Wikinvest Wire

They're raising taxes in California, oh my!

Thursday, February 12, 2009

Word comes from Sacramento this morning that Gubernator Hoovernator Arnold Schwarzenegger and state legislators have reached a tentative deal to solve the massive $40 billion budget shortfall.

As might be expected from the state with one of the biggest housing bubbles and some of the most profligate government spending in recent years, the news isn't good.

There are a raft of spending cuts, but here's a summary of the tax increases:

  • State sales tax to increase one cent from roughly 8 percent to 9 percent, depending upon the area, almost 10 percent in some areas
  • State income taxes to rise either 2.5 or 5 percent across the board via a "surcharge", depending upon the amount of Federal assistance, boosting the effective marginal tax rate to either 9.5 or 9.8 percent for amounts over $40K
  • Gasoline tax to increase 12 cents to 39 cents a gallon for a total tax of 76 cents per gallon
  • Vehicle license fees to almost double, from the current 0.65 percent of a vehicle's value to 1.15 percent
That's really going to add up - on a percentage increase basis, that's about a 12 percent boost for sales tax, a 2.5 to 5 percent increase in income tax, a 44 percent increase in the gasoline tax and a whopping 77 percent increase in the vehicle tax.

According to this report in the Sacramento Bee, it's not clear whether this budget will pass in a vote scheduled for tomorrow and there are all sorts of additional provisions still being negotiated that could cause another delay.
As a trade-off for new taxes, Republicans demanded a limit on future state spending. Under the tentative agreement, the restriction would require the state to place money into a rainy-day fund after reaching a limit determined by state revenues over a 10-year period.

Voters would have to approve the spending limit, likely in a special election later this year, and it is particularly controversial among education groups that constantly seek more state money for schools. Concerned that the state's powerful teachers union would try to kill the spending restriction at the ballot, budget negotiators included a provision that would extend the major new taxes by one to three years if the spending cap passes.

The vast majority of legislative Republicans have signed pledges not to vote for new taxes. Senate Republican leader Dave Cogdill said he could not guarantee votes, but told his members that the deal is as good as they're going to get.

"I've negotiated it to the point where I think it doesn't get any better," he said Wednesday, emerging from a private GOP caucus. "We're waiting to see all the language and all of that, so I'm not ready to commit who the votes will be at this point."
State leaders are counting on voters approving a plan to borrow $5 billion this year against future California Lottery revenues. The state would obtain another $5.5 billion in costly short-term loans with no defined way to pay it back by 2011. California would first use federal stimulus money to eliminate that borrowing.
What's most interesting about all of this (and, since we're leaving the state in a matter of months, it's all just a passing interest at this point) is that the vehicle license fees were a central part of Arnold Schwarzeneggar's 2003 election campaign.

That is, back when an internet bubble was in the process of morphing into a housing bubble.

Shown below is one of our DMV renewal slips from back in 2003. If memory serves, the VLF offset was instituted sometime during the internet stock market bubble when the state was flush with cash and elected officials were providing "tax relief" to their lucky constituents.

Without the state's generous "offset" we would have had to pay $643 to renew the registration for just one vehicle and the state always reminded taxpayers of the break they were getting.
IMAGE A back-of-the-envelope calculation indicates that a good portion of that offset is coming back.


David said...

These proposed tax burdens are too much. What a mess.

Anonymous said...

I'm sure there will be a lot of people right behind you leaving the state, especially those who are upside down in their house and either out of a job or feeling very insecure.

Dan said...

It's getting expensive to live here. I like the beach and I live right on it, but it may be time to pull up stakes and preserve more capital by living somewhere else. Who knows.

Anecdotally, my father never (and I mean never) licensed his vehicles or obtained a driver's license. He was intensely anti-statist and believed he had a right not to have to do these things. He was the worst driver I've ever seen. He was always getting pulled over but he never received one ticket. Perhaps he used some sort of jedi mind trick on the officers who pulled him over but none of them ever wrote him a ticket... maybe they just thought he was a crazy person... who knows. Toward the end of his life, I presume because he was tired of explaining himself to police, he had a laminated card made with his picture and his name and also had some bizarre license plate made up and put on his vehicle. He would still get pulled over, but now he had to explain these other items. For a period of about a decade, my brother also stopped licensing his vehicles, but he never got pulled over. I don't have the will to put myself in harm's way like that.

Anonymous said...

I thought the extra 2.5 to 5% is surcharge and not absolute addition to tax rates. Can you confirm and publish again? If 5% is added to existing 9.3 or so, it becomes 14.3% and I really don't think as the case.

Tim said...

I guess it's a 2.5 to 5 percent increase versus a 2.5 to 5 "percentage point" increase - it's been updated above.
As for the distinction between a "surcharge" and a tax increase, I don't know what that would be.

Tim said...

This Bloomberg report says the gas tax becomes a flat 39 cent rate. I'm going to go with that - also updated above.

Anonymous said...

This is funny - from MSNBC (

Doing the math on the purchase of a $20,000 car with a 20-gallon gas tank, you could expect to pay nearly $2,000 in sales tax, $300 more each time you register the car, and $2.40 more in taxes each time you turn that "E" on the dashboard to an "F."

donna said...

The Hoovernator -- LOVE IT!!!

For god sake, tax the yacht and airplane party already. Tax the hell out of them...

Anonymous said...

It's the income taxes that really hurt, the others not so much, but the income taxes!!! Ack, stop the pain, I'm being bled to death with taxes!! And the CA income tax is for all intents and purposes a FLAT tax if your talking about over 40k (in Los Angeles, give me a break, that's nothing).

Nope I don't have any deductions. I can't afford a house in this fricken state!!!! I can just afford to give every penny I earn to the government!

Mathlete said...

Glad to hear you're not going to pass Massachusetts! Our Governor has plans to make our gas tax highest in the nation.

I wish Californians, New Yorkers and Massholes wouldn't leave their states. They go to low tax states and complain that the new state doesn't spend enough money on the roads, the schools, etc. and taxes start going up...just see all the taxes Mass expats are trying to pass in New Hampshire.

Why don't they learn their lesson? Instead they are like the aliens from Independence Day, taxing the crap out of a state until it is dead and lifeless, then moving on to the next victim.

MiamiCondoForum DotCom said...

When I was considering a residency program I was split between California and Florida. Luckily around that time I started learning about income tax and was horrified to learn that Cali takes another 9% ON TOP OF Federal taxes. In Florida there is a constitutional ban on an income tax. Gas is also much cheaper in Florida. As a result, I live a much higher standard of living and my money isn't paying for some bureaucrat's $100K pension.

Anonymous said...


Anonymous said...

Vehicle License Fees at 1.15%??? Wow.

Can you imagine anyone buying a new car for $50,000 when it's going to cost almost $600 a year???? I pay $70 flat, no matter what car I own where I live... A lot more reasonable.

Adam said...

The VLF should have never been lowered in the first place. All it did was made the credit bubble worse.

At least CA has low property taxes! THANKS PROP 13!

I'm Not POTUS said...

Every single public pension in California is going to be raising the amounts that the public agencies contribute to the funds. The agencies are obligated to accept those increases and fund them.

Prop 13 also requires counties to lower taxes on falling property values.

Next time, we do this, 42 billion will look like chump change.

Anonymous said...

Raise taxes during a recession, what smarties we have up in Sac. As if we are not hurting enough. I hate all these scumbag weasel politicans who are slaves to the unions and the illegal aliens. WE WILL NOT PAY FOR YOUR INCOMPENTENCE AND CORRUPTION.

I urge you to revolt and recall everyone in Sacramento.

Anonymous said...

I don't have the will to put myself in harm's way like that.

I don't have the will either, but at some level of taxation lots of people aren't going to have the means. You'll see more people saving plates from retired cars and the state will then go back to replacing the plate designs every year or two (thus eating up much of the tax).

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