Gov. Davis seeks an $8.3-billion tax hike to balance the out-of-whack California budget; he wants to increase the sales tax, increase the income tax on high-earners, and increase the cigarette tax. Along the way, he wants to shift unpopular programs such as welfare to the counties.
This approach to solving the budget deficit is, in a word, insane. While it may play well politically to soak the rich, consumers, and smokers, this approach ends up making the perennial budget problem much, much worse, and the Republicans in Sacramento aren’t going for it. Even key members of the Administration are skeptical:
It’s unclear whether Davis will win support in the Legislature for the income tax hike, even from all Democrats. His incoming finance director, Democratic former state Sen. Steve Peace, has expressed skepticism about raising the income tax on high earners, noting that their income is notoriously volatile. To pass, at least some Republicans would have to support it.
So let’s back up and look at the big picture. California’s budget is always out of whack: we either collect too much in taxes, or too little. This is because the state derives too much of its revenue from high earners, and the incomes of high earners are volatile. So in the surplus years, the Legislature spends like a drunken sailor on new programs, and in the deficit years it shifts the funding of these programs to the counties who rely inordinately on sales taxes to pay their way. Consequently, cities and counties have a never-ending hunger for sales taxes, and they make deals with big-box retailers for rate reductions and property tax holidays to entice them in. Meanwhile, neighborhoods and wholesale businesses suffer.
These problems are aggravated by Prop 13, which prohibits fair assessment of property taxes, by Prop 98, which forces the state to pay too much for education in lean years, and the balanced budget provision in the state constitution that prohibits deficit spending in lean years.
The solutions to these problems are obvious: repeal Prop 13 and Prop 98 and the balanced budget amendment, add an amendment to the constitution prohibiting runaway growth in state spending, and broaden the base of the income tax. Taken together, these reforms would constitute a tax fairness plan that might just pass a ballot prop if it were presented in a bi-partisan manner.
The Davis proposals will make the long-term budget problem worse, and should be rejected.