Yesterday Democratic leaders Speaker John A. Pérez and Senate President Pro Tem Darrell Steinberg unveiled a new budget proposal that relies on a tax swap to help close the budget deficit:

The most controversial new mechanism would impose an income tax increase of one percentage point for 2010 on all but the highest bracket as well as a tax hike of half a percentage point on vehicles. Those increases would be coupled with a decrease in the state sales tax rate of 1.75 cents on the dollar through next June. Another sales tax decrease would take place next July.

Democrats say the plan would raise roughly $1.8 billion through next June. Though that’s only one-tenth the size of the deficit, Democrats consider any revenue idea that could gain GOP support a significant piece of the puzzle.

The San Francisco Chronicle article on the proposal seems to bear out Pérez’s and Steinberg’s claim that this would result in lower taxes for many Californians:

For an average person making $60,000 a year, income taxes would increase $473 annually, the vehicle license fee would increase $118 a year, and there would be a $677 savings in sales taxes.

That pencils out to an annual savings of $86, for Californians making $60K (and perhaps others) this would indeed be a tax cut. Of course, to Republicans, tax cuts are only good when they benefit the rich.

Not everyone is behind this plan. Jean Ross of the California Budget Project has been criticizing this proposal since at least last week. Last Tuesday she criticized the argument that the income tax increase could be nullified for households by taking advantage of a federal deduction:

First, according to the latest data from the Internal Revenue Service (IRS), in 2008 only 38 percent of California’s personal income tax taxpayers itemized deductions on their federal return.

Second, relatively few low- to middle-income taxpayers itemize, while virtually all high-income taxpayers itemize their deductions. Yet, the proposal under consideration appears to be structured to disproportionately raise taxes at the bottom of the income distribution, while imposing a relatively small increase at the top of the income distribution. Last year’s temporary increase in tax rates had a similar impact, as discussed below.

Then on Friday, Ross added that the Democrats’ plan is “upside down” because it did not emphasize raising taxes on the wealthy:

A better alternative would raise the top rates of the personal income tax and protect families who are struggling the hardest to make ends met. “Right siding” an income for sales tax swap would turn a proposal that runs counter to the arguments of prominent economists that we’ve previously cited into a well-targeted proposal. The current proposal would raise the tax rates at the bottom of the income distribution, but not at the top. The proposed increase would fall hardest on taxpayers who spend all that they earn in their local communities and who don’t benefit from the ability to deduct state income taxes on their federal returns. A “right side up” proposal would raise taxes at the top end – taxes paid by taxpayers who spend a smaller share of their earnings locally, while consuming globally and saving more, and who are far more likely to see savings on their federal return.

A “right side up” proposal would be consistent with the recommendations of prominent economists who argue that “tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits” during an economic downturn.

Certainly this would seem like a good year to make such a proposal, with Meg Whitman spending $100 million on a campaign for office, highlighting the fact that the rich have plenty of money to spare. A tax increase on the upper income brackets would help keep teachers in the classroom and cops on the beat, even if Carly Fiorina might have to sell one of her yachts as a result, even if Meg Whitman might have to scale back her TV ad buy from “shock and awe” to merely “saturation bombing.”

The full Democratic proposal can be found here.