Arnold’s Tax Hikes: Wrong and Illegal

Tuesday, November 18, 2008

Page 7

IN MY OPINION

Arnold’s Tax Hikes: Wrong and Illegal

By JON COUPAL

It is no surprise that fiscal conservatives in California are appalled at the breathtaking assault on taxpayers proposed by Governor Arnold Schwarzenegger. Both activists and elected leaders—usually Republicans—have responded with either derision or laughter (with perhaps some expletives mixed in).

Given that the Governor could find not a single legislator from either party to carry his last budget, it is safe to assume his latest proposed mix of cuts and revenue enhancements will receive similar treatment at the Capitol.

But his proposal to expand the sales tax to include a number of services has another problem: As currently outlined, it would be illegal.

First, the policy objections. (Didn’t we just have this debate?) Let’s count the reasons why tax increases should be taken off the table immediately.

First, as students of California history know, tax increases don’t always raise revenue. (See Wilson tax hike, circa 1991). It would be shame to slam California’s working class with a regressive sales tax hike to see it succeed only in suppressing Christmas shopping without raising any significant revenue, or worse, that it actually results in less revenue. Yes, Virginia, tax hikes do hurt the economy.

Second, temporary taxes aren’t. Like unicorns and Bigfoot, temporary tax hikes are mythical creatures. Permanent tax hikes are all too real, even if originally sold as their imaginary counterparts. Do the Governor and other liberal Democrats really believe that the tax-and-spend lobby will let the sales tax increase expire in three years without a fight? We can see the CTA multi-million dollar campaign now: It’s for the children; it’s just an extension of an existing tax, you heartless puppy-kickers.

Finally, California is in tax competition with other states and other nations. Low tax states have received a disproportionate share of economic growth in the last decade to the detriment of high tax states.

Why is this important now? Well, this recession isn’t going to last forever and, as the nation emerges from the economic slump, businesses will have new opportunities to relocate and expand. Where will the bulk of the renewed economic activity take place? Business friendly states like Nevada, Utah, Texas or Florida? Or California, which ranks 47th out of 50 in business tax climate according the Tax Foundation? Now, the legal problem.

There is no doubt as to the legality of tax increases at the state level as long as those increases receive a two-thirds vote of each legislative house. But the Governor proposes to extend the sales tax to services—according to the draft language we have seen—“to all currently applicable state and local taxes.” But the state lacks the constitutional authority to do this.

Proposition 218, a Jarvis-sponsored initiative approved by the voters in 1996, provides stringent voter approval requirements for taxes at the local level. The state may be able to impose a sales tax on services for only that portion of the sales tax going to the state—which the Governor want to raise from 5% to 6.5%—but the local governments receive about 2.5% called the Bradley-Burns tax, along with some other local add-ons.

Would the state attempt to bifurcate the sales tax system so that the sales tax on services would be a state tax only? Although theoretically possible, it is very doubtful this would happen. Such a separate tax system would run into significant administrative difficulties.

In order for the proposal to extend the sales tax to succeed, the state would need 100% buyoff from all local governments receiving sales tax revenue to place that issue before local voters AND all local voters would have to approve the extension.

And the chances of that happening are slim to none.

(The writer is an attorney and president of the Howard Jarvis Taxpayers Association.)