CALIFORNIA BUDGET ANALYST RECOMMENDS RAISING VEHICLE LICENSE FEE

 

Mac Taylor forecasts that the state will need to close a $27.8-billion budget gap in the next 20 months. He calls for a smaller sales tax increase than Gov. Schwarzenegger has suggested.

LAO REPORT: Webcast: Assessment of Special Session Proposals HTML   |  Summary

LAO REPORT: Overview of the 2008 Special Session Proposals November 10, 2008 HTML  |  PDF   |   Summary “We concur with the administration’s assessment that the state’s struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months. The state’s revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013‑14 absent corrective action. From 2010‑11 through 2013‑14, we project annual shortfalls that are consistently in the range of $22 billion.”

By Jordan Rau – LA Times

 

November 12, 2008 — Reporting from Sacramento — While offering the grimmest forecast yet of California's finances, the Legislature's nonpartisan fiscal analyst recommended Tuesday that lawmakers pare back Gov. Arnold Schwarzenegger's proposed 1 1/2 -cent sales tax increase and instead hike fees on cars.

In a new report, Legislative Analyst Mac Taylor forecast that the state would need to close a $27.8-billion budget gap during the next 20 months. That projection is more than $3 billion higher than the Schwarzenegger administration has estimated.

"The numbers are just truly awful," Taylor told reporters. "There are no good options left."

The analyst's wider budget gap was influenced by the rapid decline in the state's housing market. He projected that school districts would lose $1.5 billion over the next three years, requiring the state to fill that gap.

The economic downturn also has led to more people on health and social services programs. In addition, firefighting costs are higher than projected.

The governor last week called a special session of the Legislature and proposed deep cuts in services and tax increases to deal with California's collapsing finances.

Though calling the governor's proposal "credible," the analyst said that raising the sales tax would further hurt the economy by discouraging Californians from buying products locally and instead shifting them to Internet purchases that escape the state sales tax.

Schwarzenegger's proposed increase would make California's sales tax, which varies from city to city, the highest in the nation, at an average of about 9.5%, the analyst said.

"That's not something you want to be No. 1 in," he said. Taylor recommended a smaller increase of 1 cent on the dollar.

The analyst favored increasing the annual vehicle license fee, from 0.65% of a car's value to 1%. It is an idea that has traction among Democratic lawmakers, but one that Schwarzenegger has resisted.

His opposition to that fee was a main plank of his 2003 election, and he reduced the fee, then 2%, as one of his first acts in office.

The governor instead has proposed charging people an additional flat fee of $12 more when they register their automobiles each year. That would bring in only about a 10th of the $1.6 billion in revenue that a vehicle license fee increase would net.

The analyst said that without major changes, the state would run shortfalls on the order of $22 billion annually over the next five years even if the economy rebounded.

Taylor offered some variations to the $10.6 billion in cuts to schools, healthcare, welfare and transit that Schwarzenegger has proposed, but he endorsed the governor's view that the severity of the budget gap requires both new revenue and program cuts.

"The magnitude of the problem has now reached such a level that we're not clear how you could do one side or the other," he said.

Shortly after Taylor spoke to reporters, Roger Niello (R-Fair Oaks), the ranking Republican on the Assembly budget committee, issued a statement saying, "We strongly disagree with the analyst's call for higher taxes."

Some GOP votes would be needed for the Democrat-led Legislature to pass any tax increase.

Meanwhile, Assembly Speaker Karen Bass (D-Los Angeles) on Tuesday urged the federal government to bail out states as well as banks.

"We think that with the state of California about to go over a cliff, we ought to be part of the bailout as well," she said at a news conference. "Can we have $5 billion or $10 billion?"

The analyst said that although California should press for federal assistance, lawmakers should not count on or wait for such relief, which he estimated would probably not be more than $3 billion.

"If the state has any hope of developing a fiscally responsible 2009-10 budget, it must begin acting now," Taylor wrote in his report.

CALIFORNIA'S CAR TAX MAY BE ON THE ROAD AGAIN

THE VEHICLE LICENSE FEE THAT GOT GRAY DAVIS RECALLED AND ARNOLD SCHWARZENEGGER ELECTED LOOKS LIKE A GOOD IDEA AGAIN.

The Times points out that the Car Tax/VLF served California well for 60 years. Undoing it has failed the state for six years. Until last year reimplementing it would have actually balanced (or come close to balancing) the budget. It's not enough anymore, but it's got to be on the table. Along with spitting the rolls on Prop 13 …but one sacred cow/third rail/taboo metaphor at a time.

—smf

Editorial from the Los Angeles Times

November 11, 2008 -- Gov. Arnold Schwarzenegger has shown he's capable of learning. Not every governor who rode into office on a no-new-taxes pledge would propose a sales-tax increase of 1.5%. He's right to insist that every solution to the state's fiscal crisis be on the table, so we're happy to pitch in with a suggestion -- bring back the car tax.

There, we said it. Again. California's leaders took a wrong turn in 1999 when they slashed the vehicle license fee, or car tax. The move frittered away a rare revenue surplus that should have been used instead to fix the state's structural deficit. The plan supposedly called for the rate to go back up during fiscal crises to the same level it had been since 1948 -- 2% of vehicle value. But when then-Gov. Gray Davis tried to do just that, Schwarzenegger fanned voter anger and booted Davis from office.

It's not out of a sense of mischief that we now call on Schwarzenegger to bring the tax back to its historical level. Not solely, anyway. The car tax is a smarter choice than a sales tax for digging out of the current budget hole. Asking Californians to pitch in through their vehicle registration fees rather than at the cash register would have fewer negative effects on sales, which we can expect to be diminished too much already in the coming months.

Sales taxes are regressive: They take a higher percentage of household income from the poor than from the rich. A 1999 California Policy Research Center study found vehicle license fees to be nearly as regressive, but at least the proceeds are unrestricted and could be used to bail the state out of its mess. Because of voter fiat, sales taxes paid at the gas pump are off limits for any use but transportation. Local government also claims a share. Another advantage of car taxes: They are deductible from federal income tax. Try deducting your sales tax on your 1040 form and see how far you get.

Schwarzenegger already has swallowed his pride a bit on car taxes: He's proposing that each vehicle owner pay $12 more. But that's an especially regressive fee, imposing barely an irritant on a wealthy motorist while packing a wallop for a low-income one. The state can do far better for itself and its residents by returning to the tried-and-true vehicle license fee.

Any tax hike will cause pain, but not nearly as much as the deepest budget cuts the governor is proposing. And sales taxes are already rising: If the 1.5% state increase is adopted, the rate in two Los Angeles County cities will be 11.25%, and just a penny less in the rest of the county. That's not the way to go. Cutting the car tax helped get us into this mess. Restoring it to the rate that served California for 60 years can help get us out.

WHAT TAXES SCHWARZENEGGER WANTS TO RAISE

SacBee CapAlert | Steve Wiegand | November 6, 2008

With California facing a $11.2 billion shortfall in the current year and another $13 billion next year, Gov. Arnold Schwarzenegger has proposed a mixture of tax hikes, spending cuts and state worker furloughs to help balance the books.

Steve Wiegand has an overview of the plan.

Here is the full list of new revenues Schwarzenegger wants to bring in:

Temporary sales hike: Effective Jan. 1, 2009, Schwarzenegger would raise the state sales tax by 1.5 percent for three years, from 5 percent to 5.6 percent. At the end of three years, the rate would return to 5 percent.

Over the summer, the governor proposed a temporary 1-cent sales tax hike followed by a .25 cent cut - but Republicans rejected the proposal.

What it would bring in: $3.54 billion 2008-09 and $7.3 billion in 2009-10

Add tax to services: Effective Feb. 1, 2009, Schwarzenegger would begin taxing certain services that are currently untaxed at the new 6.5 percent sales tax rate. Those include appliance repair, furniture repair, vehicle repair, golf and veterinarian services.

As of March 1, Schwarzenegger would tax amusement park and sports evenings. Unlike the sales tax rate increase, the broadening to services appear to be permanent.

What it would bring in: $357 million in 2008-09 and $1.15 billion in 2009-10.

Oil severance tax: Effective Jan. 1, 2009 Schwarzenegger would tax oil extracted from the ground or water in California at a rate of 9.9 percent of the gross value.

What it would bring in: $528 million in 2008-09 and $1.195 billion in 2009-10

Nickel-a-drink tax: Effective Jan. 1, 2009 Schwarzenegger would hike the alcohol taxes in the stat by a nickel per drink (defined as 1.5 ounces of liquor, 12 ounces of beer, or 5 ounces of wine)

What it would bring in: $293 million in 208-09 and $584 million in 2009-10.

Vehicle registration fee: Effective Feb. 1, 2009, Schwarzenegger would raise vehicle registration fees by $12.

What it would bring in: $150 million in 2008-09 and $359 million in 2009-10.

CALIFORNIA BUDGET DEFICIT BALLOONS TO $11.2 BILLION

By Michael B. Marois – Bloomberg.com

November 6, 2008 16:08 EST (Bloomberg) -- California Governor Arnold Schwarzenegger said his state's finances have deteriorated so rapidly that a budget he signed just six weeks ago has already fallen into a $11.2 billion deficit and taxes must be raised.

Schwarzenegger ordered lawmakers into a special session to consider ways to close the gap. He proposed increasing the sales tax by 1.5 percentage points for three years as well as raising oil severance and alcoholic beverage taxes and motor vehicle fees. In all, taxes and fees would increase $4.7 billion while spending is cut $4.5 billion.

``We have a dramatic situation here and it will take dramatic solutions to solve it,'' Schwarzenegger, a 61-year-old Republican, told reporters in Sacramento. ``We must stop the bleeding.''

California has been hard hit by the housing-market rout and the worst financial crisis on Wall Street since the Great Depression. The state leads the nation in foreclosures and its unemployment rate reached 7.7 percent last month, the fourth highest in the country. Double-digit declines in stock markets have sapped tax revenue from income and capital gains.

Schwarzenegger said this shortfall differs from those in years past, when he resisted tax increases to solve what he said were problems caused by overspending. ``It is now a revenue problem, rather than a spending problem,'' he said.

The Standard & Poor's 500, down 39 percent in 2008, slumped 19 percent in October alone. The Dow Jones Industrial Average dropped 35 percent this year. The declines have erased more than $9.5 trillion from the value of stocks worldwide.

Proposed Cuts

Schwarzenegger's proposal also would expand sales and use taxes to include appliance and furniture repair, vehicle repairs, golf greens' fees, amusement park admissions, sporting event tickets and veterinarian services.

Statewide sales taxes would increase to 8.75 percent from 7.25 for three years. The proposal would add a 9.9 percent per barrel severance tax on oil drilled in this state. The proposal would also add 5 cents for every alcoholic mixed-drink, beer and glass of wine sold in the state.

He warned that if lawmakers don't take action soon, the state would run out of money in February and might be unable to pay some bills, including payroll.

The budget gap has grown from $3 billion the state estimated when it sold $5 billion of short-term notes Oct. 16. That deficit figure was based on tax revenue projections through September and didn't anticipate projected shortfalls in October.

Notes Shelved

The state was supposed to sell another $2 billion of notes this month. That sale has now been shelved, budget director Mike Genest said.

``Now with the announcement of this size of a deficit, I can't imagine us being able to borrow until the Legislature gives us the solutions we need to get back on an even keel,'' Genest said.

California Treasurer Bill Lockyer said he will postpone any bond offering backed by the state's general fund until lawmakers agree on how to solve the problem.

``Current financial market conditions are not favorable, and with our state budget assumptions in flux during the special session, securities disclosure requirements would make it difficult or impossible to access the credit market,'' Lockyer said in a statement. ``Investors will want to see how the state addresses the budget imbalance before lending to us at reasonable rates.''

Lame Ducks

By ordering a special session now, Schwarzenegger is gambling that Republican lawmakers who are stepping down because of term limits or who were defeated during the Nov. 4 general election might be willing to approve the tax increase before a new class of lawmakers takes office on Dec. 1.

California requires a two-thirds legislative majority to raise taxes, a requirement that has hobbled proposals to increase revenue because of steadfast resistance from Republican lawmakers. Schwarzenegger said he was optimistic that fellow members of his party would see the need to boost taxes, given the slumping stock market and economic slowdown.

``No one wants to raise taxes, but we have an obligation to fully fund public education and to fund infrastructure and to make progress in health care,'' said Senate President pro Tem- Elect Darrell Steinberg, who will take over the leadership job Dec. 1.

Foreclosures Help

Schwarzenegger today also proposed a 90-day stay on home foreclosures to help distressed homeowners and stem escalating defaults. Under the measure, lenders would be exempt from the stay if they can prove they have set up a program to help troubled homeowners modify their loans.

The number of California homes in foreclosure totaled 79,511 in the third quarter, said San Diego-based real estate research firm MDA DataQuick. That was more than triple the year- earlier number, and the highest since MDA DataQuick began tracking trustee deeds in 1988.

Schwarzenegger signed a $143 billion budget Sept. 23, a record 85 days past the start of the fiscal year, following a standoff with lawmakers over how to close a $15 billion deficit caused when the housing-market rout erased thousands of jobs and weighed on residents' incomes. Democrats wanted to raise taxes, which Republicans opposed.

Corporate Taxes

Lawmakers ultimately agreed to cut $8 billion in spending, doubling penalties charged to companies that underestimate taxes owed the state, suspending the net operating loss deduction companies can claim when they don't report a profit and temporarily cutting in half the tax credit for research and development.

California, the biggest borrower in the municipal-bond market, has $51.9 billion in general-obligation debt outstanding. The state is rated A+ by Fitch Ratings and Standard & Poor's, the fifth-highest rankings, and a comparable A1 by Moody's Investors Service.

Having your Kate… and Edith too: SCHWARZENEGGER SEEKS TAX BREAKS FOR MOVIE AND TV PRODUCTION WHILE PROPOSING TO RAISE SALES AND OTHER TAXES AND SLASH EDUCATION

by smf for LAKids from articles in the LA Times, the FATR website and wire services reports

California lawmakers are heading back to work in Sacramento to address a state budget that is projected to go as much as $25 billion into the red.

In the midst of this, Gov. Schwarzenegger will seek to push through over $100 million in tax credits for film industry companies that do business in state during the budget-focused special session. Schwarzenegger and film industry officials claim the credits are needed to keep California a competitive location for such activity.
FRIENDS OF AMERICAN TAX REFORM – a group that apparently shares Sarah Palin’s belief that paying taxes is not a patriotic duity - seems to at least philosophically supportive of this ….but question:

• raising the sales tax - as the governor proposed in August and will once again push for in the special session,
• raise(ing) corporate and individual income taxes as Democrat legislators initially sought to do (and are certain to continue to ask for)
• And 4LAKids can't picture FATF, legislative Republicans or the Governor being all that receptive to a return of the Vehicle License Fee, the "Car Tax".  And it is the elimination of the VLF that, dollar-for dollar appeared most directly responsible for the steadily worsening state budget deficit before the Wall Street/Main Street/Your Street credit default swap market fiasco.

California is the biggest borrower in the municipal-bond market and has $51.9 billion in general-obligation debt outstanding. Because California is so dependent on bonds and credit financing - the state budget mess directly contributes to the international credit mess.

The governor is expected to unveil the proposal this week, after the Legislature opens a special session to address the state's fiscal crisis. Schwarzenegger’s proposal, part of his plan to stimulate the state economy, is similar to his previous bids for such a tax break - rejected in the past.

• The tax concessions would probably cost the state at least $100 million a year.
• They are being proposed at a time when the state budget is $10 billion in the red, less than halfway into the fiscal year.
• The tax cut could be overshadowed by billions of dollars in sales tax hikes the governor has told education officials he wants lawmakers to approve.

Administration officials say the cut is necessary to stop the industry's migration out of state. As an example, they cite the recent departure of Disney's hit television series "Ugly Betty," which relocated to New York.

Five years ago, 66% of all feature film production took place in California. Last year, the state claimed just 31%. About 250,000 Californians work in the industry.

The governor's proposal tries to address the critics' concerns by extending the tax breaks only to new shows and those relocating to California from elsewhere. Productions already in California and unlikely to move elsewhere would not qualify.

Lenny Goldberg, executive director of the nonprofit California Tax Reform Assn. in Sacramento. suspects that companies the tax break is not intended to help would find ways to take advantage of it. Goldberg also is troubled by the way the credits would be structured. Even companies that pay no state taxes could cash in.

"We're sort of skeptical of this happening because so many times it's been dangled out there, and so many times it's disappeared," said Barry Broad, a Sacramento lobbyist for the International Brotherhood of Teamsters, which represents thousands of film industry workers. Broad also questioned the timing of the bid. He said his union did not support the tax break if paying for it would require more deep cuts in government services.

But filmmakers say the state's dismal finances should bring more urgency -- not less -- to the proposal.

"Desperate times call for desperate measures," said Stanley Brooks, president of Once Upon a Time Films in Santa Monica and chairman of the California Film Commission. He is an appointee of the governor.

Brooks, whose company produces television movies and miniseries, said the tax credits would boost local production, creating jobs that would bolster the state economy.

The GOP lawmakers who typically line up behind tax breaks have been wary of the governor's concept in the past. The tax concessions would aid an industry dominated by deep-pocketed Democratic political contributors.

And Republicans have questioned whether they would create the jobs that Schwarzenegger and other backers promised.

The Republicans in the legislature continue to pound the drum for "No New Taxes"; against that wall of sound it becomes easy to call for “No New Tax Breaks!”