Gov. Arnold Schwarzenegger on Thursday proposed a temporary 1.5 percent sales tax increase to deal with California's worsening fiscal crisis, which has created an $11.2 billion deficit in this year's budget.
"We have a dramatic situation here and it takes dramatic solutions...and immediate action," the governor said as he called the Legislature back into session to deal with the budget shortfall. "We must stop the bleeding."
Just six weeks ago, Schwarzenegger signed an overdue state budget that was intended to close a $15.2 billion deficit. The rapid pace of decline in the national and state economies since then has reopened that gap and threatens to widen it even more in the months ahead.
He said the state's economic condition has deteriorated significantly, with a cratering stock market and the continued decline of the housing industry.
California's budget relies greatly on capital gains taxes, which have dropped precipitously in recent months as stock prices have plummeted. Sales and property taxes also have declined.
"Many Californians have lost their homes, they've lost their jobs...and everyone is worried about their future," Schwarzenegger said.
The worsening conditions are spreading throughout state government.
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California's unemployment insurance fund, which helps those tossed out of work pay their bills, is expected to be insolvent by January. With the state's unemployment rate at 7.7 percent and likely growing, the fund is projected to be $2.4 billion in the red by the end of 2009. That would force the state to borrow from the federal government.
Schwarzenegger proposed $4.4 billion in tax increases, including a temporary hike in the sales tax. He did not specify how long the increase would remain in effect. He also alluded to bringing in more money through other "revenue generators." That might include boosting the registration fee for vehicles by $12 and taxing companies that extract oil from California, which he said would generate $528 million this year.
The governor often has characterized California's budget problems as being caused by runaway spending, rather than a lack of tax revenue. The severe financial crisis has flipped that, he said Thursday.
"It is now a revenue problem rather than a spending problem," he said.
Schwarzenegger and lawmakers agreed to $7.1 billion in spending cuts in the budget he signed in September. On Thursday, he said they will have to ask departments to trim $4.5 billion more. That will affect all state programs, including education, social services, health care and prisons.
The governor said he would accelerate public works spending as part of an economic stimulus program: $204 million from water bonds; more than $700 million for transportation; and $106 million for hospital construction.
He also proposed mortgage modifications that he said would help keep homeowners in their houses by cutting payments 25 percent to 30 percent. Schwarzenegger said state workers might be asked to take a one-day-a-month unpaid furlough and said employers and employees may have to pay more into the unemployment insurance pool to help it remain solvent.
The plan Schwarzenegger outlined during his news conference will serve as the starting point in negotiations with the Democratic and Republican leaders of the state Legislature.
Democrats already have called for tax increases, but Republicans have adamantly refused them. That complicates efforts to get a deal because some Republican votes are needed in the Senate and Assembly to reach the two-thirds majority required to pass spending plans and tax increases.