Democrats released their new tax swap proposal Friday after working with the Legislative Analyst's Office to find something tax neutral or better for every income group on average.
A one-page outline of the plan can be found here.
Democrats say the proposal will raise $1 billion to help reduce the state's $19 billion deficit. They say it will do so without raising taxes on any tax group on average, based on the LAO's analysis.
One problem is that the plan doesn't leave much breathing room for filers earning between $20,000 and $200,000 - which represented nearly 65 percent of tax filers in 2007.
The LAO analysis shows that the plan would have no impact on those earning between $20,000 and $50,000. It would save $3 for those earning between $50,000 and $100,000 and $2 for those earning between $100,000 and $200,000.
Those tax impacts are an average for an entire group of tax filers. Within each tax bracket, a host of variables can affect whether an individual filer will be positively or negatively affected by the plan. Those include ability to deduct state taxes, spending habits and car value, among others.
Within those groups, filers who can't deduct their state taxes on federal forms will be more likely to pay more taxes than those who can deduct. This includes people who do not have enough deductions to itemize. It also includes a group of taxpayers required to pay the federal Alternative Minimum Tax. That's not to say someone who doesn't itemize or deduct couldn't save under the Democratic plan, but that filer would have to make up for more of the tax costs in sales tax savings.
As we've pointed out in the past, the plan helps spenders more than savers, since the sales tax reduction is a huge factor in offsetting the income tax hike. But Democrats argue that reducing the sales tax would encourage people to spend more money and help the economy, while it would also decrease business-to-business sales tax costs.
Jean Ross of the California Budget Project, an advocate for low-income Californians, sounded skeptical Tuesday of the new Democratic plan. Like the LAO, her group determined that the Democrats' initial proposal would raise taxes on the middle class. Ross said at the very least the new proposal has worse consequences for the middle class than it does for the wealthy in 2010-11.
"It would still disproportionately hit the middle with a significant reduction at the top, which is counter to what economists tell you you ought to do when you have a weak economy," Ross said.
Another problem for the Democrats is that they want their plan to start in the 2010 tax year. That means many tax filers would find next year that they have not withheld enough money for state taxes. Even if taxpayers save on their holiday shopping this year through reduced sales taxes, it's unlikely they will set aside that savings to pay for a higher income tax bill next April.
Gov. Arnold Schwarzenegger's Department of Finance said last month that the governor had concerns about applying such a tax increase retroactively. Finance has not yet reviewed the latest proposal.
Senate President Pro Tem Darrell Steinberg, D-Sacramento, didn't sound wedded to the idea of starting the tax in 2010. Delaying the plan until 2011 would only generate $250 million toward the deficit. But it would generate $1 billion annually starting in 2011-12, the LAO found.
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