In light of the state’s worsening budget crisis, Governor Arnold Schwarzenegger proposed a temporary one percent sales tax increase on August 4, which he said is supposed to last three to four years, raising approximately $6 billion in annual revenue. As planned, the increased sales tax would eventually be lowered to a rate that could be up to one quarter of a percent lower than its current rate of 6.25 percent, in order to allow Californians to recover their losses. However, the length of time the increase stays in effect is uncertain.
While the plan was not embraced by legislators from either party, Schwarzenegger aims to use the increase along with cuts and reform to repair the ailing budget. Many Democrats have indicated that the sales tax will affect the state’s lower income residents, and that raising corporate and higher income taxes would be more appropriate. The governor’s office defended its decision, although Lieutenant Governor John Garamendi has called it a temporary solution. “The structural deficiency is not solved,” he said, calling for reform in the state’s educational, healthcare, and penal programs. “One thing we need to keep in mind is that for more than a decade, we’ve been starving the educational system.”
In order for this, or any tax increase – along with the state budget that has not been passed yet – to be approved, it must be backed by the governor and two thirds of both of the state’s legislative bodies. Garamendi said that California’s three most conservative governors – Ronald Reagan, Pete Wilson, and George Deukmejian – all employed the same methods of tax increases and reform to fix their malfunctioning budgets. He noted that the shift in California’s economy from one that focuses on hard goods to a service-based economy has necessitated a broadening of the items that can be taxed. “We should take that into consideration when we think about whether or not the increase will stand,” said Garamendi. “It depends upon what takes place this year on the budget and also the growth of the economy.”
While Garamendi called the current sales tax hike part of a “get out of town” budget – because it consists of patching something together and then getting out of town without dealing with the underlying reforms – Garamendi highlighted the importance of bringing the sales tax increase to the bargaining table.