California Democrats Propose Raising Income Tax to Plug $19 Billion Gap

California’s Democratic leaders are proposing a 1 percentage-point increase in the personal income- tax rate to help close a $19.1 billion budget gap.

The increase would affect all taxpayers except those in the highest tax bracket, according to Darrell Steinberg, a Democrat and president of the state Senate. To make the income-tax change more palatable to voters, the Democrats plan to simultaneously lower California’s highest-in-the-nation sales tax by 2.5 percentage points.

Steinberg said the two moves together would still raise as much as $3 billion and that the plan would be presented to a joint budget committee of state Senate and Assembly members next week. California’s legislative leaders have been meeting for the past three weeks to discuss ways to close the deficit for the fiscal year that began July 1. Unlike sales levies, taxpayers can deduct state income taxes from their federal returns.

“The idea is to increase some taxes that are already federally deductible and to allow taxpayers to take advantage of that while lowering some taxes that are not federally deductible,” Steinberg said in an interview.

Controller John Chiang said he may issue IOUs to state creditors in August if a budget is not passed. Republican Governor Arnold Schwarzenegger yesterday ordered more than 150,000 public workers to take three days of unpaid time off to conserve cash.

Schwarzenegger spokesman Aaron McLear said the governor hasn’t seen the Democrat’s current proposal and is inclined not to support tax increases.

‘Volatile Income Tax’

“Relying even more on the volatile income tax is not the way to go,” McLear said in an interview.

The governor’s proposed budget involves $12.4 billion in cuts, including the elimination of some health care and welfare payments to the poor. Steinberg said the Democrats may support half of those cuts, if the balance could be satisfied by tax increases or borrowing.

California’s top individual income tax rate is 9.55 percent, although there is an additional 1 percent tax for mental-health services on incomes in excess of $1 million. The state has the highest sales tax in the U.S. at 8.25 percent, according to the Washington-based Tax Foundation, a non-partisan research group.

To contact the reporters on this story: Michael B. Marois in Sacramento, California, at mmarois@bloomberg.net; Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

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