‘Tax Revolt’ Endures Despite New Increases

SACRAMENTO —  Californians, pampered and protected from large tax increases by the lingering effects of the Proposition 13 “tax revolt,” will wake up Monday to a harsh reality faced by earlier generations of taxpayers: a series of whopping tax increases.

As part of the plan put together by Gov. Pete Wilson and the Legislature to erase a projected $14.3-billion deficit, the 6% basic statewide sales tax rate--unchanged since 1974 except for a temporary earthquake assessment--will rise by 1.25 cents on each dollar. For the first time, the higher levy also will be charged on a variety of previously untaxed items--candy, snack foods, newspapers, periodicals, bottled water and the fuel used by aircraft and ships.

The sales tax is only one of a broad array of new or higher taxes that will be hitting Californians in the pocketbook over the next few months. Also taking effect Monday will be higher levies on beer, wine and hard liquor, and soon to come will be higher motor vehicle license fees.

Republican critics of the plan say that the approved tax package, which totals $5 billion, will take $1,000 a year from the budget for a family of four. In addition, $2.3 billion in other tax increases remain under discussion, including higher income taxes on the top wage earners.

In the wake of the anti-tax sentiment touched off by approval of Proposition 13 in 1978, so massive a tax increase might have been considered a political impossibility. But even though the current generation of political officeholders decided to ignore the risks of voter rebellion, few seem willing to pronounce the “tax revolt” dead.

“It would be wrong to conclude that the tax revolt has come to an end,” said Assemblyman Phillip Isenberg (D-Sacramento), who supported the tax increase.

Some are even predicting a resurgence of anti-tax activism once California taxpayers realize the price they are paying.

Assemblyman Tom McClintock (R-Thousand Oaks), a staunch anti-tax conservative, said: “This is not the end of the tax revolt, this is the prelude to the greatest tax revolt this state’s ever seen.”

The sales tax increase, by far the costliest of the measures, will affect people differently depending on where they live.

Because voters in some urban counties have raised taxes above the basic rate, the sales tax will be even higher in those regions, jumping to 8.25 cents per $1 in Los Angeles, San Diego, San Francisco, Santa Clara and Alameda counties.

The new rate will be 7.75 cents in Orange, San Bernardino, Riverside and Sacramento counties, while most other counties will levy the basic 7.25-cent rate.

The higher taxes on beer, wine and hard liquor are considered modest, amounting to the equivalent of about a penny a drink.

The new fees on motor vehicle licenses, which take effect Aug. 1, will add, on the average, about $60 to the fees on each car, truck, bus and motorcycle. Unlike previous vehicle fee increases, which were aimed at new cars, this one will even touch the oldest vehicles as well by stretching out the depreciation schedule under which license fees are supposed to decline and by raising the minimum fees.

In addition to all that are hundreds of millions of dollars that will be raised by increases in a variety of fees--led by a 20% tuition increase for students in the University of California and the California State University systems.

Meanwhile, the Republican governor is asking the Democratic-controlled Legislature to complete the task of closing the budget gap with another $2.3 billion in tax increases. One likely outcome is an increase in the top personal income tax rate for individuals making $100,000 a year and couples earning $200,000, along with new limits on deductions and exemptions.

The $7.3-billion Wilson-backed tax plan is the largest in dollar terms in California history. But when viewed in relation to the $14.3-billion deficit and the proposed $43-billion general state operations budget, it is not a record, nor is it much out of line with tax increases faced by earlier generations.

Moreover, history has shown that large tax increases of this kind have occurred on a cyclic basis regardless of who was in power.

There has been a longstanding tradition in California for two-term governors, like former Gov. George Deukmejian, to leave a state beset by financial problems, forcing their successors to bite the bullet and pass the tax increases their predecessors wanted to avoid.

David M. Doerr, a tax consultant with the business-oriented California Taxpayers Assn. who put in 25 years as the Assembly’s top tax adviser, calls it “the curse of the eighth year.”

“Every eight years we get a new governor and every eight years we need a tax increase,” Doerr said.

Although there are exceptions to the rule, Doerr is right on target.

When Deukmejian took office in 1983, he inherited a projected $1.5-billion deficit from ex-Gov. Edmund G. (Jerry) Brown Jr. and was forced to accept a tax increase.

One of the exceptions was Brown’s predecessor, Ronald Reagan. Although the state needed a tax increase when Reagan finished his second term, the rule of eight holding, Reagan bit the bullet himself and signed a penny sales tax increase in 1974, the second sales tax increase of his governorship. Partly as a result, Reagan left behind a financially healthy state that ultimately would generate annual surpluses in the billions and trigger the “tax revolt” in 1978, when the projected surplus grew beyond $5 billion.

When Reagan took office in 1967, succeeding Edmund G. (Pat) Brown, he inherited a woeful budget crisis. It resulted in a 10% across-the-board spending cut and a $934-million tax increase. That included a penny sales tax increase, a 67% increase in income tax revenues, a hefty increase in the cigarette tax and higher alcoholic beverage taxes.

The increases do not seem large compared to the $7.3 billion in tax increases proposed by Wilson. But at the time, the state’s general fund budget stood at $3.2 billion, so the tax increase represented 30% of the budget. By contrast, the current tax increase represents 17% of the state’s $43-billion operating budget.

In 1959, Pat Brown, facing a projected $269-million deficit on a budget of $1.4 billion, proposed $257 million in tax increases, 18% of the budget. That year, tax increases boosted personal income, bank and corporation, and inheritance taxes, and levies were boosted on cigarettes, beer, horse racing, insurance and petroleum products.

The granddaddy of all tax increases occurred in 1935, during the Depression, when another freshman governor, Frank Merriam, inherited a $228-million budget with a deficit of $125 million. That required a tax increase of $107 million, or 47% of the budget. Included in Merriam’s tax proposal was the first state income tax, a sales tax increase, a doubling of the bank and corporation tax, a 50% increase in the tax on beer, an insurance tax, a motor vehicle fee increase and a 10% admissions tax on movies and other entertainment.

Monday’s 1.25-cent increase on the basic sales tax rate of 6 cents for every dollar in taxable purchases is certainly not the jolt that Californians felt when the sales tax first was levied in 1933. At the time, it was levied at a rate of 2.5 cents--but on all products, including food.

Even the half-cent increase that followed in 1935 was the equivalent of a 20% increase in the sales tax rate. That is roughly the same percentage increase as in the current sales tax hike.

But the new levies negotiated by Wilson and state lawmakers constitute a real break with recent tradition against broad, general tax increases that followed the Proposition 13 “tax revolt” against soaring property taxes.

With the exception of 1989, when the Legislature passed a temporary, 0.25-cent sales tax increase to help pay for earthquake damage, the basic statewide sales tax has not been increased since 1974. During the 1970s and 1980s, under Govs. Jerry Brown and Deukmejian, income tax rates actually fell. During Brown’s tenure, income tax rates were adjusted for inflation--so-called “indexing”--saving taxpayers billions. Under Deukmejian, the top bracket of the personal income tax dropped from 11% to 9.3%, and the bank and corporation tax rate also was reduced.

Deukmejian’s budgets required tax increases, including the $800 million in tax hikes needed to balance last year’s budget. But the former governor’s tax increases were carefully targeted and were not broadly based in keeping with his view of the tax revolt.

There are other signs of cracks in the once impregnable facade of the tax revolt.

The co-authors of Proposition 13, Howard Jarvis and Paul Gann, are dead. Each of them failed to win support for follow-up initiatives meant to carry on the anti-tax theme of their landmark measure.

And the power of the group of Republican lawmakers elected to the Assembly in 1978, the so-called “Proposition 13 babies,” has been diminishing. A new breed of Republicans is on the ascent. Although they still are in the minority in the Assembly, they provided enough votes to pass Wilson’s tax plan.

Does all this mean the tax revolt is dead? Not hardly, according to lawmakers and others who follow state tax policy closely.

Anti-tax fever is still rampant in many quarters of the Legislature. Evidence of that can be seen in the prolonged fight over the last part of Wilson’s tax plan--the $2.3-billion proposal to raise income tax rates on the wealthiest taxpayers and make other adjustments to bring in more income tax revenue.

Anti-tax advocates also are counting on the tax increase to give new life to the tax revolt.

“The people haven’t started paying their bills yet,” said Assemblyman Pat Nolan (R-Glendale). “Watch out when the magnitude of this tax increase hits the public, when they have to go into the convenience store and shell out extra money for chips and dip, their newspaper, bottled water; when they see the sales tax is increased 8.25%, that their vehicle licenses fees will be increased.”

Democrat Isenberg added: “The tax revolt has been graying for many years. On the other hand, it’s not fair to say that Californians are enthusiastic about taxes.”

Sen. Becky Morgan (R-Los Altos Hills), vice chair of the Senate Revenue and Taxation Committee, said tax increases “are only acceptable because of the budget crisis.”

In arguing against the notion that the tax revolt is dying, lawmakers cite the results of last November’s election.

Although voters in the June primary agreed to double the then-9 cents a gallon gasoline tax over five years, they turned around in the November general election and rejected four proposed tax increases, along with all but one of the bond measures on the ballot.

Assemblyman Nolan said the turnaround shows that “the tax revolt is far from dead--it is just that the Legislature is out step with constituents.”

Lewis K. Uhler, president of the National Tax Limitation Committee, one of the groups that has been filling the void left by the deaths of Jarvis and Gann, said support for the tax package represents a calculated risk on Wilson’s part keyed to what Uhler said is the governor’s desire to run for President in 1996.

“If you can come out of the financial situation in California looking like a manager, that fits the mind-set of the Eastern media,” Uhler said. “They want to portray him as a balanced, moderate leader.”

Higher State Taxes

A look at upcoming increases in taxes in California: NEW TAXES & ANTICIPATED REVENUES

* STATEWIDE SALES TAXES INCREASES (effective 7/15) Temporary increase of 1/2 cent to pay for state programs: $1.44 billion

Permanent increase 1/2 cent to pay for local programs: $1.44 billion

Permanent increase of 1/4 cent for state programs: $720 million

Total Sales Tax Increases: $3.6 billion

* NEW SALES TAXES (effective 7/15) Candy and snacks: $200 million

Ship and jet fuel: 110 million

Newspapers and magazines: 83 million

Leased equipment: 38 million

Bottled water: 31 million

Total New Sales Taxes: $462 million

* VEHICLE LICENSE FEES (effective 8/1) Fees to be increased using a revised vehicle depreciation schedule, for an average of about $60 per vehicle: $769 million

Total Licence Fees: $769 million

* ALCOHOL (effective 7/15) Taxes to go up 9 cents on a six-pack of beer, 4 cents on a bottle of wine and 26 cents on a fifth of hard liquor: $200 million

Total Alcohol Taxes: $200 million

TAXES UNDER CONSIDERATION & ANTICIPATED REVENUES

* PERSONAL INCOME

Personal income tax to be increased from 9.3% to 10% for single filers earning more than $100,000 and joint filers earning $200,000. Rate goes up to 11% for single filers earning more than $200,000 or joint filers earning more than $400,000 a year: $1.2 billion

Renters credit eliminated for individuals earning more than $20,500 a year and couples earings $41,000 a year: $137 million

Employers to withhold taxes on supplemental wages: $80 million

State taxes conformed to federal tax code, including limits on itemized deductions by single filers earning $100,000 and couples earning $200,000: $333 million

Quarterly estimated tax payments to be required by estates and trusts: $42 million

TOTAL: $1.79 billion

* Business

For the next two years, businesses may not carry over losses between tax years.: $560 million

TOTAL: $560 million

OVERALL TOTAL: $7.38 billion