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In comments to the Sacramento Bee late last week, Governor Arnold Schwarzenegger magnanimously agreed to consider a proposal to maybe discuss a flat tax rate on income in California. Much like similarly surprising talk of ending marijuana prohibition, the news makes for great headlines, but taxpayers should avoid any real optimism for the time being.
While Schwarzenegger cleverly pays lip service to what some consider the holy grail of tax code reform, at a suggested flat rate of 15 percent, he has actually proposed a massive tax increase. Currently, even the wealthiest Californians pay “only” 9.3 percent. In the seven states where a flat tax is already in effect, the average rate is just 4.1 percent.
And maybe he missed the memo last month, but someone should tell the governor that there is a tax revolt afoot in the Golden State. It seems reasonable for Schwarzenegger to ask that all residents share equally in the cost of government services but, at more than three times the national average, the proposed rate almost certainly makes this debate a nonstarter.
Which may in fact be the point. Thanks to the politically-powerful unions' legacy and salary costs that have a stranglehold on state coffers, it is difficult to imagine how California can possibly afford to cut spending far enough to close its fiscal gap, let alone implement a flat tax in the low single digits. But by raising this and similarly controversial issues himself, Schwarzenegger may be hoping to gain some much-needed political cover for his next move: Begging the Obama administration for a bailout. If GM and Chrysler are any indication though, when the new czar of California is appointed, Arnold should be prepared to find himself in a familiar role—terminated.