Anatomy of a Tax Cut That Wasn’t

Recently, a bipartisan gaggle of legislative leaders gushed that “we have adopted a budget that puts $3.6 billion back into the pockets of California taxpayers.”

Missing from this chorus of self-congratulatory rhetoric are the state’s taxpayer organizations. Why? As Gertrude Stein once said of Oakland, “There is no ‘there’ there.”

Once the press releases are peeled away, taxpayers get the biggest state spending increase in American history and a smaller tax cut than they would have received under current law had the Legislature and governor done nothing.

What is the anatomy of this $3.6-billion tax cut? The biggest chunk, $2.2 billion, is the promise of a reduction in the car tax if the state’s revenue growth wildly exceeds all rational projections. That’s quite a snag, considering that every fiscal agency in California predicts that state revenue will not reach any of the 14 thresholds necessary for this tax cut to take effect.

To deliver the promised $2.2-billion tax reduction, annual state revenue would need to grow $23.6 billion--42%--within five years. In other words, five years from now, if California taxpayers are paying $23.6 billion more per year than they paid last year, they will get a $2.2-billion tax reduction. Gee, thanks.

But that still leaves $1.4 billion of tax relief--perhaps disappointing compared to the $8.2 billion of increased taxes and fees Californians suffered in 1991, but nevertheless a lot of money. Except that $218 million of the tax cut is not the work of the Legislature at all. It is the work of a citizens group that placed Proposition 7 on the November ballot precisely because the Legislature refused to act. In fact, the Legislature is adopting competing business tax cuts that would automatically self-destruct if Proposition 7 passes. This allows them to curry favor with business leaders by claiming credit for tax cuts they know will never take place.

That leaves about $1.2 billion. It’s pretty small compared to the $5.2 billion of new spending in the 1998 budget, but better than a tax increase, right? Not exactly. “Restoration” of the renters tax credit counts for $138 million. This credit was enacted in 1972 to provide an offset to the property taxes renters pay through their rent, similar to the homeowner’s property tax exemption. The Legislature has routinely suspended it every year since 1991. Before California’s renters celebrate, consider this: If the Legislature had done nothing, the renters tax credit would have been restored automatically. Renters would have received $540 million of tax cuts.

The net result of “the biggest tax cut in history” was a $400-million increase in renters’ taxes. That leaves the tattered centerpiece of the package, a $1-billion, 25% reduction in the vehicle license fee. Tattered, indeed. The Legislature left the car tax intact. It merely applied an average $46 credit against the tax bill. Why? Because credits are easy to suspend, leaving the underlying car tax undiminished.

Here’s the dirtiest secret of the “biggest tax cut in history.” To mask the true size of the tax increases in 1991, the state enacted several “temporary” taxes. One of those was a $1-billion component of the sales tax that is automatically cut when the budget reserve grows to 4%. If the Legislature had done nothing with the state surplus, current law would have triggered that $1-billion sales tax cut by next year. But then legislators wouldn’t have been able to spend the surplus on a smorgasbord of political pork. The result is a state bureaucracy that this year will grow 6% faster than inflation and population combined.

The Howard Jarvis Taxpayers Assn. concluded that “taxpayers have been shortchanged.” Yeah, but it makes great press releases.