California Proposes Sales Tax Hike To Fund Transport, Government Services

July 18, 2008 11:32 a.m. EST

Sacramento, CA (AHN) - To close California's $17.2 billion budget deficit, Gov. Arnold Schwarzenegger considered on Thursday hiking the state sales tax and using funds intended for transportation and government services.

State legislators proposed the two measures, which the governor initially described as bad ideas, but he did not rule out adopting the measures to avoid a cash crisis in California.

The lawmakers plan to close the budget gap by collecting $5.6 billion income tax increase on the rich and borrowing $1.1 billion allocated for transportation projects and $1.4 billion for local governments. Under California laws, the borrowed money must be repaid within three years at high interest rates.

To ensure the $2.5 billion is paid back, Schwarzenegger told the Los Angeles Times, "I literally would have to guarantee that with a sales tax or something... Where else do we get the revenues that someone can be saying so freely we can pay back this $2.5 billion we are borrowing?"

Local officials were alarmed by the proposals to use the money already appropriated for specific purposes.

"The money the would take is going to fund a huge amount of projects... It would be a complete violation of the spirit of Proposition 1A," Jim Earp, executive director of the California Alliance for Jobs, told the Los Angeles Times.

The governor, on Tuesday, admitted he was frustrated by the slowness of the state Legislature to pass California's budget on time. To hasten approval of the state budget, Schwarzenegger made several suggestions: setting a spending cap based on revenues over the past 10 years; automatic spending reductions during a fiscal crisis; borrowing against future state lottery sales; and creating a rainy-day fund.

"If we don't have budget reform, we're basically saying to the people of California... that even though we have the worst budget system, we're not willing to fix it," the governor told the San Francisco Chronicle.