Democrats Offer $1-Billion Tax Cut Plan
Democratic leaders, struggling to strike a state budget compromise as the new fiscal year opens, offered a one-year tax cut package of about $1 billion Tuesday that includes a quarter-cent drop in the sales tax rate and breaks for renters and businesses.
While the plan was short on details, the proposal by Senate President Pro Tem John Burton of San Francisco and Assembly Speaker Antonio Villaraigosa of Los Angeles amounts to the Democrats’ first public pronouncement that they are willing to cut taxes this year.
“This is a serious proposal for the governor to consider,” Burton said at a Capitol press conference with Villaraigosa. “The cuts in the budget to finance this are serious cuts. They are difficult cuts.”
Gov. Pete Wilson and Republican leaders quickly bashed the proposal, calling it sketchy, half-baked, even silly. They were especially critical of tax cuts that would be in effect for a year or less, which Democrats described as the largest share of their proposed reductions.
What’s more, Wilson spokesman Sean Walsh noted, the sales tax reduction would mean that someone making a $100 purchase would save “a whopping quarter.”
Burton and Villaraigosa offered the package as a counter to Wilson’s call for a permanent 75% cut in the annual vehicle license fee paid by car owners. Wilson’s car tax proposal would amount to a $1-billion tax cut in the new fiscal year, and $3.6 billion a year when it is fully phased in after the turn of the century.
Burton and Villaraigosa contend that Wilson’s cut is too deep and threatens future spending on state and local government programs, particularly public schools. They also fear it would come back to haunt government the next time California’s economy sours.
“He’s out of here after November,” Villaraigosa said. “The governor is a lame duck. The idea that he would encumber us in [future] years is unacceptable. We’re willing to match him at $1 billion. After he’s gone, let the next governor negotiate with the Legislature.”
Wilson is proposing a $75.8-billion budget that increases spending on schools and most programs other than welfare, and includes the car tax cut. Democrats, who control the Legislature, have been urging that more be spent on public schools, and are proposing boosts to various programs, including welfare.
Talk of the tax cut comes as lawmakers grapple with how to spend $4.4 billion in unexpected revenue, largely the result of a booming economy. The Democrats’ plan also comes two months after Wilson offered his tax cut proposal, and as the 1998-99 fiscal year began without a budget in place.
For the eighth time in the last nine years, Wilson and lawmakers failed to adopt a spending plan by the July 1 deadline set forth in the state Constitution. Until a budget is in place, California will be unable to pay companies and individuals who do business with the state.
Prospects of a budget deal any time within the next few weeks seem dim, with Democratic leaders saying the details of their proposal have yet to be worked out. They were leaving that to separate Senate and Assembly conference committees on taxes and the budget.
“It seems silly,” Walsh said of the Democratic offer. “The only positive thing that can be said is they actually understand the meaning of tax cut: Some money goes back to the people, as opposed to them deciding how it’s spent.”
Added Senate Republican Leader Ross Johnson of Irvine: “As novel as it is to hear a Democrat use the phrase ‘tax cut,’ we would like to see them add a few more words, like real and permanent and fair.”
As outlined Tuesday, here is the Democratic proposal:
* Sales tax: A quarter-cent cut in the sales tax for six months starting Jan. 1 would save taxpayers about $465 million, legislative budget experts estimate.
In 1991, when the recession forced massive budget cuts and tax hikes, Wilson and the Legislature raised the state sales tax rate by 1.25% to 6%. Counties also charge sales taxes, at rates ranging from 1.25% to 2.5%.
As it turns out, a state law enacted in 1991 may compel lawmakers to cut the sales tax by a quarter-cent on Jan. 1, anyway. The law requires that a quarter-cent be shaved from the state sales tax if the budget reserve reaches 4% of state general fund spending in the fiscal year just ended, and is forecast to be 4% at the start of the next fiscal year.
As of May, the reserve was 3.8% of the $54.6-billion general fund. Craig Brown, Wilson’s finance director, pointed out that a year-end savings of $125 million would boost the reserve to 4%.
“The 3.8% estimate is well within the margin of estimating error to make this trigger happen,” Brown said.
* Renters: Democrats have pushed to restore the so-called renters tax credit since it was suspended in 1992 as part of an effort to bring more money to Sacramento during the recession. Under the old program, renters received $60, regardless of their income and whether they paid income taxes.
A complete restoration of the renters tax credit would cost the state about $550 million. However, Burton is calling for about $320 million to be spent on the credit, suggesting that wealthier renters would not qualify.
Republicans support a restoration of the renters tax credit, as long as the renters who benefit make enough money to pay income taxes.
* Business: Burton called for about $150 million in business tax cuts, to be fashioned by a Senate and Assembly tax conference committee. Lawmakers have offered 90 business tax breaks, ranging from proposals to help farms and the aerospace industry to abolishment of a special tax on horse racing tracks.
Villaraigosa and Burton said they arrived at the $1-billion figure in part because as much as $2 billion of the surplus comes from so-called one-time revenue, mostly from taxes on the sale of stocks.
“We’re willing to find a middle ground,” Villaraigosa said. “The reality is, to go beyond $1 billion . . . is to take away any ability we have to invest in the future.”