The two big tax changes that Democrats proposed last month to cover part of the state's ever-worsening budget deficit were carefully chosen to give political cover to legislators who voted for them.
The biggest is restoring the vehicle license fee, otherwise known as the car tax, to its historic level of 2 percent of an automobile's value – thus tripling the current 0.65 percent tax that was reduced in stages in the late 1990s and early 2000s when the state was rolling in revenue.
Although the car tax is widely unpopular – and Arnold Schwarzenegger's first act as governor five years ago was restoring the reduction that predecessor Gray Davis had canceled – it has three things going for it politically: It raises a lot of money, over $4 billion a year; it can be labeled a "fee" and not a tax, even though it has the same legal status as any other property tax; and it can be argued that boosting it would merely restore the tax to its historic level.
The other proposed tax change is subtler: Freezing for one year the indexing of income tax brackets to inflation that voters decreed in a 1982 ballot measure. But there's a big legal question as to whether the Legislature could impose that freeze.
The 1982 ballot measure, Proposition 7, was sparked by the hyper-inflation of the late 1970s which resulted in taxpayers being pushed into higher income tax brackets even if their incomes had fallen behind the cost of living. It required that the brackets be adjusted each year for inflation and in the absence of any change, the adjustment would be about 5 percent next year.
Freezing the brackets would raise an estimated $1.4 billion in the current fiscal year and $1 billion in 2009-10. Under the Democratic plan, the freeze would last just one year and the deferred inflationary adjustment would be applied to the brackets thereafter.
The bracket freeze also contains some political cover. It could be argued that it's not a tax increase per se but merely a freeze of a tax cut and that income-tax payers would see the adjustment benefit restored eventually. Moreover, both the car tax and income taxes are deductible on federal income tax returns, thus blunting their net effect on taxpayers who itemize.
But could the Legislature change what voters decreed? One provision of the state constitution says that a law passed by voters cannot be altered unless the law itself allows legislative amendment, which some voter-passed statutes do. Proposition 7 didn't give that permission, however.
Legislative budget-writers contend – with the blessing of the Legislature's legal office – that they could write a new set of income tax brackets for 2009 without changing the underlying law, but the California Taxpayers Association and other groups would almost certainly challenge such a maneuver in court, arguing that only the voters could suspend indexing.
Like everything else attached to the state's budget crisis, this is another ball being juggled by politicians.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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