Budget +28: A Tax Swap?
Consider this the first real leak from the seemingly stalled budget negotiations: a proposal being bandied about to raise most income tax rates in California while lowering sales tax rates, erasing between $2 billion and $3 billion of the deficit.
Several legislative and lobbyist sources who spoke only on background (as with most budget rumblings) confirm that such proposal is being talked about, and that it's purported selling point is that it might not cost many Californians any money.
That's because state income taxes are deductible when it comes time to pay Uncle Sam. So, the theory goes, any hike in state rates won't actually hurt the pocketbooks of millions of Californians once they file their federal taxes. And the proposal would be sweetened by then lowering the state portion of the sales tax -- thus perhaps saving money for many folks (given that sales taxes are not deductible).
It's hard to get a precise estimate about how much gross income tax revenue would come in from this proposal, which apparently calls for bumping up all state income tax brackets except the current top bracket of 9.3% (remember that millionaires in the state pay an additional 1%). But remember that the income tax windfall would be offset by the subsequent loss in sales tax revenue -- hence the figure of $2 billion-$3 billion as a net infusion into state coffers.
Democrats may still want their demand to cancel corporate tax breaks to go along with this plan; if so, that could probably bring the total tax infusion to as much as $4 billion. Add that to the much discussed $11 billion or so in reported consensus on a deficit fix (federal money, cuts, etc.) and you get the $19 billion problem down to about $4 billion.
For their part, Democrats know that they'll have to agree to more reductions than they've publicly agreed to so far.
"There's got to be room for additional cuts," said Assembly Speaker John Perez in an interview this morning (one conducted before confirmation of this tax plan by others, not by him). Perez declined to specify how more in cuts he'd accept (Dems have so far said they accept about $3.5 billion of cuts proposed by Governor Schwarzenegger in May) but he did say the key is figuring out which cuts would not stifle an economic recovery in the state.
So does this 'Raise Taxes But Sell It To The Public As A Cut' plan have a chance? No one can say, though it has drawn early criticism. Jean Ross of the California Budget Project wrote in a blog posting that such a proposal falsely assumes most Californians itemize their federal tax deductions; those who don't would fail to see the refund that would supposedly make this palatable.
She points to data that shows only 38% of Californians itemize their deductions. And even so, says Ross, "the proposal under consideration appears to be structured to disproportionately raise taxes at the bottom of the income distribution, while imposing a relatively small increase at the top of the income distribution."
If that's true -- and again, only the broadest of outlines has been confirmed by sources inside the Capitol -- then it seems obvious that it's existence is all about trying to convince Republicans that there's some sort of revenue increase that they can sell to their political base. But there's no guarantee of that happening, especially considering their staunch public stances against any increase in taxes.
As for Schwarzenegger, his spokesman declined any comment about what might be happening upstairs in the Legislature, though reiterated the governor's opposition to increasing taxes.
For now, all of those who I spoke to stress this is just a proposal being pondered. The only actual budget development of this Day 28 was the governor's reestablishment of the monthly furloughs for most, but not all, state workers.
Still, the tax swap proposal does offer a window into the world of budget negotiations -- and seems to stand as proof that, while still stuck, at least something's happening at the Capitol.