Budget +28: A Tax Swap?

Comments (4)

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.

Maybe.

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.

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.
  • Mark

    As your posting says many people don’t itemize and another large group are subject to the AMT, which eliminates any benefit from the deduction of state income taxes. This seems like a nutty idea to me.

  • Katia

    I am staunchly opposed to an income tax/car tax increase. As Jean Ross stated, most (62%) Californians do not itemize. The way most people are able to itemize their federal taxes is by owning a home. With the current foreclosure rate, I am sure less and less people are able to itemize their deductions and therefore this will just be an increase. We have paid enough as taxpayers for assinine programs that benefit none of the taxpayers. Make the hard cuts. Unemployment numbers may decline when people actually have to get up and find a job. We all have to make sacrifices and I, for one, am tired of the vast majority of sacrifices being made by the people working hard and not sucking society dry.

  • zurda

    As Jean Ross recently wrote, this proposal is an interesting idea, but the problem with it is “The proposed increase would fall hardest on taxpayers who spend all that they earn in their local communities and who don’t benefit from the ability to deduct state income taxes on their federal returns.” She goes on to cite “the recommendations of prominent economists who argue that ‘tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits’ during an economic downturn.”

    As Gov. Schwarzenegger said over 7 years ago (and “Katia” says above), everyone must sacrifice. I am still waiting to see how those at the top, the wealthiest and the highest earners among us, are sacrificing to “save” California’s budgets. Meanwhile, those with incomes at or below median have been asked to sacrifice more every year. It’s time to share the pain.

  • flicka47

    “Share the pain”? Why is it that every department,bureau,and program in the proposed state budget is getting what amounts to a 20% raise? For some the proposals are even more,and not even considered “on the budget”?

    Consider the 4,8% “surcharge” the Gov. wants on every residential and commercial property insurance policy to fund another slush fund for CalFire,that even the state’s Legislative Analyst’s Office says IS a tax. The LAO also wants the Legislature to be a better watchdog on the other Emergency Fund that they accuse CalFire of abusing last year! Great idea there! Give the folks who mis-use state money more money to mis-use!

    Limit every department to the amount they got last year,no budget increases! That alone would save the state a lot of money!