Taxable Talk

California’s Legislative Analyst is projecting that the budget deficit, currently pegged at about $11 billion, might grow to $28 billion. What does the Legislative Analyst, Mac Taylor, want to do to cure the problem? A 5% income tax increase.

I don’t expect Republicans in the legislature to support the Legislative Analyst’s proposal. Increasing California’s income tax rate to 14.3% (15.3% on income above $1 million) will be welcome news to the development authorities in Nevada, Arizona, Oregon, and Colorado. If this tax increase were enacted—again, I doubt this will happen—and President-Elect Obama’s probable tax increase were enacted, self-employed Californians would face marginal tax rates of above 72%. With such confiscatory taxation Californians will react by creating strategies to avoid taxation. Clearly one step would be to move. There’s no doubt in my mind that actions like that would occur, and that California will be stuck in a cycle of ever-increasing tax rates.

The only way to cure this is to drastically cut spending. Spending needs to match revenues. Ideally, California should cut tax rates rather than increase tax rates. Cutting taxes would help encourage business to relocate here rather than elsewhere. Unfortunately, the odds of tax cuts in California are less than zero.

I have no idea where the Legislature will head on this issue. Smoke and mirrors won’t work anymore. The Democrats won’t cut spending. The Republicans won’t vote for new taxes. Both sides need votes from the other side.

I’ll keep you informed.

Governor Arnold Schwarzenegger proposed increasing California’s base sales tax from 7.25% to 8.75% to help close an $11 billion budget shortfall. If the measure passes the state legislature, Orange County’s sales tax would be 9.25%. The measure is billed as a “temporary” increase in the sales tax, but you and I know that temporary measures tend toward permanency.

The Governator also proposes other measures, including mandatory furlough without pay for state workers, adding an oil tax (on oil pumped from the ground), and adding the sales tax to additional items, such as veterinary services and tickets to sporting events. All told, the increases in taxes is supposed to bring in $4.7 billion in new revenue. The other $6 billion or so would come from budget cuts.

Republicans in the state legislature vow to block any new tax increases. Meanwhile, Democrats likely will attempt to block any cuts in services. Welcome to a repeat of the fiasco that occurred while the legislature debated the budget back in June through September and ultimately passed a “smoke and mirrors” budget.

Will California’s political leaders actually look at what is truly needed to permanently resolve this crisis? Looking at everything the state does, eliminating duplicative programs, and drastically changing how the state gets revenue? Well, do pigs fly?

While the most hotly debated proposition on the California ballot was Proposition 8 (banning of gay marriage—it passed 52% to 48%) that was not the proposition with the biggest fiscal impact. There were billions of dollars of bond measures on the ballot. Unfortunately for your wallets, all but one passed.

Proposition 1A passed with 52% of the vote. $10 billion in bonds will be sold for high-speed rail. Ignoring the costs to run the system (and I think this will be a boondoggle) the bonds will cost $667 million a year to be paid back.

Proposition 2 passed with 63% of the vote. This measure will devastate egg ranches and livestock operations in California. Apparently the voters don’t understand that if this industry leaves, jobs leave and prices will go up.

Proposition 3 passed with 55% of the vote. $1 billion in bonds for children’s hospitals will be sold. It sounds so nice but just remember that as you pay higher taxes to pay back the interest.

Proposition 5 would have expanded treatment for drug offenders. This measure failed, garnering just 40% of the vote.

Proposition 6 would have increased law enforcement funding, and would have cost over $1 billion. Taxpayers in California do realize that such a non-bond measure impacts them. It received just 33% of the vote.

Proposition 7 would have mandated renewable energy use. This measure, opposed by almost everyone, received just 35% of the vote.

Proposition 10 would have issued billions in bonds for renewable energy. This is the only bond measure to have failed. Perhaps voters kept hearing the advertisements against Proposition 7 and figured that this should be voted down, too. It garnered just 40% of the vote.

Proposition 11 implements new redistricting for the state legislature. It appears to have passed, receiving 50.6% of the vote. This is one measure that I agree with as California’s legislature is completely dysfunctional.

Proposition 12 will cause the issuance of $900 million in bonds. It passed with 63% of the vote.

Measure J passed easily. This Orange County measure will require votes of the people if pension plans change. It received over 75% yes votes.

Measures R and S in Irvine passed. Each received over 60% yes votes.

Unfortunately, it’s likely to be well past midnight before we know the results of the statewide propositions and the local ballot measures. I value my sleep, so I’ll be reporting on these on Wednesday.