California Democrats Seek Higher Income Tax, Oil Levy
California Governor Arnold Schwarzenegger
Ken James/Bloomberg
California Governor Arnold Schwarzenegger speaks to the state assembly about his proposed budget in Sacramento.
California Governor Arnold Schwarzenegger speaks to the state assembly about his proposed budget in Sacramento. Photographer: Ken James/Bloomberg
Aug. 2 (Bloomberg) -- California, the largest U.S. municipal borrower, began its fiscal year July 1 without a spending plan as Governor Arnold Schwarzenegger and Democrats remained deadlocked over how to best fill a $19.1 billion deficit. Bloomberg's Matt Miller reports. (Source: Bloomberg)
California Democrats unveiled a plan to erase the state’s $19.1 billion budget deficit with higher income taxes and a new levy on oil producers to offset wholesale spending cuts proposed by Governor Arnold Schwarzenegger.
The plan from Democrats in the state Legislature would bring in $1.8 billion by increasing income-tax rates 1 percentage point on all but the wealthiest Californians. It would cut spending by $8 billion and raise $1.5 billion by increasing vehicle-registration fees, $600 million by taxing oil wells and $2 billion by suspending corporate tax breaks.
Schwarzenegger, 63, and fellow Republicans said they’ll block the proposals, continuing an impasse that has left the most-populous U.S. state without a budget since the fiscal year began on July 1. Controller John Chiang, a Democrat, has warned that he may need to issue IOUs instead of paying some state bills to save cash if the stalemate lasts into next month.
“Tax increases are dead on arrival,” Aaron McLear, Schwarzenegger’s spokesman, told reporters today. “Tax increases are not something we will support.”
Higher income-tax rates would funnel money into the state’s general fund while letting Californians increase their itemized deductions on federal returns. The wealthiest residents already pay a higher rate. To make the increase more palatable to voters, the Democrats would cut California’s highest-in-the- nation sales tax by 2.5 percentage points over two years.
Nothing to Celebrate
“This is not a budget to celebrate, it’s a budget of necessity,” said Darrell Steinberg, a Democrat from Sacramento and the senate president pro tem. “It is a proposal that reflects our difficult economic times and counts on all Californians to come together in a collective effort to weather this recession and spur our economic recovery.”
The Democrats’ package would suspend a provision in last year’s budget to move California manufacturers to a single-sales factor income-tax plan in January. The method would determine how much of a California-based company’s income to tax when it has significant revenue-generating operations elsewhere in the U.S. or abroad. Democrats also want to suspend rules that let companies deduct earlier losses from current taxable income.
State Democrats count on $1.4 billion of revenue that the non-partisan Legislative Analyst’s Office says will be received yet was excluded from Schwarzenegger’s budget proposal. The plan would increase vehicle registration fees to 1.65 percent of value, from 1.15 percent now.
Formula for Stalemate
Budgets and tax increases in California must be approved by a two-thirds supermajority of the Legislature. While Democrats control both chambers, they are short of a two-thirds majority by two votes in the state Senate and five in the Assembly. A budget conference committee must review the Democrats’ proposal before it can be considered by the full Legislature.
Schwarzenegger, whose term ends in January, wants to cut spending by about $12 billion. That would be accomplished in part by dismantling the state’s main welfare program for families, known as CalWorks, and by reducing subsidies for county-level mental health programs and in-home care for the elderly and the disabled.
The governor’s plan would slash pay for state workers by almost 10 percent, eliminate child-care subsidies for all except preschoolers, and levy a 4.8 percent surcharge on home- and commercial-insurance policies to finance firefighting.
The Democrats rely on $4.1 billion in extra federal aid the state may get for health care, education and illegal immigrants in its jails. Their plan also includes $400 million in federal matching funds for surviving welfare programs.
Yield Spread
The extra yield investors are demanding on the state’s 10- year bonds above those of AAA rated municipal securities was 119 basis points today, according to Bloomberg Fair Value Index data. That’s less than the 171 basis-point spread that the bonds reached on July 1, 2009, just before the state began issuing IOUs amid a budget standoff. A basis point is 0.01 percentage point.
Standard & Poor’s, which gives the state its fourth-lowest investment-grade rating of A-, said June 8 that California’s $69 billion of outstanding general-obligation debt may be lowered if the current impasse extends for as long as three or four months. California sold $28 billion of long- and short-term bonds in the past 12 months, according to Bloomberg data. The state has the authority to sell another $41.6 billion.
Republicans and Democrats don’t agree on the size of the state’s budget gap, which may complicate the task of finding a solution. In their proposal today, the Democrats put the deficit at $17.9 billion, $1.2 billion less than what Schwarzenegger said needs to be filled. The Democrats say their plan includes a $500 million reserve, though it would leave the state confronting a $12 billion gap next fiscal year.
To contact the reporters on this story: Michael B. Marois in Sacramento, California, at mmarois@bloomberg.net;
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