Nov 6, 2008 1:07 pm US/Pacific
Schwarzenegger: $4.7B In Tax Hikes To End Deficit
Governor Proposes Temporary 1.5% Sales Tax Increase
Amusement park and sporting game tickets would be subject to the state sales tax, as would appliance and vehicle repairs under the governor's proposal. Taxes on alcohol also would increase.
SACRAMENTO (CBS13/AP) ―
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Gov. Arnold Schwarzenegger speaks with reporters in Sacramento Friday.
CBS
Gov. Arnold Schwarzenegger on Thursday proposed billions in spending cuts and a temporary 1.5 percent sales tax increase to close a worsening state budget deficit, a plan that will leave Californians paying more to buy a car, take their children to Disneyland or attend a Dodgers game next season.
His proposal represents a widening of California's sales tax, matching tax structures in effect in New York, Texas and Florida and other states.
For the first time, it will be applied to services such as vehicle repairs, appliance and furniture repairs, veterinarian services and even greens fees for playing golf. The first wave will take effect Jan. 1. By spring, the state will begin collecting sales tax on tickets to amusement parks and sporting events.
Reaction was swift from interests groups fearing they will be hurt by a sharp rise in the sales tax.
"It is patently unfair to single out California's golfers, who already pay a fair share of taxes, and expect them to assume a disproportionate share of the revenue needed to close the state's budget deficit," Bob Bouchier, executive director of the California Alliance for Golf, said in a statement.
He said courses already are struggling to attract players who are cutting back nonessential spending.
In some municipalities, Schwarzenegger's plan will boost the local sales tax to 10 percent or more. Los Angeles County will charge shoppers 10.25 percent if the governor's plan is adopted by lawmakers. The sales tax increase would be in effect for three years.
Overall, the tax hikes Schwarzenegger outlined Thursday would raise $4.7 billion. They also include raising the registration fee for vehicles by $12 and taxing companies that extract oil from California, which he said would generate $528 million this year.
Schwarzenegger said the state's economic condition has deteriorated sharply since he signed the budget for the current fiscal year in September. The stock market has cratered and the housing market has continued its slide.
While he also proposed $4.5 billion cuts to state programs, he said cuts alone would not solve California's budget problem. He said the state would have to take even more from public education without new revenue.
He and lawmakers already have enacted $7.1 billion in cuts for the current fiscal year, which ends June 30, and last summer Schwarzenegger eliminated 22,000 part-time and seasonal positions from the state payroll. On Thursday, he proposed that state workers be required to take a one-day-a-month unpaid furlough and forgo two holidays.
"We have a dramatic situation here and it takes dramatic solutions ... and immediate action," the governor said as he called the Legislature back into session to deal with the budget shortfall. "We must stop the bleeding."
California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months as stock prices have plummeted. Sales and property taxes also have declined.
Reaction to Schwarzenegger's sales tax plan from the business community was mixed.
Peter Welch, president of the California New Car Dealers Association, said the proposal will add hundreds of dollars to the price of a new vehicle.
"The fact of the matter is we are in an historic car recession (that's) bordering on a depression," he said. "We actually think we need an economic stimulus package to get people to come in and buy cars. This is just the opposite."
New car sales declined 18.5 percent in California during the first three quarters of 2008 compared to the same period last year. That has forced dealers to lay off thousands of employees and contributed to the closing of 97 dealerships, Welch said.
Bill Dombrowski, president of the California Retailers Association, said the group supported Schwarzenegger's proposal for a temporary 1 percent sales tax increase last summer but has not taken a stand on the 1.5 percent increase.
"Our position has been that there really are no good choices here, and we do need new revenue," he said.
The governor's plan recognizes the need for balancing revenue increases and spending cuts, said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.
"It's a choice of who bears that piece of the burden in this downturn," Levy said. "Somebody will bear it, whether it's the kids and folks in the (social) safety net or consumers."
Also on Thursday, the state controller issued a statement saying California runs "the very real risk" of a severe cash shortage by the end of the year and may have to resort to borrowing so it can balance its books.
California's deficit is now 11 percent of general fund spending and could double by next fiscal year if not addressed immediately, Controller John Chiang said. But even borrowing has been made more difficult by the uncertainty in the nation's economy and tightened credit market.
California typically borrows money to pay its daily expenses until the bulk of its tax revenue arrives in the spring. The state had scheduled to take out $2 billion in notes the week of Nov. 17 but has delayed that sale.
State Treasurer Bill Lockyer cited unfavorable market conditions in postponing the issue of the short-term loans.
"Investors will want to see how the state addresses the budget imbalance before lending to us at reasonable rates," Lockyer said in a statement.
The financial crisis is spreading throughout state government. California's unemployment insurance fund, which helps those tossed out of work pay their bills, is expected to be out of money by January. With the state's unemployment rate at 7.7 percent and likely to grow, the fund is projected to be $2.4 billion in the red by the end of 2009. That would force the state to borrow from the federal government.
Schwarzenegger said he wants employers to pay more into the unemployment insurance pool while laid-off workers would get less to help the fund avoid insolvency. Schwarzenegger also said he will consider tightening eligibility rules.
The plan Schwarzenegger outlined Thursday will serve as the starting point in negotiations with the Democratic and Republican leaders of the state Legislature.
Democrats already have called for tax increases, while Republicans have rejected them. That complicates efforts to get a deal because some Republican votes are needed in the Senate and Assembly to reach the two-thirds majority required to pass spending plans and tax increases.
Assembly Speaker Karen Bass said it was up to the governor to deliver GOP votes. State Sen. George Runner, the Senate's GOP caucus chairman, flatly said Republicans will not support a general tax increase.
"The fact is that during this time of economic challenges is not the time to go back to California taxpayers and ask for more money from them," said Runner, of Lancaster.
He said Republicans would be open to considering other ways to generate revenue for the state. That could include licensing more offshore oil drilling to collect fees and considering selling what Runner said are "billions of dollars of surplus properties."
The Legislature has until Nov. 30 to act on the governor's proposals. A new class of lawmakers will be sworn in Dec. 1.
The ideological clash is likely to set up another showdown between Schwarzenegger and members of his own party. The governor often has characterized California's budget problems as being caused by runaway spending, rather than a lack of tax revenue, but he now says the severe financial crisis has flipped that.
"It is now a revenue problem rather than a spending problem," Schwarzenegger said.
You can read more details about Gov. Schwarzenegger's plans below:
(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
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