Governor and Teachers Draft Compromise Tax Initiative

 

After weeks of negotiating behind the scenes, Governor Brown and the California Federation of Teachers announced that they have reached a compromise on a November tax initiative.

"This united effort makes victory more likely and will go a long way toward balancing our budget and protecting our schools, universities and public safety," said Brown in a prepared statement this past Wednesday.

The deal would result in a smaller sales tax hike and larger tax increase on the wealthy than the Governor wanted. CFT had been circulating an initiative with no sales tax hike and a two-step increase on earners starting at $1 million. 

More specifically, the new deal would:

  • Raise the statewide sales tax by a quarter-cent rather than half-cent per every dollar of purchase.
  • Retain the Governor's three higher tax brackets starting at $250,000 for single filers. But the last marginal tax hike - at $500,000 for singles and $1 million for couples - would increase by 3 percentage points rather than Brown's original 2 percentage points.
  • The income tax hike on the rich would also last longer than Brown's proposal, going for seven years instead of five. The sales tax hike would still expire at the end of 2016.

A deal between the two parties might look good on paper.  However, cutting a deal so late in the signature-gathering season ramps up the pressure on proponents -- and more importantly, ramps up the costs.  Sources say the new initiative would be filed in the next couple of days.  The Legislative Analyst’s Office would then has 45 days to return an analysis to state Attorney General Kamala Harris, who then must write ballot language for petitions.

Should the initiative gets fast-tracked, it would be eligible for signature gathering in early April. Proponents think they may have four to five weeks to collect a million-plus signatures, a compressed period that would most certainly raise the cost per signature.

According to the Sacramento Bee, there are some key points that should be raised for budget watchers:

  • Based on Brown's more optimistic assessment of capital gains, the plan would raise an additional $2 billion for the upcoming 2012-13 budget because it relies more heavily on the income tax increase, according to Senate President Pro Tem Darrell Steinberg.  That hike is retroactive to Jan. 1, 2012.
  • The money raised would also count entirely toward the state's general fund, helping reduce future cuts to areas other than K-14 education, such as health and welfare, corrections and higher education.
  • The new initiative would be a constitutional amendment and lock in a funding shift for counties to pay for new local responsibilities such as housing low-level offenders and monitoring parolees.

Brown plans to continue collecting signatures for his current initiative as a back-up measure, sources said.

It's not clear where the business community will land. For weeks, Brown has touted his lack of opposition from big business groups, a fact confirmed recently when the California Chamber of Commerce and California Business Roundtable opposed the CFT plan and another rival measure by wealthy attorney Molly Munger.  But in their opposition, business groups made clear they opposed the other measures because they were either "permanent" or "virtually permanent."  Brown's income tax hike extends by two more years in a nod to CFT, but that would be less palatable to business groups who took issue with the time length of the other initiatives.

As always, stay tuned…

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