Democrats in the state Senate on Monday countered Gov. Arnold Schwarzenegger's proposed budget cuts with a plan to raise taxes by nearly $5 billion, largely by extending temporary taxes and delaying corporate tax breaks for two years.
During a Senate subcommittee hearing, Democrats said they want to delay the start of corporate tax credits demanded by Schwarzenegger and Republicans last year to secure enough budget votes.
Their plan also would extend by two years the temporary increases in the income tax and vehicle license fee that were approved last year. Democrats proposed raising the tax on alcohol but would allow a temporary 1 cent increase in the state sales tax to expire at the end of the year.
Schwarzenegger proposed no tax increases in his latest plan to close California's projected $19 billion budget deficit, relying mostly on spending cuts.
Sen. Denise Ducheny, D-San Diego, chairwoman of the Senate Budget Committee, said nearly all state programs have been asked to keep spending flat, if not below what they were receiving two or three years ago.
"And it seems to me in that context, if we're asking programs to remain flat-funded, we ought to be able to ask ourselves as taxpayers to be flat-funded," Ducheny said.
Sen. Bob Dutton, R-Rancho Cucamonga, said extending temporary tax increases and delaying corporate tax credits would run counter to the state's attempt to jump-start job growth and get people spending.
The Senate's incoming minority leader said taxpayers would feel slighted if the Legislature reneged on past promises.
"Now you're telling them, 'Well, sorry, we didn't mean it,"' Dutton said, referring to the tax increases that were approved last year with firm end dates.
Ducheny said Republicans demanded corporate tax credits as the state faced a looming cash crisis.
The minority party often can extract concessions during budget negotiations because of California's two-thirds voting threshold for passing spending plans and tax increases.
"It was a leveraged deal that had no real relation to policy," she said. "It shouldn't have been done."
Some of the tax breaks would allow businesses to reduce their tax burden by applying net operating losses from prior years.
Multistate corporations would be able to choose the way they calculate corporate taxes, allowing them to use a formula referred to as "single sales factor."
California has taxed corporations using a formula based on employment, property and sales in the state. When the new formula takes effect in 2011, it would allow a corporation to calculate its tax based on actual sales in the state, a move favored by California technology companies.
The tax breaks are expected to cost the state $2 billion next year.
Under the Senate Democrats' proposal, the state would:
- Extend a 0.25 percent income tax increase by two years. The move would raise $1 billion in the next fiscal year.
- Extend the reduced dependent care credit from $309 to $99 for another two years, generating $430 million in the next fiscal year.
- Extend the increase in the vehicle license fee for two more years, and raise it again, bringing the total to 1.45 percent of a vehicle's value, generating an extra $1.2 billion in the next fiscal year.
- Raise the alcohol tax to reflect inflation since 1991, bringing in an additional $210 million annually.
- Extend suspension of a business's ability to reduce its taxable income by applying net operating losses from prior years. Eliminate the ability of a company to amend prior tax returns, known as carryback losses, for two years. The two changes would generate an estimated $1.5 billion next year.
- Make "single sales factor" mandatory so companies don't get to choose the tax policy that works to their advantage. The move would raise $235 million next year.
- Delay by two years the ability of corporations to share tax credits with affiliated members, generating $315 million next year.
Shannon Murphy, a spokeswoman for Assembly Speaker John Perez, D-Los Angeles, said the speaker will announce his own proposal Tuesday.