Senate Democratic Leader Darrell Steinberg defended the Democratic leadership’s tax plan Wednesday against critics on the left and the right who don’t like it because it would increase taxes on the middle class.
Steinberg describes his plan as a creative way to pull more money for California from the federal government because it would raise taxes that are deductible on federal returns – the income tax and the car tax – while cutting the sales tax, which is not deductible.
The result would be something of a windfall in federal money for California – an additional $2 billion.
But the tax swap would not affect everyone equally.
The poor would generally do well because they tend to pay little or no income tax while paying a large share of their income in sales tax, because they spend most of what they earn.
The wealthiest Californians would also do well, because Steinberg’s plan does not increase income taxes for them, except to extend a .25 percent surcharge that is supposed to expire next year.
But those in the middle would do the worst, paying more in income taxes while getting a relatively small break on their sales taxes.
“Budgets are always about values and choices,” said Jean Ross, director of the California Budget Project, which advocates for the low-income Californians. “From an economic standpoint this is not a well targeted proposal. It hits the middle hard and lets the top totally off the hook.”
Steinberg says his proposal spares the wealthy in an attempt to make the state’s tax system less volatile. Because incomes at the top end vary significantly with the economic cycle, income tax collections tend to soar in good times and crash during recessions. By flattening the tax structure, he said, the state could get a more level revenues stream.
“This kind of proposal isn’t a traditional democratic proposal to suggest progressivity in any way, but we recognize if you are going to hit that proverbial sweet spot and attract any possibility of bipartisan support is that you got to give to get,” Steinberg told the Senate Revenue and Tax committee Wednesday. “And our get here is reducing the level of devastating cuts and investments to public education and other vital services.”
But Steinberg is also fending off criticism from the right, even though he said the idea for his tax swap came originally from Republicans. Gov. Arnold Schwarzenegger and Republican leaders in the Legislature have denounced it as a tax increase, not cut or even a revenue-neutral swap.
One reason for the criticism is that Steinberg’s proposal assumes that the temporary tax increases enacted last year will continue beyond their scheduled expiration date. His calculations for how much his plan would cost Californians start from those higher rates, rather than the lower rates that will once again become law if the Legislature does nothing.
By assuming that the higher rates would remain in place, Steinberg makes it look as if his proposal is a smaller tax hike than it is.
But Republicans also note that about 60 percent of Californians do not itemize their federal taxes and would thus not benefit from the increased deductions on which Steinberg bases his plan. And even for those who do itemize, those deductions phase out over time.
According to an analysis of the plan by the Department of Finance, the plan would result in a net tax increase of $1.2 billion, and 57 percent of taxpayers would pay more. People making less than $30,000 or more than $1 million would pay less than they would under current law (after the temporary tax increases now in effect expire). All other income groups would pay more.
But Steinberg argued Wednesday that the plan would boost the economy by increasing sales of big ticket items such as appliances and cars. The tax on a $20,000 car, he said, would fall from $1,200 to $800 in 2011 and to $700 in 2012.
“Any increase in consumer sales will mean more jobs in the private sector and more sales tax revenue for the public sector,” Steinberg said, sounding a bit like a Republican for a moment.
Steinberg challenged his critics to come up with something better.
“A fair and honest resolution of the state budget deficit requires some new and ongoing revenues,” Steinberg said in testimony prepared for the committee. “This tax reform proposal allows us to realize new revenues in a way that will spur consumer sales and business investment, and maintain public investments in education and other services that are the keys to our long-term economic prosperity.
“The governor has said tax reform is an essential piece to closing this year’s budget and essential to the future health of California. It is not enough to just poke holes in the modeling here. Tell us how you would improve it so we can get on with the peoples business, finish the state budget, and move on to the rest of the challenges we face here in California.”