California Budget Crisis: When Is a Tax Not a Tax?

The California legislature continues to deadlock over a solution to the state's budget crisis. Now Democrats are trying a unique, and potentially illegal, maneuver to break the stalemate.

Photo by: Thierry Golden Gate Bridge

The Golden State is one of only three in the nation which requires a two-thirds majority vote to raise taxes. This is forcing Democrats in Sacramento to try to recruit a handful of Republicans to pass their current plan to close the state's gap with a combination of cuts and taxes. So far, no GOP legislator has broken ranks.

Then came Plan B. This week, the Democratic leadership mustered enough support to pass a series of budget bills with a simple majority, hoping to send them onto Governor Schwarzenegger.

Some of these bills do raise revenues, but legislators believe they can avoid the necessary two-thirds majority by reclassifying some taxes as "user fees", while raising taxes elsewhere and claiming the end result is "tax neutral".

It is a complex move, and one critics call unconstitutional. Specifically, Assembly Majority Leader Alberto Torrico's office tells CNBC that Democrats have passed a plan repealing an 18-cent gas tax and reclassifying it as a user fee.

Jane Wells
CNBC Reporter

That now-cancelled gas "tax" is being replaced elsewhere with new taxes on tobacco and oil production. Thus, it is "tax neutral" from a tax standpoint, but it actually increases revenues because there's now an additional new user fee.

"What they try to do is flim-flam, and we don't take this effort seriously," says Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association. "We will sue if the Governor doesn't veto it." Governor Schwarzenegger says he will veto the bills.

Sacramento officials have been reluctant to answer questions about the legality of the maneuver.

A call to the Legislative Counsel's office pointed to the part of the State Constitution which explains the need for a two-thirds majority: "any changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the Legislature, except that no new ad valorem taxes on real property, or sales or transaction taxes on the sales of real property may be imposed."

That last line is in deference to Proposition 13, which limits the amount and growth of property taxes.

But when pushed for an explanation as to where the law allows a simple majority, by creating "revenue neutral" taxes and exchanging a tax for a user fee, we were directed to the Assembly Speaker Karen Bass's office.

Her office did not return calls or emails (though the emails were read). Other calls asking for guidance were met with silence, and another reference to the section of the state constitution cited above.

Kris Vosburgh of the Howard Jarvis Taxpayers Association said, "Sacramento is like another planet."

Meantime, the California Citizens Compensation Commission voted unanimously today to cut legislators' fringe benefits, like free cars and gasoline, by 18 percent.

However, the cuts do not take effect until December 1, the same day the commission's earlier 18 percent cut to legislators' pay kicks in. http://www.sacbee.com/1095/story/1989868.html

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