State Budget Update: State Democrats Fine Tune Tax Plan to Solve Budget Woes

According to the Sacramento Bee, the new plan raises revenues for the state's General Fund (GF) by making the following changes:

• Modify the Vehicle License Fee (VLF) beginning in 2011. The VLF is currently slated for a .5 percent reduction in 2011-12. But under the Democrats' new plan, the fees would remain at the current rate of 1.15 percent. This would result in an additional $1.6 billion in GF revenues.

• Amend state income tax rates. The plan would also tweak state income tax revenues by increasing tax rates. It would also consolidate the current system of six income brackets into four. Other proposed changes include a phase-out of personal, dependent and senior exemption credits for those with adjusted gross incomes of $200,000 or more. This would result in additional GF revenues of $7.4 billion in 2010-11 and $6.3 billion the following year.

• Adjust the state sales tax rate. California's sales tax is currently 6 percent, with an anticipated decrease to 5 percent in 2011-12. Under the new proposal, current year sales tax would be dropped to 4.10 percent, with an additional reduction to 3.58 percent in 2011-12. Legislators expect a loss of $6.4 billion in GF revenues in 2010-11 and $6.9 billion in 2011-12.

Although state taxes and vehicle registration fees would still go up for Californians under the new plan, those costs would be offset by reductions in sales taxes and by lower federal taxes for those who itemize deductions. A brief outline of the revisions can be found here.

The changes were made after the Legislative Analyst's Office and other reviewers concluded that the original plan would have cost middle class taxpayers more in the next fiscal year (2011-12). Gov. Arnold Schwarzenegger and Republican legislators attacked the first plan as a middle class tax hike based on the LAO's assessment, all but sealing its fate in the Legislature. Democrats subsequently asked the LAO to produce a different version that would not increase taxes.

Democratic lawmakers expect the changes to result in a net $1 billion in revenues for California- $800 million less than the Democrats' original tax swap plan announced in August. Although it is unclear how the additional revenues would be used, if the plan was approved, lawmakers would have more resources for vital programs such as child care and Healthy Families.