For fast stimulus, restore the sales tax deduction

President-elect Barack Obama says he is open to new ideas about how to stimulate the economy. I heard him say it on TV.

So here’s an idea for cranking up cash registers while also helping to bail out California’s virtually bankrupt state government.

It’s not a new idea by any stretch. It’s an oldie, but one that makes sense to replay:

Simply restore the pre-1986 law that allowed all Americans who itemize on federal income tax forms to deduct their sales taxes. That, in turn, would help ease the pain in California of a virtually certain state sales tax increase.

Currently, federal taxpayers may choose either the state income tax or the sales tax, but they can’t deduct both. They could prior to a tax “reform” signed by President Reagan.


Reagan eliminated the sales tax deduction entirely. The few states that didn’t have a state income tax to deduct understandably squawked that the “reform” was unfair. One was Texas. And after Texas Gov. George W. Bush got elected president, taxpayers were given the sales-or-income tax option.

I’d permit itemizers to deduct both state income and sales taxes, but “sunset” the provision after one year. I’d probably secretly want to keep it permanent, but wouldn’t announce that for months. Better for recession-nervous consumers to think they’ve got a one-year window to purchase big-ticket items and save on sales taxes. Buy now.

A Californian who bought a $30,000 new car and was in the 25% income tax bracket would save, on average, $600.

The beauty of this tax break is that it would be a guaranteed stimulus. Taxpayers would get a break only if they bought goods.

By contrast, somebody who merely received a stimulus check could blow it at a casino craps table, on foreign travel or in a political donation. Or, he could hide it under the mattress, as lending institutions essentially did after receiving about $350 billion in bailout money last fall.

I have no idea what it would cost the federal treasury. $50 billion? $100 billion? More? Whatever. Washington obviously isn’t concerned about such things these days. They’re back there spending hundreds of billions blindly on “stimulus.”

Admittedly, there’s a flaw in this idea: Taxpayers wouldn’t actually realize their sales tax savings until they reported their 2009 tax obligation next year. So they’d also -- by Washington’s thinking -- need quick spending money.

But it would take some sting out of the seemingly inevitable California sales tax hike of -- just guessing -- 1 cent.

That would raise an estimated $6.3 billion through June 30, 2010, helping to fill a projected $42-billion state deficit. Gov. Arnold Schwarzenegger also has proposed extending the sales tax to vehicle and furniture repairs, veterinarian services, amusement parks, sporting events and golf fees. Call it $7.5 billion in all.

Let Californians be partly reimbursed by the feds.

Republican legislators are quietly coming around to the necessity for tax increases. Their anti-tax rhetoric hasn’t been as loud or widespread since the state began running out of cash and stopped paying some contractors on public works projects.

Business and anti-tax groups also cringed when Democrats, using obscure provisions of the law, passed a tax increase on a majority vote, rather than the presumably required two-thirds. That was legally suspect and would have been tested in court if Schwarzenegger hadn’t vetoed the bill. But it rattled the GOP and business lobby. What if it was legal?

Republicans and Democrats alike have heard from angry constituents about the prospect of receiving IOUs in place of tax refund checks.

The reality has sunk in that this ocean of red ink -- fast becoming the deepest in state history -- cannot be absorbed by spending cuts alone. Maybe half can. So Republicans have been holding out for budget reform -- some sort of spending cap -- that Democrats now seem ready to give them.

After all, the Democratic thinking goes, the issue must go on the ballot, and any cap that’s too tight will be strongly opposed by spending interests and rejected by voters.

There has been a recent mood shift in the Capitol. The politicians generally are less rigid and more realistic. Look for a budget agreement shortly after the governor and Democrats return from Obama’s inauguration Tuesday.

I noticed the new tone while talking to lawmakers in the Assembly chamber Thursday after the governor had delivered his brief State of the State speech that was concentrated solely on the fiscal crisis.

“There’s a reality that the problem is just too big,” said Republican Assemblyman Roger Niello of Sacramento County, vice chairman of the Budget Committee. “There’s a new focus.”

Conservative Sen. Tony Strickland (R-Thousand Oaks) acknowledged something no Republican -- not even Schwarzenegger -- would have a year ago: “We have a revenue and a spending problem now.” Before, Republicans claimed the only culprit was spending.

Democratic Sen. Alan Lowenthal of Long Beach said: “We’re going to do it all. Democrats realize the enormity of the situation and are willing to stretch as far as we can. We realize we’re going over a cliff.”

If Schwarzenegger follows his own State of the State advice about politicians shedding their “rigid ideology” and letting “this be a year of political courage,” he’ll raise the vehicle license fee at least halfway back to where it was before he cut it on the day he took office. That, more than any other act, doomed his budgets.

Restoring half the severed revenue would pick up $3 billion annually. And motorists could deduct it on their federal income tax.

Get the feds to partially pay for any budget-balancing state tax increases. One could be the Democrats’ proposed 2.5% surcharge on the state income tax.

The sales tax deduction may be a fantasy. But a sales tax increase is destined to soon be a reality.