CALIFORNIA DEMOCRATS PROPOSE BILLIONS IN TAX INCREASES ON TOP EARNERS AND CORPORATIONS

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Republican Assemblyman Roger Niello of Sacramento, right, said the Democratic budget proposal “will be a troubled and very challenged proposal on the Assembly floor.”

BY JUDY LIN and DAN SMITH

Democrats on Tuesday proposed billions in tax increases on businesses and high earners to help bridge California’s budget shortfall.

The proposed hikes include rolling back the dependent child income tax credit expanded in the 1990s, creating two higher income tax brackets for the state’s biggest earners and increasing corporate taxes.

The long-awaited list of revenue proposals faces near certain defeat, however, as Republican lawmakers have repeatedly said they are unified in their opposition to any tax increases. Approving a budget and increasing taxes requires a two-thirds vote, which means GOP support is mandatory.

“I guarantee you it will be a troubled and very challenged proposal on the Assembly floor,” said Assemblyman Roger Niello, a member of the two-house budget conference committee that finished its work over Republican opposition Tuesday. “After we’re done (rejecting the tax increases), we can all go back to square one to figure out how we get a supermajority vote on this budget.”

Gov. Arnold Schwarzenegger and state lawmakers have yet to strike a compromise on how to close a $15.2 billion budget shortfall in the $101 billion general fund. The entire budget proposed by the governor is $144 billion, including bond and special funds.

Lawmakers missed a June 15 constitutional deadline for passing a balanced spending plan for the fiscal year that began July 1.

In earlier drafts of the budget, majority Democrats presented plans that called for as much as $11 billion in added revenues. Tuesday’s proposals amount to $8.2 billion, plus another $1.5 billion from a proposed tax amnesty plan.

Democrats have proposed before — a 2005 move failed to receive a single GOP vote — the creation of 10 percent and 11 percent tax brackets for high earners. The highest tax bracket now is 9.3 percent.

The plan unveiled Tuesday would impose a 10 percent rate on the portion of couples’ incomes above $321,000 a year and an 11 percent rate on the portion of income above $642,000.

It would raise about $5.6 billion a year.

Big business would lose its net operating loss deduction for three years, bringing the state another $1.1 billion, according to the Senate plan. And the plan would restore the franchise tax rate for businesses from 8.4 percent to 9.3 percent, raising $470 million.

Reducing the dependent income tax exemption would bring the state about $215 million in the fiscal year that started July 1.

Lawmakers and then-Gov. Pete Wilson expanded the child dependent exemption in 1997 and 1998 when the state’s budget picture was brighter and tax relief was a necessary political piece to approve the spending plan.

The Senate’s proposal would apply only to households with adjusted gross income more than $150,000 a year. It would lower the current allowable exemption for each child from $294 to $94 – the same amount currently allowed for a personal exemption.

Democrats rejected a more ambitious plan advanced by Legislative Analyst Elizabeth Hill who called for the dependent credit to be rolled back for all families, regardless of annual income. It would have raised $1.3 billion for then state.

Niello and other Republicans said the tax proposals would drive businesses out of the state and hurt families already reeling from a flagging economy.

Democrats countered that schools and health care programs will suffer without higher taxes.

“It’s not possible to get anywhere near to current year (education) funding without (new) revenues,” said Sen. Denise Moreno Ducheny, D-San Diego and chair of the budget conference committee.

“These really are just rolling back the tax cuts that have been made since 1997,” Ducheny said. “These restore some of these in as modest a way as possible.”

State Controller John Chiang and Treasurer Bill Lockyer have warned several times that the state would face a cash shortage next month unless lawmakers can come to an agreement.

A protracted budget fight, they warn, would force the state to borrow billions in an unfriendly lending atmosphere. The move would jeopardize the state’s credit rating, which is already among the nation’s worst.

Already, the state cannot pay some programs for school districts, community colleges, local governments, vendors and salaries and per diem of state elected officials and their appointed staff.

California lawmakers will now be the last of their colleagues in the 46 states with a fiscal year beginning July 1 to pass an annual spending plan. The Golden State earned the same title last year when the budget standoff dragged on for 52 days.

Despite a sour economy, only a handful of states missed their July 1 deadlines. On Tuesday, North Carolina’s Legislature shipped off a compromise budget bill to Gov. Mike Easley after two weeks of negotiations.

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