Arnold’s Tax Hikes: Wrong and Illegal

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.

Jon Coupal is President of the Howard Jarvis Taxpayers Association
— California’s largest taxpayer organization — which is dedicated
to the protection of Proposition 13 and promoting taxpayers’ rights.

This column also appeared on the FlashReport website on November 10 2008.