Taxable Talk

Now that Governor Schwarzenegger has signed the bad budget bill, what’s next for the Bronze Golden State? Will taxpayers receive their tax refunds? What’s this about a special election in May? And what’s going to happen with the 2009-2010 budget?

The Taxes

First, the sales tax increase goes into effect on April 1st. In Orange County, the sales tax will jump from 7.75% to 8.75%. Whatever your sales tax is, just add 1% and you’ll get the new sales tax rate.

The $0.12 gasoline tax was removed from this bill. Still, the price of gasoline will go up on April 1st. Sales tax is charged on gasoline. If gasoline is selling for $3.00 (before taxes), the sales tax increase will add $0.03 to the price per gallon.

Car registrations will cost more. Instead of a tax based on 0.6% of a car’s value, the new rate is 1.15%. Basically, your DMV fees will double.

It’s still unclear what will happen with income taxes. There’s definitely going to be a surtax charged. Based on the federal stimulus, I think the 2009 income tax surcharge will be 1.25%. It’s possible it could be 2.5%. Either way, your income tax bill for California will be higher. Basically, the savings that the federal government gave to Californians the state legislature just ate.

Controller John Chiang announced that tax refunds are still in limbo. Mr. Chiang rightly wants to crunch the numbers and see when California actually has some money before sending out the refunds. I’d expect refunds to start heading out by mid-March.

The Special Election

There will be a special election on Tuesday, May 19th to vote on several propositions:

Proposition 1A: A Budget Reform/Spending Cap.
Proposition 1B: Education Finance.
Proposition 1C: California State Lottery, selling future revenues for current income.
Proposition 1D: Take Proposition 10 money (Children and Families Trust Fund) and use it to help balance the budget.
Proposition 1E: Take Proposition 63 money (Mental Health Care tax) and use it to help balance the budget.

If these initiatives fail, California is looking at a $6 billion deficit. And that’s before the impact of the economy on sales tax and income tax collections. I strongly believe the state will be facing a $6 to $10 billion deficit before the impact of these propositions. That is, should these propositions fail, California will face a $12 to $16 billion deficit for the 2009-2010 year.

The likelihood of passage is unknown. Both Propositions 1A and 1C were previously attempted and both failed. I’ll have more details on these propositions once the text of them is published.

The 2009 – 2010 Budget

The budget that just passed is yet another gimmick-filled budget. Among other things it requires borrowing about $5 billion. Given current market conditions, it’s quite possible that California will either be unable to sell general obligation bonds or that the interest rate will be far higher than expected.

Democrats in the legislature are beholden to their interest groups. These include state employees, teachers unions, and many groups dependent on state funding. Sooner or later there will be massive cuts in state funding.

Duplicitave programs will be cut. Many state employees will be losing their jobs. There is no choice. California cannot afford the largesse and waste that currently exists. For example, there’s no good reason for a CAL-OSHA when the United States has the federal OSHA.

There are numerous other constituencies which will not be happy with my views. Does California need a Film Commission, a Native American Heritage Commission, a Wildlife Conservation Board, a Housing and Community Development Administration, or even the Coastal Commission? There are numerous other Boards and Commissions. Many will have to be scrapped. The simple truth is that California government is far too large given current revenues. The only choice is to cut, and cut deep.

In the long-term California must do what’s needed to attract new business. Currently, California does almost everything it can to be hostile to business. Taxes, we’ve got ’em. Regulations, we’ve got ’em in spades. And don’t get me started on the nanny state.

The solution is to cut taxes. Indeed, California should cut business taxes. The reality is that all business taxes are passed on to consumers. If California made itself into a business-friendly state, businesses would clamor to relocate to the Golden State. Unless policies change, and soon, successful California businesses will be looking to relocate to Oregon, Nevada, Arizona, and Colorado.

Conclusion

Come June, the state legislature will likely be back where it was in August-September 2008 and January-February 2009. A big deficit is coming. Band-Aids have been tried in the past and they’ve failed. The systemic deficit is still there. It’s time for California to right the ship.

Frankly, I think what I propose is beyond our state legislature. The Democrats will call my measures Draconian. “You’re amputating state government,” they’ll say. And they’re right. But sometimes to save the patient an amputation is necessary.

California has tried the Band-Aid method for eight years. The deficit numbers have only gotten larger. It’s time for a reality check no matter how painful it is.

State Senator Abel Maldonado (R-Santa Maria) broke ranks with the rest of the California Senate Republican Caucus and voted for the bad budget bill. With his vote, the 2/3 majority was obtained and the budget was sent to the State Assembly. It passed the Assembly early this morning.

A few changes were made in order to buy persuade Maldonado to change his vote. First, the state will hold open primaries for state offices. Rather than the Republican and Democratic parties holding their own primaries with the winners facing off in the general election, the top two vote-getters will face a run-off in November. There are, though, major constitutional issues regarding an open primary in California. An open primary law for presidential elections was thrown out by the State Supreme Court a few years ago. This law will undoubtedly face similar challenges.

Second, the gasoline tax increase ($0.12/gallon) has been removed from the measure. However, gasoline prices will increase as the sales tax, which does apply to gasoline, will be going up by 1%.

Third, the legislature agreed to stop itself from getting a pay raise if the budget is late. The legislature refused to stop itself from being paid—just the pay increase was put on hold.

As I’ve said before this budget is the equivalent of putting a Band-Aid on a patient needing open heart surgery. California needs to drastically cut its spending. The $15.4 billion in budget cuts in this bill are superficial and will not fix the systemic state deficit. Come June, I believe the legislature will have to deal with a $6 to $10 billion shortfall. The new tax increases will not raise what is projected (tax increases never raise the intended amounts). Will California’s legislature have the guts to address the systemic issues (a bloated bureaucracy, duplicative programs with the federal government, and programs that a state should not be running) that cause the budget deficit?

I think we’ve seen the answer. Unfortunately, pigs don’t fly.