Budget +34: "Governing Is A Tough Thing"

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That was a comment uttered Tuesday afternoon by the leader of the state Senate, and truer words have never been spoken... especially when it comes to the now annual saga of plugging the leaks in California's seemingly sinking ship of state.

And the governing's not going to get any easier from here on out this summer, as Democrats and Republicans are clearly in very different frames of mind about how to craft a budget for a fiscal year that's now into its second month on autopilot.

Democrats in the Assembly and Senate rolled out their long anticipated unified budget counterproposal to the May plan from Governor Arnold Schwarzenegger. And no surprise here (as I reported last week): it includes an unusual swap of income and sales taxes, with a few other interesting proposals thrown in for good measure.

"We've hit as close to a sweet spot as you will ever find," said Senate President pro Tem Darrell Steinberg in a press conference with Assembly Speaker John Perez. Their plan (see more here) lays out this way: $8.3 billion in spending cutbacks, $4 billion in money from the feds, $2.7 billion in tax increases, $3.7 billion in alternative funding and funding shifts.

Simple, right?

The "sweet spot" for Steinberg is the tax swap, the plan that Democrats say will leave more money -- from a little to a lot -- in the wallets of most Californians. Of course, that claim relies on some educated guesses about the kinds of cars folks drive (because that influences the proposed cost to drivers of hiking the Vehicle License Fee -- the VLF) and how much folks spend on all kinds of retail goods (which influences the savings promised by cutting the state's portion of the sales tax almost in half). The Democratic staff calculation predicts an annual tax savings for those making $30,000 a year of $132, and a savings of $657 for those earning $250,000 a year.

Republican reaction was unsurprisingly unsupportive of the tax hike. "This is not a productive proposal to get us closer to a budget resolution," Senate GOP Leader Dennis Hollingsworth told reporters.

Governor Schwarzenegger was equally dismissive of the plan, telling a Fresno audience that the Dems want to tax everyone "from the rich to the middle income to the poor."

A few other items of note, for now...

What Was Dropped

Two key elements of the Senate and Democratic budget discussions are no longer on the table. For Assembly Democrats, gone is the controversial plan to 'securitize' tax revenues -- a cash advance of some $9 billion that would have to have been paid back over 20 years. The lower house Dems did retain the concept of money for stimulating the creation of more private sector jobs -- a $300 million 'set aside' in this plan -- but the big borrowing idea is no more.

For Senate Democrats, the new plan scraps much of what they were proposing as state-local government realignment of services and funding. Gone, it appears, are plans to transfer more parts of child care under CalWorks to the locals, as well as programs for senior citizens. County officials had been saying it was simply too complicated to do so fast. The surviving realignment element is a proposal to shift some of those convicted of 'wobbler' crimes (one that can be either a misdemeanor or a felony) to local jails would be funded by the VLF increase, with some incentive for locals to help get these folks on the straight and narrow path away from crime: if the person is helped in the community and stays there, the county gets the cash. If the person is sent to state prison, the county loses the cash.

Revenue Details

The income tax/sales tax swap is getting most of the attention, but don't forget that this proposal -- were it to become law -- would come close to undoing one of the most talked about decisions of Arnold Schwarzenegger's first day in the job: the lowering of the VLF, the infamous 'car tax.' That decision, later codified as permanent, lowered the annual tax to 0.65% of a vehicle's value from its pre-1999 level of 2%. The popular action has nonetheless cost the state some big money, as the revenues that used to flow to local governments had to be replaced with state tax dollars. As part of the 2009 budget deal, Schwarzenegger and legislators agreed to a temporary VLF hike to 1.15%, one that is set to expire next year. The Democratic plan not only cancels that expiration, but increases the VLF to 1.65% of the vehicle's value. Dems insist the VLF hike is fair, because it's another item deductible on federal taxes; the money is also the funding source for the public safety realignment plan mentioned earlier.

The Volatility Argument

A common discussion thread when it comes to California's tax system revolves around the idea that because the state's so dependent on tax revenue from the wealthy, whose income is often dependent on Wall Street investments, there's too much up-and-down 'volatility' in the revenues that fund state government -- revenues that are not as predictable as, say, property tax revenues that other states rely on. And Democratic budget staffers said today that one key element of their income tax hike was designed to address that issue: the smaller pinch to the rich. The plan tacks on an extra 1% to each bracket of taxpayers except for those already in the top tax bracket (plus another .25% which was set to expire next year). The most wealthy would only have the .25% hike... which, goes the theory, will 'flatten' out the revenue stream a bit and make the state less reliant on the rich and more reliant on the higher revenues from the not-so-rich (or even the working poor). Estimates are this change, across all tax brackets, would bring in an extra $8.7 billion this fiscal year (which would be offset by an $8.4 billion cut in the state portion of the sales tax).

That's not going to win praise from liberals and advocates for the poor. And if it's supposed to win praise from mods... well, the jury's out for now. And conservatives? It's a tax increase.

Governing is indeed a tough thing.

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About John Myers

John Myers is Sacramento Bureau Chief for KQED Public Radio and "The California Report," heard daily on 23 public radio stations across the Golden State.

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