October 30, 2008

Tax Increase in Special Session? Don’t Bet On It...

Governor Schwarzenegger has indicated his desire for a sales tax increase to be enacted during the special session he is calling commencing November 5.    He previously asked for a sales tax increase that was not adopted.  The Democratic majority in both the state Assembly and Senate support a tax increase to close the budget gap, however, the Republican minority in both the state Assembly and Senate have opposed a tax increase to close the gap.

Last August, when a sales tax increase was proposed, the business community was not vociferously opposed and, in fact, was divided on the wisdom of an increase now with a subsequent decrease in future years.  However, as the economy has deteriorated, I expect the business community will become more uniform in their opposition to a sales tax increase.  Most small businesses and retail establishments become profitable during the period from Thanksgiving to December 31.  These businesses may expect they will be having reduced profits this year and a sales tax increase would be perceived as further reducing their profits and potentially causing them to lose money for the year.  This situation will probably make it difficult for the Governor to find the 2/3 votes necessary in order to pass a sales tax increase.

Even though I expect the Democratic majority to increase in the Assembly, there will not be a 2/3 majority party in either House; consequently, Republican votes will be necessary to enact any tax increase that results in new revenues.

Because Proposition 98 is based on state General Fund revenues from the proceeds of taxes, a state General Fund tax increase would increase the minimum guarantee compared to what it would otherwise have been.  The Proposition 98 guarantee will drop if there are not significant tax increases.  I believe there will not be tax increases adopted in the special session.  Consequently, school districts will need to continue to increase their reserves in order to prepare for state funding cuts as the guarantee drops.

~Dave Walrath

dwalrath@m-w-h.com