California still faces a $19.1 billion deficit. The budget is over a month late, no negotiated compromise is in sight, and worst of all, no serious minds in Sacramento are even considering long-term solutions. What we usually get instead are short-term gimmicks, the most recent one now has been presented as part of the Democratic proposal to balance the budget.
Darrell Steinberg, Democrat and Senate President Pro Tempore (leader), is suggesting a tax shift. His proposal cuts the state sales tax rate by 1.75% and raises income tax rates and car license fees to offset the sales tax reduction. This is because in 1986 Bob Packwood, Senator from Oregon, eliminated the sales tax deduction from your federal income taxes – principally because there is no sales tax in Oregon. More recently, the sales tax deduction was restored, but in a limited form.
Mr. Steinberg figured out that if more of the taxes paid by Californians were of the deductible nature, then the federal government would be underwriting part of the California budget imbalance. Unfortunately, Mr. Steinberg appears not only to be ignorant of our tax laws, he doesn’t even seem to read the newspaper. In particular, he has obviously never heard of the Alternative Minimum Tax (AMT).
The AMT, initially imposed in 1969, wreaks havoc on our tax system. It was installed to stop a small group of high earners from not paying taxes, but because it was never indexed to inflation, it now makes ordinary Americans pay more. State and local taxes are primary generators of the AMT – this means that the higher your state and local taxes are, the more your AMT will likely be. If you are currently paying AMT, as do already a significant number of Californians, the benefits of the tax switch proposed by Mr. Steinberg will therefore be eliminated. In addition, those who do not currently pay AMT may become subject to it and thus eliminate for them any benefit conferred by this tax shift.
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For a long time, political observers wondered why Congressmen from California did not band together with other high-tax state representatives to eradicate the AMT. While some people argue that we cannot afford to dispense with the tax because it generates too much revenue, it clearly falls disproportionately on taxpayers from high-income, high-tax states like California, New Jersey, New York and Connecticut. You would think that elected officials from these states would lead a charge to get rid of the tax, and then compensate for the revenue loss with higher marginal tax rates that would affect all Americans and thus create a more honest system. After all, taxpayers from these states end up paying more to the federal government than those from other states specifically because of the AMT. Furthermore, there’s a good argument that the AMT distorts the tax system, no longer does what was originally intended, and costs taxpayers extra money for tax preparation because of its complex nature.
The apparent reason that these elected officials have not fought for tossing out the AMT has only one logical explanation – all these states are overwhelmingly Democratic, and there are two very obvious reasons that Democrats don’t press for AMT reform. The first is that most of these Democrats are from the far left and there is not a tax that they have ever seen that they don’t like even if it falls disproportionately on their constituents. The other reason is that they simply do not understand economics. Many of my friends who are in the state legislature or Congress have observed how many Democrats just do not have even the most rudimentary understanding of how the economy functions.
Mr. Steinberg should be given credit for at least coming up with a thought that has some economic basis. The unfortunate part is that it will not garner any significant increased revenues, and he should know that. All of which means that he should get back to the crux of the problem – too many state employees doing too many things they should not be doing and being paid too much in overall compensation (base pay, pension and health care costs).
California governments have still not trimmed their staffing to what it should be. Instead they’ve been adding employees! The issue of the huge pension and health care costs has not really been confronted. Just recently the Sacramento School District imposed draconian new doctor visit co-pays on their employees: they raised it from $1 to $5. Most of us outside of state government just shake our heads in frustration at the $5 amount, but even more shocking is the fact that a $1 co-pay was previously in place.
Mr. Steinberg should propose real solutions to the budget crisis, and then maybe persuade his friends in Congress to eliminate the AMT. Only then can he claim some real progress and that, my friends, would be a true Democratic revolution.
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