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Sacramento

Hold On To Your Wallets by Jon Coupal 2/5/08

Sacramento admits to a $14.5 billion deficit over the next 18 months. Chances are close to a certainty that this is a conservative estimate. After all, when do politicians ever exaggerate bad news for which they are responsible?

The responses from Sacramento officials vary, but none are especially good news for taxpayers.

The governor says there should be no new taxes, that we should close the budget gap with spending cuts, but this did not stop him from pushing his now defunct government mandated health-care proposal that could have cost Californians billions of dollars.

The state legislative analyst recommends the state do away with the mortgage interest deduction for homeowners. Senate leader Don Perata and Assembly Speaker Fabian Nunez have promised to seriously consider this recommendation. Nunez, who declares the shortfall will not be made up through budget cuts, wants to see higher taxes including an upping of the car tax, which was Gray Davis' failed response when he faced his own budget demons just five years ago. Others want to see services taxed -- imagine going to a doctor or lawyer and finding a tax added to the bill. And there are, of course, the usual rumblings from the education lobby that Proposition 13 must be jettisoned.

Additionally, a number of lawmakers, who fear they will not be able to fund their favorite programs with state money, are introducing legislation to make it easier for locals to impose new taxes to accomplish the same goals.

Any way you look at it, the most powerful forces in the Capitol are advocating higher costs for taxpayers.

So in a state that already ranks near the top in per capita taxation (8th among all states according to the Tax Foundation) all the indications are that there will be a push to make California number one.

As economist Art Laffer likes to say, if you want less of something, tax it more. Most of our taxes are based on economic activity. Raise the taxes on a business and suddenly it is less competitive and relocation to another state or country looks more attractive. Raise the income tax, and those with jobs are checking the want ads in communities outside California -- even without new taxes, for the last several years the State Department of Finance has reported a net out-migration of citizens. Raise the sales tax, a tax that falls disproportionately on those with low incomes, and the overall pressure increases on citizens to seek greener pastures out of state.

How about taxing property more, or doing away with the mortgage interest deduction, which amounts to the same thing? Does anyone really want to make owning a home more expensive in a state where fewer than 25 percent of families can afford to buy an entry level home? Does anyone want to tamper with Proposition 13 and risk putting retirees out of their homes and possibly making them dependent on the state?

Although there are already a number of tax increase proposals on the table and we can expect many more in coming weeks, the most offensive may be one that is being put forward by Gov. Schwarzenegger: A surcharge on homeowners' insurance policies dedicated to firefighting efforts. The spinmeisters in the administration are trying to portray this as a "fee," which is convenient since it would only require a simple majority vote of the Legislature to implement. If it were declared a tax it would require a two-thirds vote of lawmakers as mandated by Proposition 13.

But the "fee" argument does not pass the laugh test. The charge is a tax because it is for a generalized governmental service without the requisite nexus for a true fee. The bulk of these revenues would go to the state's Firefighting Safety Account, which may be of great benefit to a homeowner near Lake Tahoe, but will do nothing for property owners in downtown Los Angeles, San Jose or San Diego. Most urban residents already receive fire protection from city fire departments so would not benefit from the additional charge. Additionally, it is clearly not a fee in that those who chose to self-insure would still benefit from the charge without having to pay it.

The final inequity is that, if imposed, this new tax would free the state from having to fully fund firefighting services from the general fund; money that would have been spent for this purpose could be shifted to other programs.

So taxpayers must be alert to both straightforward and surreptitious efforts to increase taxes. But legislators must be wary, too. Even if some lawmakers have no sympathy for the struggles of those who must work hard to look after their families and even harder so they can take care of government, too, saner heads must see that higher taxes will be counterproductive. Just ask Pete Wilson, who, as governor, agreed to major sales and income tax increases in 1991 only to see reduced tax revenue the following two years. CRO

copyright 2008 Howard Jarvis Taxpayers association

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