Capitol Alert: Impacts of Democrats' tax changes would be a mixed bag

As Democrats unveil a new budget plan today, here's an essential question: How does this affect individual taxpayers?

Democratic leaders plan to release a proposal at 2:30 p.m. whose centerpiece is a significant shift in tax rates. Sources say that includes an increase in the state's personal-income tax for every bracket but the highest one, an increase in the state's vehicle-license fee and a two-step decrease in state sales tax.

With budget talks at a standstill, Democrats are trying to change the dynamic by offering a new revenue proposal that Republicans can swallow, all based on the argument that it has no impact on taxpayers even as it generates billions more for California.

Democrats will claim that taxpayers will not pay higher taxes and that some may actually save money. The basis of that claim is that taxpayers will pay lower federal taxes and sales taxes that more than make up for their higher income tax and VLF rates. It's a claim they must be able to sell because Gov. Arnold Schwarzenegger is already attacking the plan as a tax increase.

Clearly, some taxpayers will win and some will lose. Democrats have analyses showing that taxpayers at both the lowest and highest ends of the spectrum benefit the most, one source said. At the lowest end that's because those earners pay very little in income taxes as it is but could receive significant sales tax relief. At the highest end that's because those earners will not see an increase on the bulk of their income, while they will still benefit from the sales tax reduction.

But it's difficult to say exactly how it would affect every situation. And there is no doubt plenty of people would pay higher taxes as a result of this plan.

Jean Ross of the California Budget Project, which advocates for low-income residents, noted last week that only 38 percent of California taxpayers itemize their deductions -- the method in which it's presumed they would be able to save on their federal taxes.

Ross also mentioned this afternoon the case of older Californians. They typically don't pay as much mortgage interest because they have paid off their homes or are in the final years of payment. Under Proposition 13, they also do not pay as much in property taxes. And they don't buy as many taxable goods like furnishings for a new home or clothes for a schoolkid. They would likely suffer under this Democratic plan.

Also consider the case of a single middle-class earner who saves a significant amount of income each month, spends on little else than non-taxable goods like food and does not itemize because he rents. That earner would surely do worse off under this proposal. He would not be able to deduct his higher income taxes, nor would he be able to claim much savings in sales tax because he does not spend.

Therein lies at least one interesting twist -- the plan creates a disincentive toward saving, since the reduction in the state sales tax is one key way Californians would have to offset higher income taxes. Democrats, however, may claim that as a virtue rather than a problem by saying that more spending is necessary to boost the economy.

PHOTO CREDIT: Jerry Blankenship, left, of Newcastle, reads a tax form he needs to complete his taxes at the Internal Revenue Service Center off Watt Avenue in Sacramento, as George De La Rosa, center, looks for forms on a shelf. Sacramento Bee file photo, April 15, 2002/ Hector Amezcua

Update (4:50 p.m.) -- A previous version noted that 62 percent of Californians would not be able to deduct higher state income taxes on their federal forms, predominantly lower-income individuals and renters. That description of the 62 percent was the author's, not Ross'.