On June 28, 1991, the California Assembly began debate on what was then the biggest tax increase in California's history: a $7 billion tax hike pushed by Gov. Pete Wilson that included increases in sales, income and car taxes.
In that debate I warned my Assembly colleagues, "Do not expect the revenue estimates from this tax to hold. As sales decline, as layoffs increase, as small businesses which are barely hold¬ing on now are forced to close their doors the revenue projections under this and the other tax increases are bound to decline substantially, and we'll be back here possibly by early spring, to deal with growing budget shortfalls."
That's exactly what happened. Although the national recession had officially ended in the first quarter of 1991, the Wilson tax increases imposed in the third quarter broke the back of California's economy. By the fourth quarter of 1991, while the rest of the nation was recovering, California was suffering the biggest plunge in retail sales in 30 years. Not only did the tax package produce only half of the revenue anticipated, it caused two consecutive years of billion-dollar declines in state revenue.
The $12.8 billion tax increase signed by Arnold Schwarzenegger comes not during a period of economic recovery, but in the throes of the worst recession in a generation. It will cost more than $300 for every man, woman and child in California - $1,200 taken from the discretionary spending of an average family of four - either in direct tax increases or in tax-driven price increases as businesses pass along their costs to consumers.
By raising the sales taxes more than 13 percent and doubling the car tax, Schwarzenegger's action will hit the automobile market particularly hard. The sales tax - the second biggest income generator for the state - is already down by seven percent over the last 12 months and car sales account for fully one fifth of all sales tax collections. Meanwhile, the Governator is pushing for federal action that will add as much as $5,000 in new regulatory costs to the price of a new car.
State revenues can be enhanced - but only by relieving the economy from the high taxes and draconian restrictions that this administration has imposed.
Ironically, Gov. Schwarzenegger vigorously opposes relaxing restrictions on the development of California's vast offshore oil reserves, despite estimates that those resources could generate billions of dollars of new revenues and royalties directly into the state's treasury. His AB 32 - calling for a 25 percent reduction in carbon dioxide emissions in 11 years - is systematically shutting down entire sectors of the state's economy.
Californians bear the sixth highest per capita tax burden in the nation. Californians pay the highest corporate tax rate in the West and the second highest gas tax in the nation. Californians paid the highest income tax rate in the country before the Governor added another ¼ percent. Neighboring Nevada has no income tax. Californians paid the highest sales tax in the nation before the Governor hiked it by another penny per dollar. Neighboring Oregon has no sales tax.
Set aside all the ideological arguments about taxes: simply as a practical matter, Gov. Schwarzenegger has just made the state's budget woes - and its economy -
The dire warning that I made in vain on the Assembly floor 17 years ago came true with terrible consequences under far more favorable conditions than we face today. If the past is prologue, Schwarzenegger's unprecedented tax hike will produce only a fraction of the revenues promised and will significantly reduce tax collections over the next several years as the economy buckles under its weight.
But don't worry. The self-proclaimed "People's Governor" - tells us it will be "good for the people. That is the bottom line." One thing is undeniable: the people's bottom line just took the biggest tax hit in state history.