In Depth on the Democrats' Budget Solution

by Robert in Monterey [courtesy of Calitics - Front Page]

I will be on KRXA 540 at 8 tomorrow morning to discuss this and other California political topics

I've been looking over the Democrats' budget proposal and the more I see it, the more I really like it. It's a testament to the leadership of Speaker Karen Bass and of Assembly budget wizard John Laird (not his official title but it might as well be) that they put together such a good plan. Of course it will be a starting point for future negotiations, but Californians should rally behind this plan, which provides for the public services this state needs to survive a tough economy without hurting working Californians with a tax increase.

The plan is smart, fair, and above all progressive. It would reverse the trend toward regressive taxation in California by finally making the wealthy pay their fair share. Just as Bush's tax cuts have blown a hole in the federal budget, so too have the McClintock Republican tax cuts done the same to ours.

The first thing to understand is that, as Speaker Bass explained on a conference call earlier today, that we already have cut the budget. Over the last 3 years some $15 billion in cuts have been made, particularly back in February. We will hear the usual "more cuts!!!" from Republicans - but there really is nothing left to cut. We've cut fat, we've cut muscle, we've cut bone. We're reduced to sucking out the marrow and leaving a bare rickety skeleton.

Second, the tax increases - some of which are temporary, some of which are permanent - are not designed to be the final solution to the structural revenue shortfall. Speaker Bass made a good point that while the income tax increase is permanent, it can and perhaps should be changed when the tax reform commission unveils its proposals next year.

Third, the increases will hardly hurt the economy. Many of these tools were used in 1991-92 with the severe budget crisis at that time and they did not prevent the state economy from going into recovery by 1993-94. Of course we need to get away from the notion that tax increases by themselves hurt economic growth - firing teachers, cutting public transportation, and closing hospitals are really what produce severe and lasting damage.

That all in mind I discuss the specific plans over the flip.
Going off the SacBee summary:

New income tax brackets

Revenue generated: $5.6 billion

Reinstates 10 percent and 11 percent tax brackets for wealthiest Californians. Income tax rates range in California from 1 percent to 9.3 percent. The new proposal would raise the rate to 10 percent for "taxpayers filing joint returns with taxable income above $321,000 and 11 percent for those with incomes above $642,000."

This title from the Bee is misleading - the brackets are NOT new. They were created in 1991 and then recklessly cut in 1998 when Tom McClintock insisted on new tax cuts at the height of the dot-com bubble. This tax would be permanent but, as Speaker Bass noted, these wealthy individuals can deduct that amount on their federal income tax return. It's a wash for them an a boon to the state.

In any event this revenue solution is smart, fair, and desperately needed. Even if the other proposals are abandoned, this one should stay.

Suspend "net operating losses" for corporations

Revenue generated: $1.1 billion

For three years, big business would lose its "net operating loss" deduction. That allows companies to carry forward losses from one year to the next and use them as a deduction in taxes.

This would only apply to businesses making over $5 million in profit, protecting small and medium businesses. Again it is a progressive solution that pushes the tax burden onto the rich to benefit the masses.

Suspend inflation indexing of state income tax brackets

Revenue generated: $815 million

This plan would suspend the adjustment of income tax brackets for inflation. As a result, Democrats say, a single filer with a taxable income of $50,000 a year would pay $34 more, while a taxpayer with income exceeding $97,000 would pay about $180 more.

$34 per person is a very small price to pay. Especially considering that wages are not rising much due to this current inflation - indexing of tax brackets was done in the 1970s in response to the "bracket creep" that stagflation produced.

Eliminate dependent credit for those with incomes above $150,000

Revenue generated: $215 million

The dependent tax credit was $294 last year. The LAO proposed lowering the credit to $94 -- the amount of the individual exemption. The legislative Democrats have proposed lowering the tax credit for those taxpayers with adjusted gross income above $150,000.

This is a necessary tax loophole closure, but it is right to protect those middle-income families who have children.

Raising the franchise tax

Revenue generated: $470 million

The top tax rate for corporations is currently 8.84 percent. The proposal returns the tax rate to 9.3 percent, where it was in 1997.

This will finally undo one of McClintock's reckless 1998 tax cuts that blew a hole in the state budget during the temporary dot-com boom. Republicans cut taxes during the flush times, not leaving Californians with enough during the hard times.

Steps up tax enforcement

Revenue generated: $1.5 billion

This is a plan to collect taxes already owed to the state, to be "modeled after successful tax amnesty efforts in the past," according to legislative Democrats. They said some of the $1.5 billion in revenue "will be an acceleration of revenues that would be paid in the future."

A no-brainer.

All in all these are smart and fair solutions that will protect vital state programs and services from radical Republican slashing. We cannot afford more cuts, but we CAN afford new revenues.