The Newest Version of the California Budget Debacle

With the election out of the way, California Governor Arnold Schwarzenegger is displaying some optimism that Republican legislators will reconsider their opposition to any and all tax increases. So far, Republicans have been content with slashing services, borrowing heavily, and employing clever accounting games to get the current year's budget into balance. With more shortfalls staring the state in the face, however, the Governor has called a special session in which he has proposed a variety of tax increases, as well as spending reductions.

The Governor's previous plan to temporarily increase the sales tax by 1-cent has evolved into a plan to hike the sales tax (still temporarily) by 1.5 cents.

In addition, the Governor proposes:
- closing loopholes in the sales tax that allow a variety of personal services to go untaxed,
- instituting an oil extraction tax (California is the only major oil-producing state that lacks such a tax),
- raising the tax on alcoholic beverages,
- and enacting some modest increases in vehicle registration fees.

His plan would also include sizeable cuts in school budgets and health care services for low-income Californians.

Of course, the sales tax, alcohol tax, and vehicle registration fee increases would all hit low-income Californians hardest just as the budget cuts would. The fact that more progressive options have not yet surfaced is a major disappointment. Nonetheless, it seems clear that the state will have to raise revenue in some way, and the fact that a Republican governor traditionally opposed to tax increases has recognized that is a major step forward.

Unfortunately, though, that step forward has been accompanied by another step backwards, as the governor is simultaneously proposing to give millions in tax breaks to film and television companies.

And making matters even worse, California's budget hole could become deeper if the federal government does not act to reverse a little-noticed IRS ruling on the corporate income tax that we publicized last week.

Tax Commission Likely to Play Major Role in Future of California's Tax System

Alongside the budget struggles sure to dominate California headlines for the next few weeks is another tax story that could ultimately end up being even more important. The Governor, together with House Speaker Karen Bass recently agreed to form a "Commission on the 21st Century Economy" with the explicit goal to "stabilize state revenues and reduce volatility". While the Commission's recommendations won't be made until April 15, 2009, there has already been some speculation about what those recommendations will be. So far, expanding the sales tax base to include more services seems to be at the top of the list. Less encouraging, however, is talk of reducing the progressivity of the income tax.

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