Davis Budget Proposal Sets Stage for Fight Over Taxes

SACRAMENTO —  Gov. Gray Davis’ call for tax hikes to help close a $23.6-billion budget hole has not only set the stage for a partisan fight over the state’s next spending plan, it has also opened him to criticism from motorists, smokers and tax watchdogs.

Davis has proposed essentially doubling for one year the vehicle license fees paid by motorists and increasing state taxes paid on cigarettes by 50 cents a pack. The proposal is part of a shortfall-reduction plan that also includes deep spending cuts, particularly in health-care programs, along with borrowing and budget transfers.

The tax portion of the plan accounts for about $1.8 billion of the $23.6-billion shortfall--$1.3 billion from the higher vehicle fees and $475 million from cigarettes. Davis, who promised in January not to seek a tax increase, said last week that both proposals were a last resort and necessary to preserve funding for public schools and other critical needs.

Critics, including some hit directly by the proposals, say the higher taxes are unfair, excessive or regressive, meaning that they hit poor people harder than the wealthy.

California is home to 29.6 million cars, motorcycles, trucks and trailers that would be subject to the higher vehicle license fee if it’s approved and takes effect in January, as the governor proposes.

The registration fee--computed at 2% of a vehicle’s depreciated value--has been reduced by slightly more than two-thirds since 1998 in a series of rebates approved by the Legislature. Davis wants to suspend part of the rebate, restoring the fee to 1.5% of the vehicle’s value, for the 2003 calendar year.

Under the plan, the license fee for a 2002 Volvo wagon purchased for $33,000 would jump from $215 to $497, according to a spokeswoman for the Automobile Club of Southern California. Someone who paid $18,000 for a 2000 Ford Explorer would see the fee rise from $82 to $190. On a 1998 Honda Accord that cost $19,485, the fee would grow from $114 to $234.

Michael Cohen of the state’s legislative analyst’s office said the fee on a car valued at $9,200--the state average--would rise from $60 to $138, an increase of $78.

Automobile Club spokeswoman Carol Thorp said the fee hike, when combined with another Davis proposal to shift money from a transportation fund to the general fund, represents a “double whammy” for drivers. (A Davis spokeswoman said the borrowing proposed in the governor’s new budget is not expected to delay transportation projects.)

“We care about fairness,” Thorp said. “We don’t think the motorists should be singled out for a disproportionate tax burden.... This is a significant amount of money.”

An administration spokeswoman pointed out that even at the amount Davis proposes, the fee is still lower than it was in 1998.

“We’re still providing tax relief for Californians because they will still be able to benefit from a 25% reduction in the vehicle license fee,” Davis spokeswoman Hilary McLean said. “It’s a one-time impact.”

Critics complain that even though the fee is based on a vehicle’s value, it still falls most heavily on the poor. A study by the Institute on Taxation and Economic Policy, California Policy Research Center, found that in 1996 the fees represented an average 1.18% of the annual income of the poorest 20% of the state’s people, but only 0.41% of income for the wealthiest 20%.

Advocates for the poor say they prefer a proposal by Senate leader John Burton (D-San Francisco) to raise $2.5 billion a year by increasing the income tax on the wealthiest Californians.

Jean Ross, executive director of the California Budget Project, a group that lobbies for the poor during the budget process, said that the top 1% of California taxpayers would still come out ahead under Burton’s plan when federal tax breaks are taken into account. These households, she said, will have received an average federal tax cut of $51,717 when it is fully phased in, compared with a state tax increase of $7,674 under the Burton proposal.

Ross also noted that new data released last week from the 2000 Census found widening gaps between California’s rich and poor. McLean, the governor’s spokeswoman, said the top 5% of taxpayers in California paid 70% of last year’s personal income taxes.

“If I could make one change in the [governor’s revised budget], it would be to swap the [Burton proposal] for the vehicle license fees,” Ross said. “It would give you enough money so you could reverse some of those deep reductions, particularly in terms of health and human services, and it would tax those Californians who have fared the best over the past decade.”

Some Californians are willing to pay the higher fees. About 3,000 members of the Pacific Institute for Community Organization, a coalition of faith-based groups that has lobbied to expand health coverage for the uninsured, are planning a Tuesday rally in Sacramento. Members will fill out fake vehicle license fee checks to demonstrate that they are willing to be part of the solution, but they will also call for California’s wealthy and corporations to do more.

“When people look at what cuts [proposed by Davis] will do to health care, schools and local communities, they are willing to pay more,” said Jim Keddy of the coalition. “They just want to know where the money is going to go and that people are paying something that is fair.”

The fairness argument is also being invoked by those opposed to raising the cigarette tax. Davis proposes increasing state excise taxes levied on cigarettes by 50 cents to $1.37 per pack.

Smoking among Californians has declined from about 23% in 1989 to 17% in 2000, while the number of cigarettes consumed has dropped by more than half, according to Greg Oleva of the state Department of Health Services’ Tobacco Control Section.

But the drop in smoking has not hit all Californians the same. John Miller, staff director for the state Senate Committee on Health and Human Services, said that Californians between the ages of 18 and 24, young working-class Asians and working-class whites continue to have higher smoking rates.

Miller and other health-care advocates have taken issue with the fact that none of the money raised by the proposed cigarette tax is earmarked for anti-smoking programs.

The approach differs significantly from a proposal by Sen. Deborah Ortiz (D-Sacramento) to raise the state excise tax on a pack of cigarettes by 65 cents to $1.52, which would give California the highest tax of that variety in the nation. Revenue generated from Ortiz’s proposal would fund anti-smoking programs and help cover health-care costs for the working poor, such as treating asthma and heart disease.

Miller said efforts are underway to incorporate Davis’ tobacco tax hike into Ortiz’s measure and to increase the tax from 50 cents to 65 cents. Revenue generated from the difference would go to fund health and anti-smoking programs.

“It’s unconscionable to ask a minority to finance that amount of services to the state and not realize any benefit whatsoever,” Miller said.

Added Paul Knepprath, a lobbyist for the American Lung Assn. of California: “Investing a small portion of the new tobacco tax revenues will not only save more lives, but will save the state more dollars down the road in health-care costs.”

Knepprath noted that Davis’ new budget cuts $35 million from a youth anti-tobacco program and borrows $4.5 billion against the state’s future share of the national tobacco settlement.

“Taken together, you have no investment in further reducing tobacco consumption through prevention programs that have been proven effective,” Knepprath said.

Knepprath cited an industry estimate that put the average cost of a pack of cigarettes in California at $3.65 as of last summer. The cost includes 87 cents in state excise taxes, 39 cents in federal taxes and a base state sales tax rate of 7.25%.

The tobacco industry also has problems with the governor’s proposal.

Philip Morris spokesman Tom Ryan said California smokers face some of the highest taxes in the country. He also said that raising cigarette taxes will only compound California’s problems with the black market, where smuggling and Internet sales--often without any age verification--are cutting into the state’s tax base and putting tobacco into the hands of minors.

“If our past experience is any indication, this is going to make that problem worse,” Ryan said.

Hiking state taxes on cigarettes, according to Ken August, a spokesman for the California Department of Health Services, will result in reduced consumption, particularly among teenagers, who are sensitive to pricing.

“This increase in the tax will have a great impact on reducing youth smoking during a time when overall spending on anti-smoking programs has to be reduced due to the budget problems in California,” August said.

Davis spokeswoman McLean said that by raising the tax, the governor avoids making even deeper cuts to health programs.

The timing for a tax fight could not be worse for Davis. He must confront the fresh onslaught of criticism and the possibility of a prolonged budget battle this summer as he seeks reelection in November against Republican Bill Simon Jr.

Sherry Bebitch Jeffe, who teaches political science at USC, said that by throwing taxes on the table, Davis could find himself caught between Democratic lawmakers seeking even greater increases, which would allow them to restore certain spending cuts, and their Republican counterparts who oppose any new taxes.

“It puts the governor in a very awkward position,” Bebitch Jeffe said. “If Democrats propose greater taxation, I think Republicans will become more firm in their opposition. This gives them an issue around which to unify ... which means it’s going to be a very long time before we get a budget, and that’s not politically helpful for Gray Davis.”

Sen. Tom McClintock, the Thousand Oaks Republican who has led a crusade to eliminate vehicle license fees, said he believes the governor’s proposal will become a rallying point for Democrats and Republicans alike.

“I haven’t run into one person who doesn’t know exactly how much they’re paying in the car tax,” McClintock said. “All they have to do is more than double what they are currently paying and that is what it will cost. People know immediately what that means to them.”

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Times staff writer Miguel Bustillo contributed to this report.