[priceyicey]

California Democrats devise plan to hike taxes
By structuring them as fees, they would skirt GOP opponents and raise $9.3 billion. A court fight looms.
By Jordan Rau and Evan Halper
December 18, 2008

Reporting from Sacramento -- California's Democratic leaders were planning a vote today on a brazen proposal to raise gas, sales and income taxes through a series of legal maneuvers that would bypass the Legislature's minority Republicans.

The Democratic gambit, announced Wednesday, would raise $9.3 billion to ease the state's fiscal crisis by increasing sales taxes by three-fourths of a cent and gas taxes by 13 cents a gallon, starting in February. The plan would add a surcharge of 2.5% to everyone's 2009 state income tax bill.

It would also require businesses to withhold taxes on payments above $600 made to independent contractors, as they are now required to do with salaried employees.

In addition, the Democrats said they would cut $7.3 billion from schools, healthcare and other programs. Their package would total $18 billion and nearly halve the state's budget shortfall, projected to reach $41.8 billion in the next 18 months.

Both the Assembly and Senate planned to vote on the package today. Late Wednesday, Democratic lawmakers were negotiating with Gov. Arnold Schwarzenegger over items he wanted included in the proposal before he would support it.


Inside the Capitol, the strategy is considered revolutionary, because it would sideline the GOP. Though Republicans are a minority in both houses of the Legislature, they have repeatedly blocked tax increases and thwarted budgets they did not like, because California is one of only three states mandating a two-thirds vote for both budgets and tax increases. Achieving that threshold requires some Republican votes.

"I still believe in bipartisanship," Senate President Pro Tem Darrell Steinberg (D-Sacramento) said at a Capitol news conference. "But there is an even greater responsibility than practicing bipartisanship, and that is to govern. And that is what we intend to do here today."

Republican legislators and antitax groups promised legal challenges to derail the Democrats' plan.

"Raising taxes on people and playing funny math and calling it fees is not governing," said Assembly GOP leader Michael Villines of Clovis. "That's trickery, is what that is."

The plan hinges on a legal distinction made by judges that a tax is imposed broadly and used for general government purposes, while a fee is charged to users of a specific benefit provided by government, such as a road.

The proposal would employ an arcane loophole in state law that lets legislators pass a tax bill with a simple majority vote -- if the bill does not raise more revenue.

The Democrats intend to do two things: eliminate some existing fees, including those on gasoline, and substitute tax increases that would include a 9.9% levy on oil extraction and the income tax surcharge.

Under the proposal, the Democrats would then reimpose the gas fees at higher levels; fees can be raised with simple majority votes. The gas money would go to roads and transportation. The net effect would be billions of dollars in new revenue for the state.

Similar proposals have been considered in past budget crises but never acted on out of concern that they would unravel in court. The Democrats said Wednesday the plan had passed muster with the nonpartisan Legislative Counsel's office, which provides legal advice to lawmakers. But the only opinion from that office that Democrats released was from 2003.

Democrats said this plan was the only way they could see of breaking the current budget impasse, which has stretched on for more than a month since Schwarzenegger called lawmakers back into session.

"Sen. Steinberg and I are committed to getting this job done with or without our Republican colleagues," said Assembly Speaker Karen Bass (D-Los Angeles).

Matt David, a spokesman for Schwarzenegger, said the Republican governor would not sign the measure unless it included cuts to the state's workforce, which public employee unions are resisting.

David said Schwarzenegger also is insisting that lawmakers include measures for mortgage relief and provisions allowing private contractors to perform more state construction and even take over some government facilities, such as roads.

"If it doesn't have these components, then the vote . . . is nothing more than a drill," David said in an interview.

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., said the Democrats' bid violates tenets of Proposition 13, the 1978 initiative that capped property taxes and required that all other tax increases be approved by two-thirds of the Legislature.

"If they proceed with this proposal to raise taxes with a simple majority vote, they will be sued and they will lose," Coupal said. "So we're very confident this is more of a ploy than anything else."

Legal experts said no one can know how the courts would rule. Judges might be reluctant to take an action that could send the state spiraling into insolvency. On the other hand, the experts said, judges -- particularly those afraid of recall campaigns -- might be afraid of a populist uprising akin to the revolt that led to Proposition 13.

"It is absolutely a shell game," said Kirk Stark, a professor at UCLA School of Law. But "in the 30 years since Prop. 13 was enacted, the courts have been accommodating of legislative ingenuity."

Or, said another UCLA law professor, Jonathan Zasloff: "The court may just say, 'We are not dealing with this; it is not our job' " to run the state's finances. "It will be a galvanizing issue that tests the independence of the judiciary."

If the plan were to survive legal tests, the state would still face a debilitating budget gap and a cash crisis so severe that California's top three financial officials -- the state treasurer, the controller and Schwarzenegger's finance director -- voted Wednesday to freeze financing on road, levee, school and housing projects.

State fiscal experts said lawmakers would have to erase the entire budget gap before they would resume issuing the bonds that finance such projects, which number more than 2,000. They said state bonds are not selling while financial speculation grows that California may become insolvent.

"In a market where investors are looking for quality, we do not feel they are going to want to buy the bonds of the state of California" until the state's finances are righted, said Paul Rosenstiel, a deputy treasurer. "We don't hear from the investment bankers at all these days."