Schwarzenegger Defends Tax Hikes

by Leroy Baker, Tax-News.com, New York

24 February 2009

Arnold Schwarzenegger, the Governor of California, has put his signature to something that a short time ago he said he would never contemplate - a budget which raises Californian taxes, albeit temporarily.

Schwarzenegger said that his “four-legged stool” blueprint will help to solve California's long-term and systemic budgetary problems by taking the necessary steps to reduce spending, raise new revenue, create new business incentives and reduce the cost of government.

“We have achieved a great victory for California today," Schwarzenegger declared during the signing ceremony on February 20. "By staying focused on what was best for the people of our state and not the special interests, we were able to come together and solve our USD42bn deficit and also find meaningful and lasting solutions to our broken budget system,” he added.

The budget includes temporary revenue increases totaling USD12.5bn, including a 0.25% 'surtax' on personal income, raising almost USD3.7bn in additional revenues, a 1% increase in the state sales tax, raising just under USD6bn, and an increase in the vehicle licensing fee to 1.15% from 0.65% raising about USD2bn.

Schwarzenegger said that he is prepared to tolerate the temporary increase in taxation because this will be balanced out by an economic stimulus package that includes incentives for Californian business creating jobs for workers in the state (but not for business that "simply do business" in the state). This stimulus package contains a "new hire" tax incentive targeting small businesses that provide new jobs over the next two years. In addition, the stimulus package will create a permanent elective single sales factor allowing companies to weight sales made in a state - versus property or payroll - to determine corporate taxes owed, in a bid to lure out-of-state companies to California.

The economic stimulus package also includes a five-year tax credit program to halt 'runaway' Hollywood production and encourage television and movie production back to California, and a Homebuyer Tax Credit, which provides a tax credit for 5% of an unoccupied home’s purchase cost up to USD10,000.

However, the Governor said that the "silver lining" in the budget plan is the long-term structural changes that it will bring to the way in which the state government is funded, mostly through an increase in the allocations to the budget stabilization account, designed to even out California's historic cycle of surplus followed by huge deficit.

“During a down economy and facing an historic budget deficit we had to make some very difficult decisions," Schwarzenegger observed.

"We will continue to work with our most important partners - the people of our great state - to ensure we never again face the kind of catastrophic budget scenario we experienced this year," he added.

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