Various reports from Sacramento hint that a budget deal has been struck. UPI’s report states (from the Sacramento Bee)
Sources close to the negotiations told the newspaper that the tax provisions include an across-the-board hike in the income tax, higher vehicle registration fees and a 1-cent-on-the-dollar increase in the sales tax. The hikes would be in effect for a minimum of two years.
The report also states that this “…would close California’s projected $140 billion budget deficit through borrowing, tax increases and spending cuts.”
Ignoring the faux pas of the $140 billion deficit (it’s “only” $40 billion), borrowing just postpones the inevitable. Sooner or later California must realize that the state’s current level of spending is untenable. Of course, the devil is in the details, and what the Democrats have conceded (supposedly a rainy day fund and spending caps, both of which require voter approval) don’t appear nearly enough for me to think that a tax increase should be moved forward. And I don’t even want to mention the massive difficulties California will have borrowing money given current financial markets and conditions.
Additionally, anyone who thinks that a tax increase will bring in the projected amount of revenues needs to study basic economics. In a recession, people will spend only what they can afford to. If the price of goods goes up by a sales tax increase, they’ll spend less. If their income goes down (by an income tax increase), they’ll spend less. If what’s discussed above is the plan, I guarantee that come June (when the 2009-2010 budget gets debated) you will be hearing about yet another budget crisis in Sacramento.
What needs to be done is the use of an axe on the budget. Yes, this may sound draconian but California has lived beyond its means; the state has been budgeting using the assumption that good times will continue ad infinitum. That doesn’t happen (as is being borne out now) and the solution is to get down to a level of spending that’s commensurate with reality.
I may be wrong on all of this; as I said, we need to see the details. But it sounds like a deal everyone will regret in just a few months, and one which will make the economic climate even worse in the Bronze Golden State.