The voices of Tax Policy Center's researchers and staff
Five years ago, gubernatorial candidate Arnold Schwarzenegger made this lament about Californians' tax burden:
"From the time they get up in the morning and flush the toilet, they're taxed. When they go and get a coffee, they're taxed. They get into their car, they're taxed. They go to the gas station, they're taxed. They go for lunch, they're taxed. This goes on all day long. Tax, tax, tax, tax, tax. Even when they go to bed, you can go to bed in fear that you are going to be taxed while you're sleeping, that there is a sleeping tax."
Now in his second term with a budget 52 days overdue and facing a $15 billion budget shortfall, the Governor is backing a temporary 1 cent sales tax hike. In return, he wants a real spending limit (California already has two that don't work) and new powers to cut spending during fiscal emergencies.
Channeling Edith Piaf, the governor says: "I have no regrets at all. It's just the regret I have is that not everyone is seeing it exactly as I see it."
Indeed, California's legislative leaders see things very differently. Democrats think the state should raise taxes on California's wealthiest residents and corporations and roll back some tax credits. Republican leader Mike Villines, who's been negotiating with the governor and top two Democratic legislators, complains that "I'm tired of being in a room where three people keep talking about tax increases."
The governor's tax proposal does raise policy concerns. It continues California's practice of taxing relatively narrow bases at high rates and forgoes an opportunity to consider extending the sales tax to services, which constitute most spending. As Democrats have pointed out, the burden of the proposed tax is also likely to fall on low-income residents, although it is broader than prior increases on specific items like tobacco.
However, the Democratic proposal might have bigger flaws. Heavy dependence on income taxes from high-income Californians has already sent California finances on a wild ride, including a one-year revenue drop of $10-12 billion in 2001 when the stock market tanked, eliminating billions of capital gains and stock options.
Unfortunately, there are few good choices for California and many other states. Tax revenues have been slammed by the housing market slump, weak job growth, and declining consumer sales. They are down about 5% nationally—6% in California— and there are no signs that things will get better any time soon.
So give the governor credit for bucking his party and talking about a broad tax increase. Although this might not seem like a lot, it can be hard to turn a ship. Many costs of state and local government are fixed and cuts that are easy in theory— freezing state payrolls, cost-of-living adjustments for welfare recipients, and medical provider payments, for example—are politically difficult.
Bonne chance, governor. Courage!
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