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.