Monday, November 10, 2008

More California Budget Problems

Just weeks after the California legislature passed a budget for this year, Governor Arnold Schwarzenegger is calling out for tax increases, and drastic spending cuts, to help keep the state out of bankruptcy.

According to the San Francisco Business Times, “California Gov. Arnold Schwarzenegger proposed $4.7 billion in new taxes -- including a three-year increase in the state sales tax -- and $4.5 billion in new cuts Thursday to prevent a cash crisis brought on by a projected $11.2 billion hole in the current state budget.

Proposed new taxes include an immediate, three-year increase in the sales tax by 1.5 cents on the dollar; broadening sales and use taxes to items such as car repair, golf and veterinary services; a tax on oil extraction in the state; and an increase in alcohol taxes. The temporary increase would push the state portion of the sales tax to 8.75 percent, before any local sales taxes were considered.”

However, his plans are drawing a lot of criticism, with many claiming that a sales tax increase is not the best option. According to Mercury News, the Governor has plenty of better options to increase revenue.

“Eliminating tax credits for families with children, taxing attorneys' fees and raising business property taxes—these are some of the options Gov. Arnold Schwarzenegger could have proposed before settling on a 1.5 percent temporary sales tax increase.

None are easy choices in a struggling economy.

In laying out a proposal to increase sales tax for three years, the governor stressed an urgent need to raise revenue to maintain police protection and uphold California's education system.

‘We feel very comfortable that this is the best tax to use,’ the governor said Thursday while revealing a $11.2 billion hole in this year's budget. ‘This is the best way to go and we have to not delay it. I think now is the time for action.’

Economists recognize that the best form of taxation is the broadest one at the lowest rate. But California's budget fluctuates because it depends on a narrow segment of high-income earners whose fortunes ride with the stock market. About 50 percent of the state's personal income tax revenue comes from the top one percent of wage earners.

To complicate matters, the state's manufacturing-based sales tax has been shrinking proportionately because it hasn't been modified in decades to reflect service sector growth.

And a higher sales tax at a time when overall consumption is down may not do much to grow revenues.”

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