Talk Turns to Which Taxes to Hike

With Gov. Gray Davis leading a growing consensus that California taxes are likely to increase next year, legislators and others are contemplating an array of possible hikes, including boosts in sales and income taxes, as well as taxes on movie tickets and higher fees for passengers landing at airports.

The need for tax increases was underscored Thursday when Standard & Poor’s lowered California’s credit rating from A-plus to A, a level not seen since the recession a decade ago.

The change came a day after Davis projected the state’s budget deficit at $34.8 billion.

“The low-hanging fruit has been lopped off and now serious cuts or revenue increases will have to be considered,” David Hitchcock of Standard & Poor’s said, suggesting that a “fundamental rethinking” of the state budget is needed. “The state can’t print money, so there will have to be some kind of long-term balance.”

While Davis and his aides continue working on the budget, interviews and past proposals point to some of the most likely tax hikes:

* Car tax. Davis proposed raising it earlier this year and almost certainly will again. Although Republicans managed to deflect the earlier hike, Democrats believe they can legally open the way to raise the car registration fee on a simple majority vote, rather than the two-thirds needed for most tax hikes. That makes this increase most likely.

The legislative analyst’s office has estimated that raising the fee would bring in $3.9 billion next year.

* Income taxes. Some lawmakers and lobbyists are talking about imposing at least some income taxes on people at lower and middle-income levels. As it is, a typical California family earning less than $50,000 pays little or no state income taxes.

More likely, the Democrats who control Sacramento will embrace higher taxes for people earning $150,000 or more. Though Republicans could block this increase in the Legislature, proponents could place it on a statewide ballot and let the voters decide.

By imposing higher income taxes on wealthy Californians, the state could raise $2.5 billion in the fiscal year that begins July 1, the nonpartisan legislative analyst estimates. Treasurer Phil Angelides endorses such an idea.

“I would much rather see us raising taxes on the wealthiest Californians rather than ripping textbooks out the hands of school kids,” Angelides said Thursday.

* Sales taxes. Raising the state sales tax by a half percentage point would generate about $2.5 billion annually, the legislative analyst has said.

Some Republicans have been less opposed to sales tax hikes than in the past. But if they remain solid in their opposition to all tax increases, backers could place a sales tax increase before voters.

Some lawmakers have suggested lowering the sales tax and extending it to some services.

Taxing amusement and recreation services, such as tickets to movies, sporting events and such things as health club memberships, would raise $475 million a year, the legislative analyst says.

* Tobacco. Davis proposed raising the tax on cigarettes by 50 cents a pack in May, a step that would cost smokers $475 million next year. He is now likely to seek a larger increase, given the size of the budget gap. Assembly Democrats embraced a $3-a-pack increase earlier this year, but that idea died amid Republican opposition.

Under California’s method of financing public schools, more than half of any general tax hike up to $5 billion would go to schools, according to the legislative analyst’s office.

To get around that, the Legislature could suspend the law governing school financing -- unlikely, given the influence of the public school lobby. It also could forgo general tax hikes and instead raise fees aimed at paying for specific state costs.

Several lobbyists have suggested a variety of fee and tax increases.

Pat Leary, lobbyist for the California State Assn. of Counties, noted that enforcing sales tax laws already on the books on Internet purchases could add $200 million and perhaps as much as $1 billion to state coffers.

The Assn. of Counties also is proposing a “tax” on lottery winnings. Under that idea, lottery players could pay an extra dime as “insurance” against having to pay taxes on any winnings. Such a step would require voter approval. Leary also suggested new fees on rental cars and on airport landings to help defray the cost of heightened security.

“You’re looking at a $34.8-billion hole,” Leary said. “You can’t solve it by cuts alone.”

Standard & Poor’s decision to lower the rating on California’s voter-approved general obligation bonds will add to the state’s cost of borrowing money -- and California will be borrowing heavily as officials work their way out of the budget quagmire.

With the downgrade, California drops into a tie with Louisiana as the state with the lowest credit rating, said S&P;’s Hitchcock.

“We’ve taken harder hits,” said Treasurer Angelides, who markets the state’s bonds. “California is the midst of a fiscal storm. I have every faith that we will endure it, and we will be leading the nation out of its morass.”

Republicans renewed their claim Thursday that by raising the deficit estimate to $34.8 billion over the next 18 months, from the earlier estimate of $21 billion, Davis has inflated the problem to try to soften opposition to tax increases.

Davis administration officials dismiss the charge. Hitchcock also said he saw no reason for the administration to overstate the depth of the shortfall.

Whether the deficit estimate is inflated or not, the state faces a major problem. And Davis’ new finance director, former state Sen. Steve Peace, is sure to be a central player in any tax discussion.

As Senate Budget Committee chairman and a 20-year veteran of the Legislature, Peace voted for several tax hikes and tax cuts. He has pushed for cuts in capital gains taxes on small corporations and voted for budgets that included deep cuts to the car tax, which motorists pay when they register their vehicles each year.

Last year, however, Peace angered Republicans by arguing for a bill that would have permitted the finance director to raise the car tax without a vote of the Legislature.

Senate Democrats approved the measure over GOP objections, but it stalled in the Assembly. It is likely to be revived early next year.

Peace, who would not comment Thursday, in the past has advocated raising property taxes on businesses, an idea embraced by some Republicans, and has been a critic of tax loopholes, once holding a hearing that looked into special tax breaks.

He also has urged that lawmakers retool the relationship between state and local financing to make it more stable.