Tax Threats Surface in California

Published February 1, 2005

Despite emphatic anti-tax election results in 2004, tax-hike proposals are surfacing for the 2005-06 session of the California legislature.

In several referenda across the state in the past year, voters rejected proposals to raise taxes or remove legislative constraints on tax hikes.

Nonetheless, new tax-hike proposals are being pushed despite repeated vows from Governor Arnold Schwarzenegger (R) that he will not allow taxes to be increased to address the state’s budget woes. California has a projected $8 billion budget deficit, which the governor sees as the result of unbridled spending, not a lack of taxing capacity. Total state spending is about $105 billion.

In spite of Schwarzenegger’s resolve, the Legislative Analyst’s Office (LAO) for the Democrat-controlled state legislature has suggested raising taxes along with some spending reductions. Democrat leaders, being heavily lobbied by public employee unions, insist more taxes be on the table for discussion, and they have rebuffed talk of spending restraint.

Several Tax Hikes Pending

Among the tax-hike proposals already introduced for the session that got underway in earnest on January 3 are these:

  • Raising personal income taxes. Assembly Bill 6 by Assemblywoman Wilma Chan (D-Oakland) is a redo of her failed 2003-04 legislation. It would add 10 percent and 11 percent tax brackets, starting at more than $100,000 (single) and more than $200,000 (single). The highest bracket is now 9.3 percent. Passage of Proposition 63 in November 2004 already added a 1 percent tax on income over $1 million.
  • Making tax hikes easier to approve. Assemblyman Joe Nation (D-San Rafael) has introduced Assembly Constitutional Amendment 7, which would reduce from two-thirds to 55 percent the margin needed to pass special taxes on local ballots.
  • Increasing taxes on business property. Senate Bill 17 by Senator Martha Escutia (D-Whittier) would create a “split roll” property tax system by reassessing property owned by corporations when 50 percent of the stock is transferred.
  • Limiting tax credits. SB 27 (sponsored by Escutia) would limit aggregate amounts of all tax credits with carry-forward provisions to 50 percent of the net tax.

A number of tax-hike bills that failed last session are likely to crop up again this session, according to their sponsors. Those measures include:

  • Reducing research and development credits. Last session’s SB 1501 (Escutia) sought to reduce the R&D tax credit from 15 percent to 10 percent, and the basic research tax credit from 24 percent to 20 percent. That would have represented a tax increase of $150 million.
  • Splitting the tax roll. Assemblywoman Loni Hancock (D-Berkeley) wrote the proposed Assembly Constitutional Amendment 16, instituting a split-roll property tax by assessing most non-residential property each year at fair market value–constituting a tax increase of up to $3.3 billion. Non-residential property is now reassessed only when it is sold.
  • Increasing the vehicle license fee, a property tax-like levy on cars and trucks that Schwarzenegger rolled back soon after winning office in the Fall 2003 special election.
  • Granting local authority to impose income taxes.
  • New taxes on oil refineries, toxic chemicals, and railroad operations, and a recycling tax on fluorescent lamps.

More New Taxes Proposed

The LAO has suggested taxing owners of rural land to pay for state-provided fire protection. Such a tax, defined as a fee by legislative counsel, was enacted in 2003 but scrapped before the courts could decide a lawsuit contending it was an unconstitutional non-voter-approved parcel tax. The LAO also has suggested higher taxes on gasoline.

At a December news conference, Assembly Speaker Fabian Nuñez (D-Los Angeles) responded to a reporter who noted the governor’s continued opposition to higher taxes by saying, “Everything ought to be on the table, and that includes new revenues. It is irresponsible to draw a line in the sand.”

The Senate’s new president pro tempore, Don Perata (D-Oakland), also has been an outspoken advocate of boosting taxes on commercial property.

Assembly Republican Leader Kevin McCarthy of Bakersfield believes tax-hike advocates are passionate in their embrace of higher taxes. Many of them can afford a pro-tax stance because they are in politically safe districts, the result of gerrymandering of district boundaries, he said.

Schwarzenegger has been mulling a special election in the fall that could include reapportionment reform.

Hoping to Break Governor’s Will

“(Tax-hike supporters) will continue to push for higher taxes and fees and see if the governor will break,” McCarthy said. “The governor won’t break. Then they will try to pass bills. We [tax-hike opponents] won’t vote for them. Tax increases are losers with voters, and Democrats need to get over it.”

Democrats control the legislature, but not by the two-thirds majority needed to pass tax increases. Democrats outnumber Republicans 25-15 in the Senate and 48-32 in the Assembly; it takes 27 Senate votes and 54 Assembly votes for two-thirds majorities to approve the state budget or raise taxes. So some Republicans would need to vote with the Democrats for higher taxes.

Income Taxes Criticized

McCarthy specifically criticized Chan’s income tax proposal, saying proponents of the tax don’t realize how easily people can avoid it by moving out of state. He cited Nevada, which has become a haven for well-off residents from California because Nevada has no state income tax. He also cited Tiger Woods, who moved from California to Florida after becoming a professional golfer. Florida has no state income tax.

By continuing to raise income taxes, McCarthy said, California drives out high-wage earners, costing the state all of the income tax money that could have been collected from them at lower rates.

McCarthy also noted California voters last year rejected several proposals that would have hiked taxes or made tax increases easier to achieve. For instance, Proposition 56, which would have changed the California constitution to allow the legislature to pass the state budget and budget-related tax and appropriation bills with a 55 percent vote, lost by a 66 to 34 percent margin last March. In November, local tax hikes in Democrat strongholds of San Francisco and Berkeley were defeated, as were county sales tax hikes proposed in Santa Cruz and Los Angeles counties.

The governor’s finance director, Tom Campbell, told the Sacramento Bee on December 18 that state revenues are expected to be 7 percent higher in 2005-06 than in the previous fiscal year. He said the governor’s no-new-taxes budget proposal would reinforce an overriding need to rein in spending growth. The state’s $8 billion gap between revenues and business-as-usual spending is due to auto-pilot spending formulas that must be reformed, said Campbell, a former state legislator and member of Congress.

McCarthy said, “You can [balance the budget and erase the deficit] without raising taxes. Government growth was 46 percent in four full years of a Democratic governor [Gray Davis] and a Democratic legislature. Are the roads 46 percent better? Are the Department of Motor Vehicle lines 46 percent shorter? The answers are ‘No.'”

Ron Roach ([email protected]) is director of communications for the California Taxpayers’ Association (