In order to give the illusion that the tax relief is much greater than it is, the Big Five proposal incorporates 14 separate triggers promising future increases in the tax credit if certain revenue targets are met. Thus, a $1 billion credit is hailed as $3.6 billion of tax relief. For example, an August 5^th press release from the Assembly Republican Leader proclaimed, "The state spending plan includes a record $3.6 billion tax cut and more money for schools … We are giving California’s working families a $3.6 billion tax cut. This is billions of dollars more than what the Democrats would have agreed to just a few short weeks ago."

The truth is quite different. In order to provide the $3.6 billion in tax relief, fourteen separate conditions, or "triggers" in bureaucratise, would need to be met. These conditions require revenue growth in excess of $3.7 billion above the most optimistic revenue forecasts that have been made. As discussed below, California taxpayers will need to pay $27 billion more in taxes than they paid in 1996 in order to trigger this $3.6 billion tax cut.

It is important to understand that no fiscal agencies – including the Department of Finance -- are predicting revenues anywhere close to these fiscal "triggers." Indeed, according to the Legislative Analyst’s Office, "If the LAO’s long term revenue forecast is correct for state revenues over the next five years, then none of the currently proposed triggers would be reached. In other words, the VLF tax cut would remain at the proposed 25% reduction level for an annual cost of approximately $1 billion."

Figure 1 compares the revenue growth needed to trigger the tax cut with estimates from both the Legislative Analyst’s Office and the Department of Finance:

In order for the promise of a $3.6 billion tax cut to be fulfilled, state general fund revenues must reach $78.258 billion by FY 2003-04. This constitutes an increase of $29.038 billion over FY 1996-97, or 59 percent in a period of seven years – equal to the economic growth that produced this year’s massive surplus.

Put another way, in order to achieve a $3.6 billion tax cut, Californians would need to pay $27 billion more in taxes than they did in 1996 – a net tax increase of $23.4 billion.

The intellectual dishonesty in this claim of rapid economic expansion triggering a $3.6 billion tax cut is underscored by the fact that Mr. Leonard’s press release was issued on the same day that the New York Times reported,

"After months of shrugging off bad economic news from Asia and a slowdown in U.S. corporate profit growth, investors stampeded out of stocks Tuesday … investors seemed suddenly to be giving credence to a series of red flags that had been waving for some time. For example, the economic meltdown in Asia has translated to a sizable drop in demand for U.S. products. Economic growth in the United States slowed to an annual rate of 1.4 percent in the second quarter, down from the 5.5 percent reported in the first quarter … adding to the pessimism, the Conference Board, a business research group, said on Tuesday that its Index of Leading Economic Indicators slipped in June for the second straight month."

 

Doing Nothing Produces A Bigger Tax Cut Than The Big Five Proposal

The Capitol spin-doctors are working the photocopy machines overtime proclaiming "The Biggest Tax Cut in State History." The irony is this: it actually produces a $400 million tax increase over current law. Doing nothing actually produces a larger tax cut than the governor and legislative leaders have proposed.

The components of the Governor’s "tax cut" in its first full year are: (1) Proposition 7 (a voter-sponsored ballot initiative heavily favored to pass in November, $212 million); (2) partial restoration of the renters’ tax credit ($138 million); (3) indexing of the senior citizen homeowners’ and Renters’ program ($70 million) (4) reductions in horse racing fees and federal tax conformity measures ($49 million) and (5) VLF Tax Credit ($1 billion), for an annual total of $1.469 billion.

If the legislature did nothing, however, taxpayers would receive much greater relief, because of two provisions in current law.

First, one of the public relations devices that the administration used in 1991 to mask the total size of its tax increases was to claim that many of the taxes were "temporary." One of the "temporary" devices was a one-quarter-cent component of the state sales tax that is automatically suspended if the general fund reaches a 4 percent budget surplus. The Department of Finance makes this certification in November of each year. Given the size of the state’s surplus, it is possible that the 1997-98 fiscal year will end with a 4 percent reserve, and it is absolutely certain to do so for the 1998-99 fiscal year if the surplus is simply left alone. The automatic suspension of the tax will mean $985 million in annual tax relief to California taxpayers.

Second, although the governor proposes a $138 million tax cut by partially restoring the renters’ tax credit to low-income renters, it must be understood that if the legislature took no action, renters’ taxes would actually be reduced by $540 million. Thus, the renters’ tax credit component of the "tax cut" actually comprises a tax increase of approximately $400 million.

Some Republicans support this tax increase based on the argument that some of the tax credit (approximately $270 million) is refunded to renters with no income tax liability. But the renters tax credit was never intended to offset income taxes – it is meant to offset property taxes which renters pay through their rent to their landlords.

Homeowners get the homeowners tax exemption from their property taxes. Renters got the renters tax credit as a simple matter of equity and fairness -- until the legislature began routinely suspending the renters’ tax credit beginning with the 1991-state budget. (It should be noted that the VLF tax credit, which is the cornerstone of this so-called "tax cut," has no more protection against being routinely suspended that the renters’ tax credit).

Thus, (including Proposition 7), current law produces automatic tax cuts of $1.737 billion – or nearly $300 million more than the Big Five proposal.

The annual tax cuts under the governor’s compromise and the status quo are graphically represented below:

The Big Five Proposal Nullifies Future Tax Cuts

The Big Five proposal contains a provision in Section 2, subsection (c), paragraph (4), that automatically increases the VLF burden by the same amount as taxes are cut in future years. In other words, if the legislature passed a $500 million business tax cut, California motorists would automatically suffer a $500 million increase in their car tax. This will make future tax cuts both politically and fiscally impossible. The Legislative Analyst’s Office describes the effect of this provision:

Recalculation of VLF Percentages. For any fiscal year in which DOF determines that new tax law changes resulted in a General Fund reduction of more than $100 million, the various potential percentage reductions in VLF owed (above the base 25% reduction – 35%, 46.5%, 55%, and 67.5%) would also be recalculated. In these cases, new VLF reduction percentages would be calculated in order to achieve the same level of total tax relief as would have occurred without the new tax law changes. In other words, if a new tax law provided $500 million of tax relief in a certain fiscal year, then each potential VLF reduction percentage would be lowered to a percentage that would provide $500 million less in VLF tax relief in that fiscal year. This new percentage would only apply if the corresponding trigger was met. (emphasis added)

The Big Five Proposal is Closest to Democrats’ Original Car Tax Cut

When public opinion forced the legislature’s Democratic leaders to acknowledge that relief from the car tax was a political necessity, they proposed a refundable income tax credit of 70 percent of the VLF up to a maximum of $130 per vehicle. This produced a static reduction of $1 billion annually, or $5.5 billion between FY 1998-99 and FY 2003-04.

The Big Five proposal provides a 25 percent across-the-board VLF credit, which also produces a reduction of $1 billion annually, slowly growing to $1.25 billion by FY 2003-04, or $6.3 billion cumulatively. This is a dramatic reduction from AB 1776/ACA 45, which proposed $18.5 billion, and the governor’s original proposal, which yielded $15.5 billion for taxpayers.

Figure 3 produces a graphic comparison:

The Big Five Proposal Leaves the Car Tax Fully Intact

It should be clearly understood that the Big Five proposal is not a tax cut at all. The car tax is left fully and completely intact. The massive increases in depreciation schedules adopted in 1991 are left completely intact.

There Is No Guarantee That The Credit Won’t Be Suspended Next Year

It should also be clearly understood that the Big Five proposal simply applies a credit against the amount owed on the VLF bill. Although this produces a 25 percent reduction in the bottom-line paid by motorists, there is no assurance that the credit will not be reduced, suspended or repealed in future budgets, just as the renters’ tax credit has been suspended every year since 1991. Indeed, suspension of the renters’ tax credit has become a routine housekeeping trailer bill in the state budget process for nearly a decade. The car tax credit could just as easily suffer a similar fate at the first hint of a fiscal pinch.

The Governor’s Compromise Builds Billions of Dollars of New Spending into the Budget Base

If the surplus is not being returned to taxpayers and (as legislative sources report), it is not being placed in reserve, where is it going? Obviously, it is being spent.

General fund revenues under the Big Five proposal increase from $49.220 billion in FY 1996-97 to $57.847 billion in FY 1998-99, minus $1.381 billion in tax relief for a net of $56.466 billion. This constitutes an increase in general fund revenues of $7.246 billion in just two years, or 15 percent. Per capita revenues increase from $1,520 to $1,684, or 11 percent.

Of the $4.209 billion in new revenues reported in the governor’s May budget revision, taxpayers receive $1.381 billion of tax relief (or 33 percent), and government consumes $2.828 billion – or 67 percent.

"He Gets the Rhetoric, We Get the Cash:" Tax Cuts are Sacrificed to Spending Increases

In discussing the Big Five budget, an anonymous Democratic staffer was quoted in the San Jose Mercury News as saying, "He (the governor) gets the rhetoric, we get the cash." Indeed, as outlined above, taxpayers receive only 1/3 of the surplus revenues and will have to pay $27 billion more in taxes in order to receive $3.6 billion in tax relief five years from now. And even this pittance would be nullified if any future tax cuts were approved.

The hallmark of the Big Five budget is that billions of dollars of new spending are being built into the state’s spending base, including $800 million more than required by the constitution’s Proposition 98 requirement. Welfare entitlements and state employee salaries also consume a sizeable amount of the surplus.

By increasing the state’s spending by this amount, and locking it into constitutional spending mandates and entitlements, the Big Five budget virtually assures that taxes will be increased at the earliest sign of an economic downturn. By contrast, AB 1776/ACA 45 were designed to finance the abolition of the car tax solely from a portion of revenue growth on the non-education side of the general fund, even if revenue growth slowed to 3.2 percent. (See this office’s "A Proposal for Abolishing California’s Car Tax," February 18, 1998).

The Governor Alone Could Force a Tax Cut – If He Wanted To

One of the great ironies of the 1998 budget is that California’s constitution gave Governor Wilson all the power he needed to obtain total abolition of the car tax, and a range of other tax reductions if he had the inclination to do so.

As noted in this office’s paper, "The Car Tax and the 1998 State Budget" (July 10, 1998), the governor’s January budget was widely hailed by the most liberal elements of the California legislature and government. Indeed, State Schools Superintendent Delaine Eastin said of the budget, "I feel like I’ve died and gone to heaven." This was before the surplus materialized.

All $4.2 billion of additional revenues announced in the governor’s May budget revision are subject to the governor’s line item veto authority. Within this authority, he could have called for the legislature to send him any budget they wanted, and then acted to conserve the funds necessary to provide for a genuine and substantial tax cut. With $4.2 billion sitting in the treasury awaiting a tax reduction bill just months before legislative elections, political pressure on the legislature to abolish the car tax would have been irresistible. Instead, the governor, in concert with Republican legislative leaders, chose to bargain away the people’s best hope for tax relief.

The Governor’s Legacy: Higher Taxes Now, and Higher Taxes Later

Thus, the governor leaves office having cost California taxpayers billions of dollars of their earnings through the eight budgets he has signed.

The political reason that the administration wants to claim a $3.6 billion tax cut is simple. According to an analysis by Dan Morain of the Los Angeles Times, "Tax increases at the start of Wilson’s administration in 1991 hover at $3.6 billion a year above recent cuts – and that does not include many fees that have increased in the 1990’s."

Governor Wilson’s last budget is in many ways a bookend to his first. That year, he approved legislation to increase state taxes and fees by a combined total of $8.2 billion – including, ironically, a $900 million increase in the car tax. This was the biggest tax increase by any state in American history, amounting to about $270 per capita, or $1,100 per family. The tax increase, enacted in the midst of a recession, broke the back of California’s economy.

California’s recovery made it possible to square things with taxpayers, by restoring California’s overall level of taxation to what it had been before the administration had begun.

Instead, the administration has produced a brittle tax reduction that leaves California taxpayers still paying $2.3 billion each year – or roughly $287 per family -- more than they did when George Deukmejian left office.

Worse, the Big Five proposal actually cancels a slightly larger tax cut that would have taken effect next year in the absence of legislative action, and makes future tax cuts impossible while making future tax increases inevitable.