Governor Proposes $4.7 Billion Tax Increase

You knew it was coming!

Governor Arnold Schwarzenegger has issued his proposals for addressing the anticipated $11.2 billion revenue shortfall. The center piece of his proposal is $4.7 billion in new taxes.

Here are the details:

A Revenue Problem: While Governor Schwarzenegger has worked to fix the state’s spending problem, and has kept state spending relatively flat for the past three budget cycles, the dramatic drop in our revenue projections over the past six weeks resents an extraordinary situation which, combined with the volatility of our tax ystem, creates a revenue problem. Raising taxes is never a good idea, but in this xtraordinary situation, there is no question that new revenues must be brought into he state to protect education and vital services. The Governor is proposing $ 4.7 billion in new revenues for the current budget year in the form of:

  • A Temporary Sales Tax Increase: A temporary increase in the state sales tax (from 5 percent to 6.5 percent) will generate additional sales tax revenues of $3.5 billion in 2008-09 for the General Fund. It will also effectively protect significant education funding. At the end of three years, the state sales tax would revert to 5 percent.

  • Broadening the Sales and Use Tax to Include Certain Services: Effective February 1, 2009, the sales and use tax rate will be applied to appliance and furniture repair, vehicle repair, golf, and veterinarian services. Effective March 1, 2009, the sales and use tax rate will be applied to amusement parks and sporting events. This is expected to generate additional General Fund sales tax
    revenue of $357 million in 2008-09.
  • Oil Severance Tax: Effective January 1, 2009, impose an oil severance tax upon any oil producer for the right to extract oil from the earth or water in this state. This brings California in line with other states. The tax shall be applied to the gross value of each barrel of oil at a rate of 9.9 percent and will generate additional tax revenues of $528 million in 2008-09.
  • Increase Alcohol and Excise Taxes: Alcohol excise taxes are proposed to be raised by five cents a drink beginning on January 1, 2009. This increase is estimated to raise $293 million in 2008-09. Revenues from this tax will be used to fund critical drug and alcohol treatment and prevention services. Alcohol taxes were last raised in 1991.

In the Governor’s defense, he has also proposed $4.5 billion in spending cuts. This includes a deep $2.5 billion cut in education funding for this year. The fact is, there is something for everyone to hate in this proposal. But then again, maybe we wouldn’t have such a big budget shortfall if we didn’t ignore the fact that the revenue projects were unrealistic from the start.

But I won’t go there!