Davies Will Tax And Borrow To Fund California Deficit

by Mike Godfrey, Tax-News.com, Washington

16 May 2003

California Governor Gray Davies introduced a revised budget this week which involves an increased reliance on borrowing and increases in taxation to bridge a projected $38 billion deficit.

Davies has proposed selling $10.7 billion worth of state bonds which would be offset with a 50 basis point increase in the state's sales tax, which currently stands at 7.25% and is already the highest in the union.

Alhough these measures are designed to spare the populace harsher tax hikes, California's residents are apparently not going to get off too lightly. The Governor has asked lawmakers to consider raising an extra $1.8 billion through increases in taxation on high earners and higher tobacco taxes. State vehicle licensing fees are also likely to be increased, which should raise a further $4.2 billion, according to reports.

On the spending front, Davies intends to reduce expenditure by $18.7 billion whilst leaving funding for education and the emergency services intact.

Meanwhile, the state's fiscal crisis has caused the ratings agency Moody's to downgrade California's bond rating to A2, the third lowest rating in the country ahead of New York and Louisiana.

Recommended