Democrats Propose Income Tax Hike

Democrats in the Assembly on Tuesday proposed raising taxes on high-income Californians to close the state’s multibillion-dollar budget shortfall and bring more money to schools.

Democrats announced the idea of an income tax hike on single taxpayers earning more than $143,000 a year and couples earning more than $285,000 as part of their alternative to the $115.7-billion budget drafted by Gov. Arnold Schwarzenegger. His proposed spending plan would withhold billions of dollars schools are owed under voter-approved funding guarantees that he and the Legislature suspended last year.

The proposed tax increase, which would raise an estimated $1.8 billion a year, suggests bruising negotiations ahead with the governor, who has flatly declared he will not agree to any new taxes.

The Legislature’s deadline for approving a budget for fiscal 2005-06 is June 15, and Schwarzenegger has until the end of the month to sign it. Those deadlines have rarely been met in recent years, leading to disruption in state payments to school districts, local governments and vendors -- and frustration among voters.

In addition to proposing a tax hike, the Democrats’ budget rejects the governor’s plans to cut the salaries of in-home care workers for the disabled. It also restores cost-of-living increases in state payments to low-income seniors and the state’s contribution to the retirement fund for public-school teachers.

The proposal also projects property taxes coming in at $200 million higher than the administration estimates, as well as more in federal money to help pay for state programs.

The call for a tax hike follows months of attacks by education groups on the governor’s proposed budget. Those broadsides have caused the governor’s approval ratings to sag in recent months -- so much so that Democrats are gambling that voters’ distaste for his education plans will outweigh anxiety about new taxes.

“We think we are right,” said Assembly Speaker Fabian Nunez (D-Los Angeles). “We think the governor and Republican legislators are wrong.

“We are going to take this fight to the people of the state of California,” he said, appropriating one of the governor’s favorite populist challenges.

Democrats have not stood united in support of a new tax to balance the budget since former Gov. Gray Davis raised vehicle license fees by $4 billion. That move proved extremely unpopular and ultimately helped fuel the successful effort to recall him in 2003.

One of Schwarzenegger’s first acts as governor was to roll back the fee hike, and he has vowed not to replace it.

The governor and anti-tax groups called the Democrats’ plan a nonstarter, saying a tax hike would only hurt the state’s fragile economy by prompting high earners to move elsewhere.

“The governor has made his opposition to tax increases abundantly clear,” said Department of Finance spokesman H.D. Palmer, who added that Schwarzenegger’s budget plan increases spending on education by about $3 billion over this year.

Republican lawmakers, whose votes would be needed to pass a tax hike in the Legislature, quickly denounced the Democrats’ proposal.

Assembly Budget Committee Vice Chairman Rick Keene (R-Chico) called it “more evidence that despite California’s deficit, Democrats just aren’t ready to give up their voracious spending appetite.”

Nunez made clear Tuesday that Democrats will not vote for any budget that fails to restore more money to schools. He said raising taxes on the wealthy is the most reasonable way to ensure the education money. If Republicans refuse to support that approach, Nunez said, Democrats will demand that the state borrow to get the money.

California has already borrowed so much that it faces multibillion-dollar deficits for the next several years.

“The point is education [spending] increasing,” Nunez said. “Not necessarily how you get there.”

Palmer said the approach the Democrats want would add to the state’s budget problems.

“They want the state to tax more or borrow more to spend more,” he said. “Either way, we don’t agree.”

The Democratic strategy appears driven by the lack of public enthusiasm for Schwarzenegger’s education agenda. A poll released last week by the Public Policy Institute of California found that only 29% of Californians approve of the governor’s handling of education issues.

Assembly Budget Committee Chairman John Laird (D-Santa Cruz) pointed out that the same poll concluded that 68% of Californians support raising taxes on the wealthy to help close the state’s $6-billion budget gap.

Tax hikes on the rich are among the few types of new taxes that consistently receive voter support in public opinion polls. Others include raising taxes on tobacco and raising taxes on corporations. Most Californians would not pay such taxes.

And taxes on the wealthy have already proved popular at the ballot box. Last year, Californians voted for a new 1% tax on income over $1 million. The measure is expected to raise $600 million a year for new mental health programs.

Economists caution that the state can go back to that well only so many times before rich people begin to move elsewhere. But some say that the latest Democratic proposal -- which would put income tax rates on the rich back where they were when former Gov. Pete Wilson temporarily raised taxes during the budget crisis of the early 1990s -- would not seriously damage California’s economy.

“We already have a number of unfavorable tax conditions in California, and you wonder about adding one more,” said Mike Bazdarich, a senior economist at the UCLA Anderson Forecast, which businesses rely on to project trends.

“But I don’t think this particular move is going to destroy the California economy all by itself.”

Bazdarich and his colleagues have warned that the decline of the state’s school system could pose as big a threat to the state’s economic growth as its heavy reliance on income taxes.

“We spend a lot less per student than other states and we have bigger classes,” said Bazdarich. “On most counts, our schools system is in bad shape.”

Republican strategist Dan Schnur warned that the call for a tax hike may play right into the hands of a governor who got elected by successfully portraying California lawmakers as reckless spenders.

“Given the obvious political downsides, the only possible reason to ever propose a tax increase is if you think you will get one,” he said. “They know they will not get one from this governor.

“The Democrats must think they are going to be able to score political points,” Schnur continued. “But the obstacle tax-the-rich proposals always have is a lot of voters out there aren’t rich but would like to be someday, or they hope their children will be.”

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Tax increase proposed

Assembly Democrats would impose higher state income tax rates on the wealthiest taxpayers to close the state’s budget shortfall. Currently, the highest rate is 9.3%.

New rates would apply to taxable incomes that exceed:

*--* Filing status 10% rate 11% rate

Single or married filing separately $142,582 $285,164

Head of household 194,075 388,151

Married filing jointly 285,164 570,327 *--*

Democrats say a married taxpayer filing jointly could expect an annual net tax increase of:

*--* Taxable income Tax increase* $309,577 $124 555,554 1,239 925,924 6,896 *--*

*Assumes taxpayer has average deductions, is not subject to alternative minimum tax and deducts state taxes on federal tax return.

Source: Assembly Democrats