Dean Calbreath hopes Arnold Schwarzeneggar will stop tax breaks

Tax changes may be key to plugging budget hole
Dean Calbreath
San Diego Union-Tribune
June 21, 2009

With California on the brink of insolvency, Sen. Dianne Feinstein recently recalled the days when, as mayor of San Francisco, she would venture out into the neighborhoods and ask people what kind of services they wanted.

“Do you want more police?” Feinstein would ask.

The answer would come back, loudly, “Yes.”

“Do you want more firefighters?”

The answer would come back, loudly, “Yes.”

“Do you want to pay for them?”

“And instantly,” Feinstein said, “there would be a booming 'No.' ”

Speaking to a crowd of mostly government workers at Lawrence Livermore National Laboratory late last month, Feinstein said “that's part of the dilemma of (the California budget crisis). And the hard part of it is where the cuts have to come from.”

Feinstein's comments get to the heart of the problem facing Sacramento now. How many schools, libraries, parks and other public services is California willing to do without as we try to close our budget deficit, currently pegged at $24.3 billion?

Gov. Arnold Schwarzenegger's proposal before the Legislature is to rely on cuts alone to fix the budget: $5.5 billion from health and human services, $5.1 billion from education and $1.3 billion from the court and prison systems. The rest of the money would come from one-time sales of state assets; borrowing from cities and counties (an idea that infuriates local officials); furloughs, pay cuts and layoffs of state employees; fee increases and cuts in other services.

Schwarzenegger pledged last week to veto any budget that includes new taxes beyond what he has already proposed, which largely consist of increases to the state sales and income taxes.

“To do another tax increase is irresponsible,” Schwarzenegger said.

But if Schwarzenegger really wants to be responsible about putting out a budget, he should re-examine some of the tax breaks that were inserted into the budget last year to gain the votes needed for a two-thirds passage in the Legislature. And he should reconsider some of the taxes that were abandoned during the budget negotiations.

A conference committee of the Legislature last week proposed doing just that: clipping out the tax breaks and adding back the taxes. Despite Schwarzenegger's veto pledge, he should give the panel's recommendations some consideration:

Oil companies. California is the fourth-largest oil-producing state in the country behind Louisiana, Texas and Alaska. But despite our reputation as a high-tax area, California has never imposed severance taxes for pulling gas or oil out of the ground.

That's a stark contrast to the other oil-and gas-producing states, most of which have double-digit severance taxes. The taxes in conservative, Republican-dominated Alaska are at 25 percent, generating so much money that the state is able to pay residents $2,000 per year as a benefit, besides building a war chest for when oil will no longer be available.

The conference committee proposed putting a 9.9 percent severance tax on oil – a proposal that Schwarzenegger supported last year – which would generate an estimated $830 million in revenue.

Joseph Sparano, who represents oil interests as head of the Western States Petroleum Association in Sacramento, argues against the severance, noting that in California, as opposed to some (but not all) oil-producing states, oil companies pay property taxes for the land where they are drilling.

“If you add the severance tax, oil producers would be paying higher taxes than anywhere else in the country,” he said.

Sparano may have a point. But perhaps we could at least lift severance taxes to the point where we'd be on a par with, say, Texas, Louisiana, New Mexico and Wyoming, which now collect far more on their oil and gas than we do, even after taking property taxes into account.

Corporate tax breaks. During the budget negotiations in February, the Legislature inserted three corporate tax breaks that resulted in a total gap of $2 billion to $2.5 billion

Data from the state Franchise Tax Board show that one of the proposals – to allow companies to choose between two ways of being taxed in the state – would largely benefit the 0.1 percent of companies in California that make more than $1 billion per year. Much of the benefit would go to just nine companies, saving them an average of $33 million a year.

“These massive, permanent tax cuts will exacerbate California's persistent budget troubles, requiring deeper cuts in public services or potentially larger tax revenues from California's families,” said a report of the California Budget Project, a liberal think tank in Sacramento.

Another proposal, which would allow corporations to transfer taxes among related companies, would benefit just 0.03 percent of corporations, with the top six companies saving an average of $23.5 million a year.

Auto license fee. Schwarzenegger's first action as governor was to roll back California's fee on automobile licenses, which put a $4 billion hole in the budget. As the budget problems mounted last year, Schwarzenegger was forced to increase the license fee. And now the Legislature is proposing to raise it an additional $15.

The standard argument against raising taxes is that it would discourage people from buying automobiles. But will an additional $15 fee on an auto license really stop Californians from buying a new car? That's doubtful – but it could generate millions of dollars for the health care, education and other services being cut.

Cigarette taxes. The committee is proposing to increase excise taxes on cigarettes and other tobacco products by $1.50 per pack, nearly tripling the tax on a pack of cigarettes from 87 cents to $2.37. This proposal would increase revenue by an estimated $1 billion next year.

Esmael Adibi, economist at Chapman University in Orange, who happens to be a smoker, complained that such a tax would be “Draconian” and would fall most heavily on the poor.

But if you weigh the value of helping people quit smoking versus laying off teachers and suspending health care for poor children, it would be hard to call it an altogether bad idea. Even if that proposal were chopped down by 90 percent, to 15 cents per pack instead of $1.50, it would still generate $100 million in revenue, which would be enough to keep quite a few teachers on the job.

The bottom line is that to have a balanced budget, there will be pain all around. Assembly Speaker Karen Bass, who supports the tax revisions, said she just wants to make sure “that the shared pain be shared by oil companies and tobacco products, as well.”