxes were passed. Californians were told that the budget that passed resolved everything through the end of the 2009-2010 fiscal year (June 2010). That wasn’t true.

Amazingly, only Governor Schwarzenegger has proposed a budget. His budget has cuts everywhere. That’s what needs to happen. The bureaucracy needs to be cut. Regulations need to be rolled back. The state needs to open negotiations with unions and force changes in pension plans to defined contribution from defined benefit. The pain must be shared.

Taxpayers are sharing in it. We’ve seen sales taxes increased by 1%, and state income taxes increased by 0.25%. Will our legislature actually take action by June 15th? No. Can it at least take action by June 30th?

We’ll see, but I wouldn’t bet on it.

As a tax accountant I know of several deadlines that fall on June 15th. If you were out of the country on April 15th, June 15th is the deadline to file your tax return (or file an extension). June 15th is also the date of the second quarter estimated tax payments for individuals and corporations. This year, though, June 15th is yet another deadline.

That’s the day that California needs to have a balanced budget or the state will be unable to borrow funds according to Governor Schwarzenegger. California faces a $24 billion deficit for the 2009-2010 fiscal year that begins on July 1st.

I doubt we’ll see a budget deal done by the deadline. Democrats are continuing in their normal ways of pandering to their constituents (unions). Senator George Runner’s commentary on AB656 shows that at least one Democrat has no comprehension that higher taxes lead to lower sales.

Unfortunately, until the elected officials feel pain I don’t think we’ll see a resolution to the crisis. Democrats are floating the idea of getting bailed out by Washington. As long as they think that’s a possibility meaningful cuts in California’s budget won’t occur. I hope I’m wrong about this but I doubt it. I expect this budget mess to drag on into the fall.