California lawmakers have returned to Sacramento and are gaveling back into session today, the 33^rd day of the state’s budget impasse. While legislative Democrats and Republicans remain far from an agreement, a broad outline for a prospective deal being considered by budget negotiators was leaked last Wednesday and confirmed by Senate President Steinberg on Thursday.

The creative, yet flawed proposal entails raising income tax rates across the board and cutting the California’s sales tax – the highest in the nation, resulting in a reported $2 billion - $3 billion net state tax hike. Steinberg claims that the sales tax reduction, in conjunction with the fact that Californians can deduct state income taxes from their federal income tax liability will preclude most Golden State residents from seeing an increase in their overall tax burden. In an interview with the LA Times Steinberg claimed that people would probably pay less. However, Steinberg’s math and assumptions don’t add up.

Here are a few of the problems with Steinberg’s proposal:

1. The Alternative Minimum Tax (AMT) is a huge problem in California. If you’re among the increasing number of Californians who gets sucked into the AMT every year, you don’t get to deduct state taxes from your federal income tax liability would see a substantial increase in your overall tax burden.
2. In order to deduct California taxes from federal tax liability, you have to itemize your deductions. Two out of three taxpayers do not do this.
3. For high earning California individuals and small businesses, itemized deductions phase out.
4. This plan would also hurt Californians who would see their state income taxes go up, but don’t have a federal income tax liability from which to deduct. According to IRS data, 33% of income tax returns have $0 or negative income tax liability and the Congressional Budget Office reports that slightly less than half of families have a $0 or less income tax liability. Under Steinberg’s plan, families who fall into this category will face higher state taxes and have the same federal tax liability as before, the result being a sizable increase in their tax burden.

Those are a few of the problems with this proposal. But simplest and most important reason that it should be opposed is that it’s a net increase in state taxes. That right there makes it a violation of the Taxpayer Protection Pledge. All Republicans, save for Assemblyman Niello, have signed the Pledge. With California’s 2/3rds majority requirement to raise taxes, multiple Republican votes would be needed to pass this plan. Bottom line: some Republican lawmakers would have to violate a key commitment to their constituents to pass the agreement favored by Steinberg.

Posted by Patrick Gleason on Monday, August 2, 2010 8:53 AM EDT

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