California Senate leader offers pathway out of budget stalemate

Capitol Journal

An eternal optimist, state Senate leader Darrell Steinberg believes he has found a solution to this summer’s annual budget standoff.

It’s conceivable.

He calls it “a pathway.”

Any pathway to a balanced budget, however, still seems like a long trek.

We’re now four weeks into a new fiscal year without a state spending plan.

“We need a greater sense of urgency,” says Steinberg, a Sacramento Democrat.

No kidding. Also some courage by Democrats to cut more spending and by a few Republicans to raise additional revenue to close a $19.1-billion deficit hole.

Steinberg explained his idea to me while digging into a plate of bacon and eggs at a popular breakfast spot near the Capitol.

What if, he asked, the state could increase its tax revenue but California taxpayers didn’t have to pay any more than they already do? Probably they’d pay even less.

Good luck trying to sell that one, I responded.

But his concept does have simple logic.

Here’s his thinking:

Increase state income taxes for everyone — except less so for the most affluent — and also raise the vehicle license fee (or car tax). Both the income tax and the vehicle fee are deductible when paying the federal income tax. So, depending on a person’s federal tax bracket, up to 35% of the increase in state levies would be reimbursed by the feds.

Then lower the state sales tax.

“Bottom line,” Steinberg says, “is that the tax cut and the deductible would be more than the tax increase. And the federal government would pay for the deductible.”

The feds would involuntarily help staunch the California bleeding.

Gov. Arnold Schwarzenegger and many state politicians persistently complain that Washington grabs more tax money from California than it sends back in goodies and services, Steinberg notes. Here’s a chance to partly remedy that.

Hey, nobody’s come up with a better idea in the Capitol.

There has been much more bickering than bargaining.

Democrats insist they’ve cut plenty over the last two years — roughly 20% from a general fund that once totaled around $100 billion — and they’re about through slashing.

“We have done more than enough cuts, and I have the billboards to prove it,” says Steinberg, referring to an aggressive intimidation campaign being run against him by the powerful California Teachers Assn.

Schwarzenegger and Republicans, the Senate leader says, “want to squeeze out as many cuts as possible and we’re not going to do that. We’re talking about real kids, real elderly and real people trying to get back to work” and needing child care.

“I’m fighting for two things: a minimum amount of education cuts, and for moms, kids and the elderly. We don’t have to cause people more pain than absolutely necessary.”

Republicans remain locked in their “no new taxes” mode.

Steinberg says the income-sales tax concept actually was the brainchild of Senate Republican leader Dennis Hollingsworth of Murrieta. If so, Hollingsworth has disowned it.

“It was intriguing,” the GOP leader says. “We looked at it with some interest. But once we ran the numbers, there was no way to accomplish what the Democrats wanted without a massive tax increase. Their assumptions are faulty.”

Hollingsworth adds: “Democrats have got to get serious about making some very large and, yeah, painful cuts to them, before this [stalemate] is going to come to a close. We can’t be looking at raising taxes in this economy in order to pay for essentially the safety net, or social welfare programs, that we can’t afford right now.”

In the Assembly, Speaker John Pérez (D- Los Angeles) calls Steinberg’s idea “logical.”

Two months ago, Pérez proposed a long-term borrowing scheme that pleased public employee unions but was DOA everywhere else. “It’s no longer the cornerstone of our approach,” the speaker says.

What is the cornerstone of the Assembly Democrats’ budget concept? “I don’t know that we have a cornerstone any longer,” he acknowledges.

Schwarzenegger is adamant that he won’t sign a budget unless it’s accompanied by pension, budget and tax reforms. “If I don’t get all the things that we need in order to be fiscally responsible,” he told reporters Monday, “I will not sign a budget and it could actually drag out until the next governor gets into office.”

That would be a splendid way to vacate Sacramento: leaving a pile of crud on the new governor’s doorstep.

Pension reform? That’s up to the governor and unions to negotiate, Democrats insist. Six pension rollback agreements already have been reached and more are being negotiated.

Budget reform? Nobody’s saying this out loud, but part of any final budget deal could be the resurrection of a proposed rainy day fund (Proposition 1A) that voters rejected along with a tax increase last year. Schwarzenegger wants it. Unions fear it. Democrats could accept it.

Tax reform? Wrap a bow around Steinberg’s idea and call it reform.

It would broaden the tax base by slightly flattening the income tax. Tax rates would increase by one percentage point except at the top bracket, where it would remain the same (9.55%).

The sales-tax cut, dropping 1.5 cents on the dollar, would be good for business.

Schwarzenegger would probably buy it.

But the tax plan would raise only $1.8 billion.

An additional $2.1 billion would be raised by delaying corporate tax breaks for a year.

There’d be an additional $3.7 billion saved by cutting schools and the tattered safety net.

Actually, $9.4 billion in “solutions” — including $3 billion in others cuts — already have been agreed to, Steinberg says.

“It’s not hopeless,” the Senate leader insists.

He might be outvoted on that thought.