Tuesday, August 19, 2008


By JUSTIN SCHECK - Wall Street Journal

August 19, 2008; Page A3 - California's months-long budget standoff hit a low when an emergency State Assembly meeting failed to produce a compromise between Democrats and Republicans over how to compensate for a shortfall exceeding $15 billion.

At issue is the Democrats' proposal to make up for the deficit largely by increasing taxes on California's wealthiest residents -- a plan that Republicans oppose. In a vote Sunday, not a single Assembly Republican voted for the plan to raise $6.7 billion in revenue largely through income-tax increases. Republicans account for 32 of the assembly's 80 seats, but California requires that two-thirds of the legislature approve the budget.

"We're fundamentally saying 'no tax increases,'" said Mike Villines, the Assembly Republican leader. If the tax standoff continues, California state workers could have their pay reduced to minimum wage, and the state could be forced to take out high-interest loans to fund ongoing operations.

Similar conflicts over how to make up budget deficits in tough economic times could crop up in other states over the next year because of the housing crisis, said Kim Rueben, a fellow with the Public Policy Institute of California who studies state budgets.

Ms. Rueben said California is particularly susceptible to economic changes as it is heavily dependent on income taxes on the rich, thanks largely to limits on property-tax increases as well as a 2004 measure that imposed increased taxes on the wealthy. The Democrats' plan for more income-tax increases amounts to "exaggerating a tendency that's already one of the state's biggest tax problems," she said.

Assembly Speaker Karen Bass, a Democrat, said there is little choice because the state has already cut funding for programs and needs to find more revenue.

Both sides have been reluctant to accept Gov. Arnold Schwarzenegger's proposal for a temporary sales-tax increase.

"I'm very skeptical of any politician claiming they want a temporary tax," said Republican Assemblyman Chuck Devore. In the future, he said, legislators will argue that they have "grown accustomed to the tax and we need the revenue." Democrats said the sales tax places an undue burden on poor and middle-income residents.

Democrats say a sales tax increase would be regressive. That stance could be changing in the wake of Sunday's vote, which was preceded by a debate in which dozens of legislators aired their grievances.

Ms. Bass, in between meetings with Mr. Villines, said both parties are discussing a sales-tax increase with a built-in end date and several measures to close tax loopholes for the wealthy that won't amount to increases in the income-tax rate. For example, she said, Democrats and Republicans agree that a rule exempting out-of-state yacht purchases from state taxes could be changed.

She and Mr. Villines said they expect to reach a compromise sometime this week. The key to the latest talks, she said, was the Sunday debate. "Frankly, the catharsis was needed yesterday," Ms. Bass said on Monday.


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