California budget crisis grows

If you want to get a feeling for the size of California’s current budget problem – it comes in around $735 for every man, woman, and child based on the latest population estimates. That means in order to balance the budget over the next 20 months every PERSON would have to pay an additional $735 in taxes just to balance the budget.

On November 6th the Governor released his budget solution. It is full of “revenue hikes” which is exactly what we do not need given the projected size and length of time the budget deficit is going to
be with us. The just-released analysis by the Legislative Analyst Office (LAO) says the state must come up with an additional $27.8 billion in the next 20 months and then face ongoing deficits far into the future (see LAO’s statement at the end of this item). The $27.8 billion equates to over 25% of the
state’s general fund. There has to be a fundamental restructuring of the way the state operates and what services it provides. Small service cuts and large tax increases are not going to solve this problem.

Here are the revenue sources Governor Schwarzenegger has proposed:

Temporary sales hike: Effective Jan. 1, 2009, state sales taxes would increase by 1.5% for
three years, from 5 percent to 6.5 percent. At the end of three years, the rate would return to 5
percent. Theoretical revenue: $3.54 billion 2008-09 and $7.3 billion in 2009-10. WITH NO PLAN TO REPLACE THIS REVENUE IT IS UNLIKELY THIS WOULD BE A “TEMPORARY” TAX. Note: This would place the majority of CCC sales tax levels at 9.75%. This tax increase can be put in place with a 2/3rds vote of both houses in the Legislature.

Add tax to services: Effective Feb. 1, 2009, the state 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, the tax would expand to amusement parks and sports events. Theoretical revenue: $357 million in 2008-09 and $1.15 billion in 2009-10. THESE TAXES ARE PERMANENTLY EXTENDED TO SERVICES. NOTE: Unlike the sales tax increase, it is not at all clear that this can be done with a Legislative vote. It appears this will take a vote of the people under Prop 218.

Oil severance tax: Effective Jan. 1, 2009 there would be a new tax on oil extracted from the ground or water in California at a rate of 9.9 percent of the gross value. Theoretical revenue: $528 million in 2008-09 and $1.195 billion in 2009-10. Note: much of California’s oil is not the highly valued “light sweet crude” and there are many marginal wells just barely producing. This additional tax could mean that these wells will be permanently taken out of service. To be realistic – these taxes would be passed on to the consumer.

Nickel-a-drink tax: Effective Jan. 1, 2009 there would be a hike in alcohol taxes in the state by a nickel per drink (defined as 1.5 ounces of liquor, 12 ounces of beer, or 5 ounces of wine) Theoretical revenue: $293 million in 208-09 and $584 million in 2009-10.

Vehicle registration fee: Effective Feb. 1, 2009 vehicle registration fees would be raised by $12. Theoretical revenue: $150 million in 2008-09 and $359 million in 2009-2010 Note: Isn’t this where the Governor came in? This kind of tax is regressive and extremely unpopular.

Statement From the nonpartisan state Legislative Analyst’s Office:
Overview of the 2008 Special Legislative Session Proposals
——————————————–
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.

— This update from Kris Hunt, Executive Director of the Contra Costa Taxpayers Association.