Schwarzenegger proposes sales tax increase

Gov. Schwarzenegger has proposed a temporary one-cent increase in the state sales tax for the next three years in exchange for long-term fixes he believes would solve the state's perennial budget woes, several sources familiar with the negotiations said Monday.

The governor's proposal comes as he and lawmakers are 35 days into the fiscal year with no approved spending plan.

Schwarzenegger has said he opposes tax increases, but was willing to consider all options to close an estimated $15.2 billion shortfall in the $101 billion general fund.

The state sales tax is 6.25 percent, but most counties have local tax additions, such as those for transportation projects, that drive the actual sales tax rate to 7.25 percent or higher. A one-cent increase statewide would raise $4 billion to $5 billion a year, based on $29 billion in sales tax revenue expected in the current year.

The governor basically framed his sales tax hike as a temporary sacrifice to be recouped in subsequent years, multiple legislative sources said.

Specifically, the proposal would raise the state's sales tax rate by one cent for three or four years, then drop the rate even lower than the current rate, perhaps by a quarter cent, for enough years that consumers would recover their losses, the sources said.

Aaron McLear, Schwarzenegger's spokesman, declined to confirm or deny the report Monday in keeping with his practice of not discussing closed-door budget talks involving legislative leaders.

"The governor has been pushing for a compromise between legislative leaders, and budget reform must be part of any agreement," McLear said.

The governor's sales tax proposal appears to put him squarely at odds with his own Republican Party, which consistently has argued that the state has a spending problem, not a revenue problem.

Democrats are not certain to embrace the sales tax hike, either. Critics argue that sales taxes are regressive, meaning that the greatest impact falls on low-income Californians.

The long-term budget fixes that Schwarzenegger wanted in return for a sales tax hike would include a system to save revenue in a rainy day fund during good years to bridge budget gaps in down years.