In case you haven't been paying attention, we'd like to inform you that California still doesn't have a budget, as politicians squabble over how to fill a $19.1 billion budget hole.
As Paul Krugman has just noted, help from Washington is not in the cards. Or is it?
The Democrats have proposed floated a new budget idea, and the basic idea is that California can extract cash from Uncle Sam, whether DC politicians like it or not.
An editorial today in the San Jose Mercury News explains how it works.
The plan does this by raising income tax rates 1 percentage point on all but the highest earners and increasing the vehicle license fee by half a percentage point, bringing in $10.2 billion. At the same time it decreases the state sales tax rate over two years, costing an estimated $8.4 billion next year.
Democratic leaders in the Legislature say that because the income and car taxes are deductible from federal taxes but the sales tax is not, their plan would result in a tax break of between $10 and $1,000 for residents in all income groups. The sales tax reduction would also boost consumer spending.
Get it? Democrats think they can use the state tax code to establish a free lunch at the expense of Uncle Sam, but raising the taxes that are deductible, and cutting taxes which are not.
The only question we have, then, is why won't every state pursue a similar angle?
Actually, the probably will.
For what it's worth Schwarzenegger has pronounced the idea dead on arrival, but we wouldn't be shocked to see him come around to some version of this arbitrage.
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Full story at http://feedproxy.google.com/~r/businessinsider/~3/KU2Ph16ZLfY/california-budget-democrat-version-2010-8
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