Capitol Alert: LAO: Democratic plan would raise middle-class taxes

The nonpartisan Legislative Analyst's Office said today that a new Democratic tax swap proposal would raise taxes on middle-class Californians, counter to Democratic claims last week that it would lower taxes for all income groups.

The plan envisions raising state taxes on income and vehicles but lowering the state sales tax. Democrats said taxpayers would save by virtue of federal deductions and lower costs at the cash register.

But LAO State Finance Director Jason Sisney told a Senate committee the proposal would generally result in higher taxes for taxpayers earning between $20,000 and $200,000 a year. Sisney did not say how large the tax hikes would be for each income level, but he said the proposal would increase taxes overall by $1.6 billion in 2011-12.

A significant difference was that LAO measured the Democratic tax plan against the scheduled tax rates for 2011-12 under current law. Democrats instead compared their proposal against current, higher tax rates, taking credit for tax reductions already scheduled to take effect next year.

In a separate analysis released today, the California Budget Project, an advocacy group for low-income Californians, also found the proposal would hike taxes on the middle class. The group had two different results based on whether businesses would pass their sales tax reductions on to households. In both cases, those in the 40th to 98th percentile of taxpayers would pay higher taxes overall.

Before the hearing, Senate President Pro Tem Darrell Steinberg, D-Sacramento, framed the Democratic tax swap as a work in progress.

"I am confident about our modeling and our numbers, but I also recognize that this is a proposal that can be tweaked," Steinberg said. "This is a proposal that can be modified ... If there are skeptics who don't believe the numbers as we put them forward are 100 percent on the mark, then give us your counter."

Sisney and two tax law professors lauded the idea of relying more on state taxes that are deductible against federal taxes, namely those on income and vehicles. Because taxpayers can deduct those taxes, the federal government in essence helps pay a portion of them to the state.

No matter the policy arguments for the shift, it will be difficult for legislative leaders to obtain a two-thirds vote for any proposal that increases taxes on the middle class.