2010 Budget Fixes, Part Three:
The February Neutral Tax Proposal
by Sheila Kuehl
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As California awaits the January unveiling of Governor Brown's first budget, this set of essays reviews the budget situation over the last twelve months, culminating in a report on the new budget when it is presented.
This essay is third in a series describing the condition of the 2009-10 state budget at the beginning of 2010, the 2010-11 budget introduced in January of 2010, the many Special Legislative Sessions called by the Governor to address the problem of escalating deficits and the tug of war between the Legislature and the Governor on solutions. You have received this essay either because you joined my general essay list or someone forwarded it to you. If you received it by forwarding, this essay is from former California State Senator Sheila Kuehl. If you want to subscribe to these essays, go to my website at www.SheilaKuehl.org. If you want to unsubscribe, there's an easy button at the bottom of this email.
My first essay in this series gave an overview of the budget situation in the middle of the fiscal 2009-10 year and the problems foreseen by the Legislative Analyst as 2010 began. The second essay set out Governor Schwarzenegger's proposed 2010-11 budget. This essay describes the first "fixes" proposed by the Democratic majority in February of 2010 to try and fill the endless gaping hole already tearing up the 2009-2010 budget. Further essays will describe vetoes, other proposed fixes, ongoing struggles, and final passage of the budget in October, as well as problems that arose immediately after that passage.
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How Many Special Sessions Does It Take Before They're Not Really Special?
Setting a new world record for the most "special" sessions in one two-year legislative session, the Governor convened special session number eight to fix the budget mess that had appeared minutes after the adoption of the 2009-10 budget. Early in 2010, members worked feverishly to come up with ways to plug a growing gap that steadfastly refused to be papered over. Special sessions run concurrently with regular sessions, but bills enacted in such a session can go into effect in 90 days, rather than waiting until the next January, as with the regular sessions. This special session had reams of proposals, some of them adaptations of proposals in the Governor's budget. The gas tax swap was one of these.
The Strange Notion of the Neutral Tax Swap
Under California law, no tax can be raised without a 2/3 vote in each house of the Legislature. However, the theory has been floated that, if one tax is reduced and another raised, with no change in overall revenue, it is not technically a raise in taxes and, therefore, does not require a 2/3 vote. California's Democrats, in the majority in both houses, proposed a "tax swap" in February of 2010 that looked like a neutral swap but allowed expenditures to be used for different purposes, therefore freeing up certain portions of general fund monies to fill the deficit gap.
The Biggest Swap: Transportation and Fuel
In February of 2010, Democrats proposed eliminating the state sales tax on gasoline entirely and, instead, proposed an increase in excise taxes on gasoline. The proposal would have reduced the cost of gasoline at the pump by five cents per gallon (in some versions, three cents) in the first year. The new excise tax would have been used in 2010 to pay down General Fund Debt (which, since the elimination of the Vehicle License fee and a spate of borrowing, has been growing like Topsy). In 2011, the new excise tax would continue to pay for debt but also fund highways and roads that would have been funded by the sales tax which had been eliminated. Elimination of the sales tax, which must be spent on transportation, and its replacement by an excise tax, which could go into the General Fund rather than directed to transit, allowed "savings" by generating monies that could pay debt rather than transit.
In addition, the proposal would have allowed local governments to establish a fee at the pump in their jurisdictions, either by fiat or by vote. This would have provided monies for local transportation projects that could not be "swept" into the budget, and provided some of the raison d'etre for the swap.
The reduction in sales tax on gasoline was also to be paired with other increases as described below to create the allegedly neutral impact on taxes overall and allow passage by a majority, rather than a 2/3, vote.
When Is The End of a Tax Break an Increase in Taxes?
Answer: Always. At least that's the way it's scored for figuring out a vote threshold. The reason for the elimination of the sales tax on gasoline was to allow a substitute "tax increase" in the form of rollbacks of two corporate tax breaks, and still hold overall taxes at the same level. It simply shifted tax responsibility from drivers to corporations, which had gotten two big breaks the year before. In the 2009-2010 budget, as a sop to Gov. Schwarzenegger and the Republican caucuses, corporations were allowed to apply almost all of their past operating losses against 2010 income, shrinking taxable corporate income to almost nothing. The Democrats proposed to reduce that ability to allow deductions of only 68% of past operating losses.
In addition, the Democratic proposal would have prevented corporations from assigning tax credits to their affiliated corporations or their subsidiaries.
The Winners and The Losers
Because the gasoline sales tax is used for transit, local transit agencies would have lost some sorely needed revenue, but not as much as they would have lost under Gov. Schwarzenegger's original budget proposal. The Democrats retained the sales tax on diesel fuel, thus keeping about $313 million for transit. They also sweetened the pot by adding $400 million for transit operations.
Allowing local jurisdictions to impose their own tax at the pump was also seen as a way to help them comply with state greenhouse gas reduction requirements.
Another part of the proposal would have imposed a 4.8% surcharge on residential and commercial property insurance and raised another $200 million.
The total realized for the state budget in 09-10 and 10-11: an estimated 1.8 billion. In 11-12: another 2.4 billion.
Don't Go Away: There's More!
The proposal also included provisions for the 2011-12 budget to increase the sales tax on diesel that goes to public transit from 4.75% to 6.5% and reduces the excise tax on diesel by an equal amount. This allows monies to start flowing again to public transit while the price at the pump doesn't change.
Of Course None of This Was Signed As Is...Next: Other Proposed Cuts
and What Happened in March
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