Taxable Talk

Governor Schwarzenegger vetoed the Democrats’ end-run budget on Friday, and the veto stands no chance of being overridden (it would take a 2/3 vote, and it’s certain that no Republicans would vote for it). So what’s next?

First, Governor Schwarzenegger will call yet another special session of the Legislature. He hopes that the legislature will pass something. After all, he only vetoed the budget because it didn’t have a stimulus attached to it. There was nary a word about the obvious constitutional problems with the budget in the Governor’s veto message.

Meanwhile, Wall Street is telling California in no uncertain terms that the fiscal house will be in order before any more bonds are issued. And that’s going to be a problem. The basic conundrum still exists: Democrats have seen almost no programs worth cutting and Republicans have seen no taxes worth enacting. Meanwhile, somewhere around $16 billion or so has to be found and/or cut to balance the budget.

How will the budget be balanced? Eventually the Democrats will agree to cut spending everywhere. User fees that aren’t taxes are going up, and up a lot. Tuition to state colleges and universities will be going up at least 10% next year. And there will be a sales tax increase, probably of 1%.

While I’d prefer cutting taxes across the board that’s just not feasible in this environment. The sales tax increase is the one that’s most likely to pass muster politically. Thus, that’s the one I think will be enacted. But I don’t expect our legislature to enact this without a gun to their heads—late January or early February is when I see this happening.

But even this probable solution won’t be enough for the 2009-2010 budget. I know from talking to my clients what income tax collections are likely to be, and it’s not going to be a pretty scene in Sacramento in April through June. Major cuts in California government are coming because the revenues flowing into Sacramento are going to be far below what is being projected.

The budget over the past few years has been balanced by gimmicks. Eventually you can’t use gimmicks and you reach the day of reckoning. That’s happening now, and a lot of people have their heads in the sand.

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

…So goes the budget fiasco in Sacramento. Nothing’s changed at all. Democrats don’t want to cut programs and Republicans don’t want to add new taxes. Governor Schwarzenegger now estimates the deficit at over $14 billion, and that the state could run out of cash in February.

The Los Angeles Times has an update but I don’t see a quick end to this crisis. Until legislators believe that not being partisan is helpful—and it’s clear that’s not the case today—nothing is going to change.

My friends know that I’m a skeptic on global warming. I don’t think that there’s proof today that anthropogenic (man-cause) global warming is a factor in the higher temperatures of recent years. Additionally, temperatures have fallen the last couple years. Am I right? On this only time will tell.

However, the California Air Resources Board has taken the theory of global warming and made it into a fact, and it’s likely to harm the Bronze Golden State’s economy. CARB has imposed a mandate that the state cut carbon dioxide emissions by 15% over the next 13 years. The regulations needed to cause this drop will be written over the next two years.

CARB believes that this will have “net economic benefits through 2020.” I haven’t a clue where they get that idea. I expect that this will give yet another reason for businesses to leave California for friendlier environs. Of course, if population drops enough California will meet its carbon dioxide goal.

All taxes are passed on to customers—that’s basic economics. The regulatory burden that is imposed on California businesses will be passed on, and we’re in the middle of a recession. But given the general dysfunction of California’s government that shouldn’t come as a surprise.