Schwarzenegger's proposed budget could fail Calif. Latinos

Calif. Governor Arnold Schwarzenegger has unveiled a revolutionary approach for collecting taxes that has drawn some cheering and other jeering.  It’s goal is to try to make sense of how California collects taxes, a task viewed as impossible as governing this state.  With business owners near revolt, voters considering a constitutional convention, and unions suing the state for work furloughs, is this good timing for the Gov?

The proposed plan, which embraces a blue-ribbon panel’s recent recommendations, would cut the highest state income tax down to 7.5 percent, benefiting the wealthy, and cut 6.5 percent for single filers earning between $28,000 and $1 million (middle-income).  Although this appears like budget suicide, it wouldn’t be since the plan also calls for a new “business net receipts tax” that could offset the proposed aforementioned cuts.  

Unfortunately, the plan is a year too late and quite a few pennies short of obtaining legislative support.

California’s state budget seriously needs revamping, but to assume that the revamping would occur in the final year of Schwarzenegger’s term is to also be naive of the state’s political mess.  The Governor, who is banking on getting support before the end of the year, has called for a special session of the legislature, a move democratic leaders have said won’t speed things any faster.  

As California’s Latino population continues to grow, it will be the largest group that will be most impacted by any budget changes.  Latinos are starting small businesses three times faster than any other group, and stand to lose much if the concerns about the budget plan become a reality.

The concerns being expressed by small businesses revolve around a simple fact – the plan is untested.  Business owners like the current system because it is predictable and gives them a good handle on the taxes they are going to pay.  Currently, the corporate tax is 8.84 percent and would be reduced to 4 percent, which theoretically means more jobs.  The proposed plan is not only unpredictable, but it could evolve into another regulatory process that may interfere with competitiveness, not an attractive feature in this current economic climate.  

Then there are the unions, many comprised by mostly Latinos, which dislike the proposal because it may require businesses to reduce employee benefits, including salaries, to offset the loss of business deductions as delineated in the proposed plan.  As a result, some have dubbed the Plan “an employee tax.”

Finally, there’s the average Californian, who has been hit hard in the current job market.  The Plan would change the allowed tax deductions to include only mortgage interest, property taxes, and charitable contributions and eliminates childcare and medical expenses.  The elimination of these two deductions would be a direct hit on those growing a new family and the elderly whose medical expenses keep climbing and has become a key discussion in the healthcare debate.  But, the plans does allow for some relief by eliminating the 5 percent sales tax, except at the fuel pump, where the tax remains the same.

The Blue-ribbon Commission was established to address California’s tax problem, a focus so narrow that in the eyes of many, it should have included how state legislators and the governor spend the limited revenue.  A key recommendation is to include taxing service industries like accountants, lawyers and auto mechanics, which have escaped taxation.  In addition, the proposed tax plan would not go into effect until 2012, with a 5-year period allowed to resolve unanticipated issues, like lawsuits challenging its constitutionality filed by lawyers who would be taxed.  What could be worse than taxing the lawyers who write these laws?