Democratic leaders are floating a new tax overhaul that the state's nonpartisan legislative analyst says would generate $1 billion without raising taxes on average for any income group.

The plan comes a month after Democrats released a different version that the Legislative Analyst's Office said would increase taxes on the middle class.

As state leaders try to close a $19 billion deficit two months into the fiscal year, they are seeking new revenues that avoid the tax-hike label. They have their strongest differences over about $4 billion of the problem, where Democrats want taxes and Republicans want cuts.

Under the new Democratic plan provided to The Bee, the state would permanently set the vehicle license fee at its current 1.15 percent rate and cancel a reduction scheduled for July. Democrats originally proposed a 1.65 percent rate. The plan would still raise income taxes this year and lower the sales tax by nearly two percentage points in October.

The proposal would affect taxpayers differently based on factors such as spending habits, vehicle value and federal tax itemization. New-home buyers and shoppers may save under the plan, while those who are frugal could pay more in taxes.

But LAO deputy legislative analyst Michael Cohen said that, on average, the plan would not increase taxes for any income bracket and would reduce taxes for those at both ends of the income spectrum.

The state would collect at least $800 million less than from the Democrats' original tax swap. Because the plan leans more on income and vehicle taxes – deductible against federal tax returns – California taxpayers would send less money to Washington.

"We still raise a billion dollars," said Senate President Pro Tem Darrell Steinberg, D-Sacramento. "There is absolutely no reason we shouldn't figure out how to bring more federal dollars to California."

Democrats last month said their first proposal would have cut taxes for Californians. But the Legislative Analyst's Office and other reviewers concluded that the plan would have cost middle-class taxpayers more in fiscal 2011-12. Democrats used a measuring stick that resulted in a more favorable outcome.

Gov. Arnold Schwarzenegger and GOP leaders assailed the first plan as a middle-class tax hike based on the LAO review, all but sealing its fate in the Legislature.

Democrats asked the LAO to produce a different version that would not increase taxes.

"We did come up with a scenario where all income groups would have at least no impact or better once you take into account federal deductibility," Cohen said. "Just like all the other scenarios, there's going to be a wide variation within a group, where some people do well and others could be worse off."

Schwarzenegger has not reviewed the new plan and does not have an opinion on it, said spokesman Aaron McLear. He opposed the previous version and does not support higher taxes.

The new version was crafted so delicately that the state sales tax rate in fiscal 2011-12 would be 3.58 percent, not a typical quarter-cent increment. In Sacramento, with local taxes included, the sales tax rate would be 6.85 percent in October, then 6.33 percent starting in July 2011.

It also consolidates the current system of six income brackets into four. The 4.25 percent bracket would decrease, the 9.55 percent bracket would remain the same and all other brackets would increase by at least one percentage point.

A criticism of the Democrats' first proposal was that the majority of California taxpayers – 62 percent – do not itemize and are unable to take advantage of greater deductibility. The new plan increases the standard deduction by $61 for state filers as a small boost to non-itemizers.

According to the LAO, the average filer earning between $50,000 and $100,000 would owe $633 more in income taxes in 2010-11. But the same filer would, on average, receive a $112 federal deduction and a $524 reduction in sales taxes. The net impact is a $3 reduction in taxes.

That $3 margin is so slim that many taxpayers could pay more and many could pay less. Margins are slimmest for middle-class taxpayers earning between $20,000 and $200,000, according to the analysis.

"The slimmer it is, the more sensitive it's going to be to the assumptions you make," Cohen said.

Another challenge for the new proposal is that it raises income tax rates on Californians for the entire 2010 year. That means filers may be surprised with a higher income tax bill in April because they withheld this year under lower rates.

Steinberg said applying the rate retroactively is "negotiable." Delaying the plan until 2011 would generate $250 million rather than $1 billion, Steinberg's office said.

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Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.

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