December 15, 2007

California: Bring Back the Car Tax?

Via the 21st Century Taxation blog, news that history may be repeating itself in the Golden State.

California's historic 2003 recall of then-Governor Gray Davis, and subsequent election of Arnold Schwarzenegger, was one of the biggest tax-policy-related electoral dramas in recent memory. (And was certainly one of the most flagrant abuses of "special elections" in modern California history-- but that's another story.)

Every Californian-- including, no doubt, Schwarzenegger, who owes his job to this bit of political theater-- remembers that what drove the recall election was public anger (almost certainly fueled by out of state money, but again, that's another story) over Davis' decision to balance the state's budget by ending a state-financed cut in the annual "car tax" that he himself had pushed through back in 1998. And most Californians probably also remember that the first thing Schwarzenegger did after taking office was to restore the car tax cut.

So it might seem downright absurd to hear anyone talking about repeating Davis' tactic and ending the car tax cut. But that's what the Sacramento Bee's Dan Walters has to say in his column this week-- and he's right.

Walters points out, correctly, that Schwarzenegger's move to permanently cut the annual car tax from 2% of a car's value to 0.65% of value is simply not affordable now-- and probably wasn't affordable when he first did it in '03.

In states such as Virgina and Washington, the debate in the past decade has been more about whether an annual car tax should even exist (answer: it should), rather than what the rate should be. This doesn't appear to be the case in California, where the tax is in no danger of being repealed entirely.

The question in California is simply whether the rate cuts enacted in 1998, and permanently extended after Davis' recall debacle, were ever-- then or now-- remotely affordable. Walters makes a convincing case that Schwarzenegger has used short-term surpluses to paper over the inherent unaffordability of the car tax cut.

With those budget surpluses suddenly and spectacularly gone, a sensible approach for state lawmakers-- and the governator-- would be to put all cards back on the table, including the state-funded car tax cut. If the state can't afford to pay for the car tax cut, lawmakers owe it to their constituents-- and to the state's future-- to either repeal the cuts, or to hike some other tax to pay for it.

It remains to be seen whether lawmakers can achieve this standard of sensibility. But California wouldn't be the first state in which lawmakers were forced to eat crow by repealing tax cuts enacted during the boom days of the late 1990s-- or even the first in late 2007. Michigan lawmakers earlier this year raised that state's flat income tax rate, essentially reversing the signature tax cut pushed through by then-Governor John Engler in the late 90s.

If Michigan can come to its senses, can California be far behind?


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