The taxes should have been raised a year ago. Make that years. The bite would have been a lot smaller. Maybe just a nibble.
Ditto some of the spending cuts, although there were $11 billion in program whacks last year.
Last summer’s gimmicky budget immediately began spewing red ink, confronting Gov. Arnold Schwarzenegger and the Legislature with a $42-billion mess spread over the current fiscal year and next.
To close that unprecedented deficit and rescue the state from fiscal ruin, the so-called Big Five -- the governor and legislative leaders -- tentatively have agreed on additional program poundings totaling $15 billion and temporary tax hikes of $14.4 billion, according to people familiar with the secret talks. Borrowing fills the rest of the hole, including $6 billion in short-term loans and $5 billion from future lottery profits.
I haven’t looked closely at the cuts -- and nothing yet has been officially announced, so anything can change -- but the apparent tax increases seem to be reasonably balanced.
And in return, Republicans will get what they’ve long wanted: an improved rainy day fund and spending controls. There also are some job-creation incentives.
Income. A 5% surcharge on what the tax filer owes. This was the idea of nonpartisan legislative analyst Mac Taylor, who estimated the take next year at $2.3 billion.
The good thing about a surcharge is that it hits everybody who pays income tax, not just the super-rich. The middle class chips in as well as the wealthy. Democrats in the past have advocated raising the top rate, which adds only to the roller-coaster volatility of California’s tax structure. When the rich have a good year, the state prospers; when they don’t -- as now -- it becomes a pauper.
Another plus: The state income tax is deductible on the federal tax return.
Vehicle license fee, the so-called car tax. Increase the annual fee on the value of vehicles from 0.65% to 1.15%, good for $1.2 billion annually.
This was a big concession for Schwarzenegger, who grandiosely blocked a scheduled return of the VLF to its historic 2% level in his first act as governor. The governor’s “car tax cut” actually went on the books as a spending increase because all the revenue had gone to local government and Schwarzenegger agreed to make up for the locals’ loss by sending them money from the state general fund. That dug the state deeper into debt.
The VLF is another state tax that can be deducted on the federal return.
Sales. Increase the sales tax by one cent on the dollar, raising $4.5 billion annually.
This makes more sense than the 1.5-cent hike previously proposed by the governor. That was a bit scary. California’s average sales tax already is 8 cents.
Gasoline. Increase the per-gallon excise tax by 12 cents, generating $1.8 billion a year.
Motorists benefit because all the tax money goes to transportation. Specifically, the revenue will pay off loans owed by the general fund to the special transportation account.
Dependent income tax credit. Dramatically reduce it from $309 to $103, gaining the state $1.4 billion a year.
This makes sense. Tripling the kiddie credit was one of the tax cuts -- along with the VLF -- that the state generously gave a decade ago when it was rolling in money and politicians eagerly were spending it all, either on new programs or tax breaks. The credit will return to the same amount it is for a single tax filer.
Besides helping to close the deficit, the income and sales tax increases benefit schools. Under Proposition 98, they get roughly 40% of general fund revenue. Senate President Pro Tem Darrell Steinberg (D-Sacramento) told reporters Wednesday that the new revenue will help schools over time to recover from the short-term cuts about to hit them.
The sales tax increase will stay in effect for three full years; the income tax four and the VLF five -- on one important condition: that the spending controls agreed to as part of the deal are approved by voters. If they aren’t, the tax hikes will stay on the books only two years. A special election will be called sometime this year.
The spending reform seems logical and long overdue:
A rainy day fund will claim 3% of the general fund off the top. It will grow to 12.5% of the general fund and be tapped to bail out the state during bad times. The companion spending control will be tied to the previous 10-year revenue trend. Spending can’t exceed a number based on that trend. And any excess revenue goes into the rainy day fund.
Schwarzenegger and Republicans regard the spending reform as a huge victory.
The former Hollywood superstar also wheedled $100 million annually for five years, starting in 2011, to halt “runaway” film production and keep moviemakers in California. That’s a good investment, as long as tax money isn’t subsidizing porno flicks. Somebody should check.
As part of the deal-closer, Democrats also agreed to nearly $700 million in tax breaks, beginning in 2011, for companies that build facilities and hire employees in California. And $200 million is set aside to provide $3,000 tax credits, starting in July, for each new worker hired.
Democrats also went along with state overtime reforms and stripping civil servants of two paid holidays, leaving them with 12.
“I don’t know any good news to come out of this,” Steinberg said. “The only good news is getting this behind us.”
The next time Capitol politicians become afflicted with deficit disease, let’s hope they nip it in the bud -- even if the treatment is painful -- rather than ever again allow the condition to become nearly fatal.