Capitol Alert: State budget assumptions: Where politics and policy intersect

The new Democratic budget plan relies on an argument that average taxpayers will ultimately pay less in taxes.

Gov. Arnold Schwarzenegger's Department of Finance says Democrats used a sleight of hand to reach that conclusion.

Data that Democrats provided Tuesday compares tax burdens for average Californians in 2011 to tax burdens at 2010 rates. Their conclusion? Taxpayers will save on taxes in 2011 under the Democratic plan, from $11 a year for someone earning $100,000 to $1,174 for someone earning $600,000.

But Finance points out that taxpayers already will pay lower taxes in 2011. That's because existing law dictates that the sales tax will decrease 1 cent per dollar, the vehicle-license fee rate will go down by half a percentage point and the income tax will decline by a quarter of a percentage point in 2011.

A significant question, then, is whether taxpayers will fare better under existing law or the Democratic plan. And according to the analysis, middle-income taxpayers will actually pay more in taxes under the Democratic plan than they would under existing law.

In fact, Democrats do not dispute that claim, though they say that some taxpayers -- at the high and low ends -- would still save money using that methodology. And they say that taxpayers as a whole would save, though Finance disagrees.

As with many political arguments, it boils down to assumptions.

Democrats have built their case for taxes this year on comparisons to current tax rates. But traditional analysis has made comparisons to existing law. What's the difference? Existing law takes into account scheduled changes in tax policy. Current tax rates are a snapshot in time and may have an expiration date, as is now the case.

Tax rates right now are at a higher level than they were three years ago. Democrats want to assume this higher level as a baseline for discussing their budget proposals. In their only chart spelling out impacts for individual tax filers, Democrats compared their 2011 policies to existing, higher 2010 tax rates.

For example, Democrats say they want to raise the vehicle-license fee rate to 1.65 percent when it currently stands at 1.15 percent. That's a softer comparison than to the 0.65 percent it will be next July under existing law. Using the Democrats' comparison results in a smaller tax hike.

At the same time, Democratic analysis suggests that Democrats' tax swap would drop the state sales tax rate from 6 percent to 3.5 percent in July 2011, a 2.5 percentage point decrease.

But existing law already drops the rate from 6 percent to 5 percent in July 2011. That means the Democrats' sales tax drop next July is only 1.5 percentage point less than what it would be under existing law. But Democrats assumed the 2.5 percentage point decrease in calculating what taxpayers would save in the second half of 2011.

We're awaiting analysis from the nonpartisan Legislative Analyst's Office and the Franchise Tax Board. For now, Schwarzenegger may have a legitimate argument that the Democratic plan will result in higher middle-class taxes when compared to 2011 tax rates under existing law.

PHOTO CREDIT: Gov. Arnold Schwarzenegger, answers questions from the media in Downtown Sacramento on Tuesday, June 15, 2010. Sacramento Bee/ Hector Amezcua