With investors’ appetite for municipal bonds ravenous again, California plans to dive into the market in March to borrow as much as $4 billion to fund infrastructure projects.

Treasurer Bill Lockyer is betting that changes the Legislature is expected to approve soon in how Sacramento manages its cash will forestall the risk of yet another cut in the state’s credit rating, which already is the lowest of the 50 states.

Lockyer has held back on bond offerings this year as the state has struggled to close a $20-billion budget gap. Ratings firm Standard & Poor’s in January cut the state’s credit grade one more notch, to A-minus from A, and warned that it might lower the rating further if it saw a cash crunch looming in March. A weaker credit rating could force the state to pay higher interest rates to borrow.

Lockyer’s spokesman, Tom Dresslar, said legislation has been introduced to give state finance officials “much greater flexibility” to deal with short-term cash-flow problems, by temporarily delaying payments to companies and individuals owed money from the general fund. The idea is to keep a bigger cash cushion on hand for money owed to bondholders, whose payments are assured by the state constitution.

The state borrowed heavily via bonds in the fall as Lockyer sought to work down a big backlog of voter-approved issues that will finance schools, water facilities and other infrastructure projects. That backlog still is huge, at $47 billion. Note that proceeds from these bond sales go for designated capital projects, not to plug budget holes.

The March bond sales will be in two parts: In the first week of the month Lockyer expects to sell $2 billion in tax-free general obligation bonds of various maturities, aiming at individual investors through the state’s Buy California Bonds program. The minimum order usually is $5,000.

The second offering, also for about $2 billion, will be sold later in the month in the form of taxable issues, including “Build America Bonds” that are partly subsidized by the federal government and have been extremely popular with institutional investors.

As he has with other bond deals in recent years, Lockyer plans an advertising campaign to attract income-hungry individual investors to the tax-free offering, Dresslar said.

Muni market analysts say it’s a good strategy. Interest on the state’s bonds is exempt from state and federal income tax for California residents, and that exemption will be more appealing if Congress allows President Bush’s tax cuts for high-income earners to expire as scheduled next Jan. 1.

“People are looking to shield their money from the feds,” said Matt Fabian, senior analyst at research firm Municipal Market Advisors in Westport, Conn.

Illinois, which like California faces severe fiscal woes, this week sold $1.5 billion in tax-free bonds -- $630  million of which were bought by individuals, the state’s director of capital markets told Bloomberg News. Illinois had expected individuals to buy about $250 million of the bonds.

The current annualized yield on five-year California general obligation bonds is about 2.7%. In the 35% combined federal and state tax bracket that’s the equivalent of a 4.15% fully taxable yield. In the same tax bracket, a 10-year California bond, now yielding about 4.5%, would pay the equivalent of a 6.9% taxable bond.

The 35% combined bracket begins around taxable income of $137,000 for couples.

Naturally, the higher your tax bracket, the more appealing muni yields become.

-- Tom Petruno

Here's your wantonly Wednesday roundup of consumer news from around the Web:

-- Do you have a trip pending on American Airlines? If so, keep this in mind: Airline workers have asked federal mediators to let them walk away from contract talks if no deal is reached by March 8. If so, this would allow union members at the second-largest carrier to go on strike 30 days later, or in early April. The Obama administration or Congress could still block a walkout, but that's politically dicey. I'm thinking this is a heavy-duty negotiating tactic to push the labor talks forward.

-- Burger King wants better brew (coffee, that is). The fast-food chain says it will add Starbucks' Seattle's Best Coffee to all its roughly 7,000 restaurants by summer in a bid to boost breakfast sales. Rival Mickey D's has seen healthy growth among the breakfast set, and BK wants a piece of that action. I'm just wondering: How did it take them this long to realize that people appreciate a decent cup of joe?

-- With March Madness around the corner, here's something to keep in mind: Our friends at the Internal Revenue Service expect you to report any gambling winnings. This is taxable income, and as such the IRS wants a bite. Actually, you can probably get away with a big score in the office pool, but remember that casinos and racing tracks and lotteries are required to report big payouts, which could leave you open to an audit if you're not on the up and up. Just something to consider.

-- David Lazarus

--- CEO confidence climbs to a four-year high: So says a survey of Business Council leaders. But most don’t see much hope for a big drop in unemployment, because they themselves aren’t planning to do a lot of hiring. Meanwhile, big companies continue to pile up cash on their balance sheets.

--- Where have all the stock market bulls gone? Bullish sentiment among investment newsletter writers has quickly fallen to the lowest level since last March. All it took was four straight down weeks on Wall Street. And yet, the market's recent pullback still hasn't crossed the 10% "correction" threshold.

--- New Jersey's governor declares “fiscal emergency.” Believe it or not, the Garden State’s budget mess is worse than California’s -- per capita, anyway.

--- Is a value-added tax the best way to restore U.S. budgetary sanity? "It's the only vehicle capable of raising the money to cover the gigantic projected increases in spending and deficits," writes Shawn Tully at Fortune.

-- Tom Petruno

--- Did Goldman help Greece hide its debt troubles? Germany’s Spiegel magazine contends that Goldman Sachs designed a big “cross-currency swap” debt deal for Greece in 2002 that didn’t show up in the country’s official borrowing statistics.

--- Businesses face soaring state unemployment-insurance taxes: The extra money is needed to replenish depleted state insurance trust funds. The irony: The cash some companies will shell out might otherwise have been used to boost hiring.

--- Morningstar buys data-digger Footnoted.org: The Footnoted site has won kudos for its work unearthing what investors need to know from the fine print in companies’ filings with the Securities and Exchange Commission. Morningstar's announcement is here.

--- Or maybe he’s just really lucky: So says “Black Swan” author Nassim Taleb about Warren Buffett, on the question of luck versus skill in investing. 

-- Tom Petruno

More than 180,000 California businesses may owe "use" taxes on goods they purchased over the Internet or the telephone from out-of-state suppliers, the state Board of Equalization is warning.

A new state law requires firms with gross receipts of over $100,000 a year to register with the tax collection agency and pay any use taxes due from the previous year by an April 15 deadline. Firms that take in less than $100,000 do not need to register but must still pay the tax.

The use tax, which has been on the books since 1935, is the same rate as the better-known sales tax. It's aimed at purchases by individuals and companies from outside the state when the seller does not collect the California sales tax.

The rate, which involves statewide and local taxes applied by cities and counties, varies from a low of 8.25% to a high of 10.75% in the Los Angeles County cities of South Gate and Pico Rivera.

California's enhanced effort to collect the use tax is expected to increase state revenues by $81 million in the spending year that ends June 30. Use tax returns should jump to an estimated $183 million in fiscal year 2010-11 and $367 million in 2011-12, the board said.

For more information, check out www.boe.ca.gov or call the Taxpayer Information Center at 800-400-7115.

-- Marc Lifsher

The huge California tax-free municipal bond market has a lot riding on proposed tax changes in President Obama’s budget.

The administration’s call to restore higher tax brackets for the nation’s top income-earners, by allowing President George W. Bush’s tax cuts to expire as scheduled next Jan. 1, could fuel more investor demand for tax-free bonds. That would be good for current bond owners, and for muni issuers, if the result is to push down interest rates on new bonds.

But Obama also proposes to reduce the federal subsidy for a new breed of taxable muni bonds -- so-called Build America Bonds -- that some state and local borrowers began to issue a year ago in place of tax-free securities.

That lower subsidy could give borrowers, including California, less incentive to issue the taxable bonds. If they shift their borrowing back to the tax-free market, that would mean more supply of standard munis, which could put upward pressure on market interest rates.

For the country’s highest-income earners -- singles earning more than $200,000 and couples earning more than $250,000 -- the White House proposes to restore the top two marginal tax brackets of 36% and 39.6%, up from the current 33% and 35% rates. That almost certainly should boost the appeal of tax-free munis: They’re the last legal tax dodge for many investors.

In the 35% tax bracket, a tax-free yield of 4.5% is worth the same as a 6.9% yield on a taxable investment. In the 39.6% bracket that 4.5% tax-free yield would be worth the same as a 7.4% taxable yield.

Obama also proposes to restrict high-income-earners’ tax deductions, which would give them more incentive to seek out investments that produce higher after-tax returns.

Meanwhile, the administration’s proposed changes to the Build America Bonds program could have a significant impact on the California muni market: The state and its municipalities have been big beneficiaries of that year-old program.

BABs allow muni issuers to sell long-term taxable bonds to finance infrastructure projects and have Uncle Sam pick up 35% of the gross interest cost. The idea was to make it cheaper for many issuers to finance projects with taxable bonds than with tax-free bonds, and to open the muni market to a wider mix of institutional investors that typically limit their bond investments to taxable securities.

California issuers have sold $16.3 billion of BABs over the last year, 23% of the total of $71.5 billion of BABs issued nationwide, according to data firm Municipal Market Advisors. More telling is that California issuers of BABs account for 29% of the total federal subsidy under the program, in part because the state’s fiscal mess has forced it to pay above-average interest rates to borrow.

California voters were accused of "class warfare" in 2004 when they approved a proposition that slapped a 1% extra tax on the state's highest earners.

If that was a declaration of war on the upper class, Oregon voters just launched a major new offensive.

In a bid to boost revenue amid the lousy economy, Oregonians on Tuesday said yes to raising the state’s highest marginal income tax rate from 9% to 11% -- topping even California’s maximum rate of 10.55%.

The new 11% Oregon rate will apply to income above $250,000 for individuals and $500,000 for couples.

A slightly lower new rate of 10.8% will apply to income between $125,000 and $250,000 for individuals and between $250,000 and $500,000 for couples.

The new 11% rate ties with Hawaii for the highest marginal tax rate among the 50 states.

Oregon voters also approved a ballot measure to boost taxes on corporations.

Oregonians have repeatedly refused to approve a sales tax (the state is just one of four that has neither a retail sales tax nor a so-called gross receipts tax) but the income- and business-tax-hike proposals passed handily, each with more than 53% of the vote.

As my colleague Kim Murphy wrote earlier this week, ballot Measures 66 and 67 were viewed as a test of “how willing voters are to accept tax increases targeted at those theoretically best equipped to pay them.”

But Phil Knight, the founder of Nike Inc. -- probably Oregon’s most famous home-grown company -- has warned that passage of the measures would fuel a “death spiral” for the economy, driving away companies and entrepreneurs.

In California, however, the victory in Oregon has thrilled some pro-tax-hike groups.  Robert Cruickshank of the Calitics blog wrote today:

It's a message that works nationally. And it's a message that'll work here in California. Voters don't like seeing their neighborhood schools close, or mass layoffs of teachers, or ending care for the disabled, or kicking kids off of health care. They don't want it, and are willing to raise taxes to prevent it.

All eyes now turn to Sacramento. Oregon proved, beyond any doubt, that anti-tax sentiment can be beaten by progressive taxes on the wealthy and corporations in order to save programs people like. The message could not possibly be any clearer. Voters want their programs saved, and are willing to tax the elite to do it.

In 2004, Californians approved Proposition 63, which slapped a 1% surtax on incomes above $1 million to fund county mental-health programs.

For incomes below $1 million California’s top marginal tax rate now is 9.55%.

Eight state legislatures last year raised tax rates specifically on higher-income earners. The California Legislature raised tax rates on everyone, lifting each marginal rate 0.25 of a percentage point.

-- Tom Petruno

Photo: Pro-tax-hike supporters in Oregon late Tuesday. Credit: Doug Beghtel / The Oregonian

The Obama administration’s proposed “financial crisis responsibility fee” would hit the nation’s biggest names in banking, brokerage and insurance with a new tax aimed at raising about $9 billion a year for federal coffers.

Here’s a look at some of the details of the plan, which must be approved by Congress:

--- Which companies would pay the fee? The plan targets financial companies with more than $50 billion in assets. The administration estimates that the list of covered firms would number about 50 -- about 35 U.S. companies and 10 to 15 U.S. subsidiaries of foreign firms.

Brokerage firm Keefe Bruyette & Woods today pulled together a list of the companies it figures would be subject to the fee. Among big banks and credit-card issuers, the names include Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, PNC Financial, U.S. Bancorp, SunTrust Banks, UnionBanCal (parent of Union Bank of California), Comerica, American Express and Capital One.

Among brokerages, Keefe lists Goldman Sachs, Morgan Stanley and Charles Schwab.

In the insurance sector the names include MetLife, Prudential Financial, Hartford Financial and Lincoln National. The administration also says that American International Group would be subject to the fee, even though the bailed-out firm already is 80% owned by the government.

--- How much would the companies pay Uncle Sam? The fee would total 0.15% of a company’s covered liabilities each year for at least the next 10 years.

--- Which liabilities would be covered, and why tax liabilities as opposed to assets? A financial company’s liabilities are the funds it has raised (via deposits or by borrowing) to make loans or buy investment securities. By imposing the fee on liabilities the administration says it would “place the heaviest burden on the largest firms that have taken on the most debt.”

A fee on liabilities would provide “a deterrent against excessive leverage” by the companies, the White House says, thereby reining in the level of risk the firms are taking and the risk they pose to the financial system. That’s the theory, at least.

Some liabilities would be exempt from the fee, however -- in particular, deposits on which which a company already pays insurance fees to the Federal Deposit Insurance Corp.

--- How much would the fee shave from the companies’ earnings? Expressed as a percentage, that would depend on what earnings turned out to be, of course. But Keefe estimated that, based on its current 2011 earnings estimates, per-share results would be reduced by 14% at Bank of America, 9% at JPMorgan Chase, 5% at Wells Fargo and 10% at Goldman Sachs.

Another brokerage, Ladenburg Thalmann, estimated that 2011 earnings per share of the biggest banks would be reduced by 7%, on average.

--- Can’t the companies just pass on the fee to customers? That’s exactly what some on Wall Street are threatening.

“Costs are generally passed on to customers in our industry,” Timothy Ryan, president of the Securities Industry and Financial Markets Assn., said in a statement. “While we still don’t have the full details yet, it’s more than likely that the burden of this tax will fall on institutions and individual investors who are clients of these firms.”

The administration is betting otherwise.

“If those people chose to pass on those costs they would face a competitive disadvantage from the far, far large number of financial firms who are excluded from this fee,” said a senior administration official, speaking on the usual condition of anonymity. “We think they have a competitive incentive not to pass this fee on.”

The White House also wants to believe the banks will opt to take a moral high ground. (Insert your own guffaw or snicker here.)

“It will just seem beyond the pale to the typical American to hear of the bonus pools in the $10- to $15- to $20-billion level in the coming weeks and then suggest that the only way they could pay this financial crisis responsibility fee back to the American taxpayer is to pass on the cost,” the official said.

-- Tom Petruno and Jim Puzzanghera

Photo: President Obama announcing the proposed big-bank tax Thursday. Credit: Ron Sachs / Bloomberg News

--- When $12.1 trillion is not enough: The Senate gets ready to lift the Treasury’s borrowing limit to accommodate another wave of deficit financing. The Cato Institute's Richard Rahn fears we're nearing the tipping point on the U.S. debt load.

--- One less source of federal income: Wells Fargo completes its repayment of $25 billion in federal aid under the TARP program, which brought the Treasury $1.44 billion in dividends over the last year.

--- Google shares have topped $600 for the first time since January 2008. Why Wall Street is back in love with tech this year.

--- Tanning salons see ruin from proposed tax in the healthcare bill.

--- Year-end list of the day: Caroline Baum on the six most overused words or phrases of 2009. And yes, "new normal" is No. 1.

-- Tom Petruno

The good news in the sell-off that has clipped California tax-free municipal bond prices over the last six weeks is that the market now should be harder to shock.

So for muni investors, the report Wednesday that Sacramento already may be facing a $21-billion budget gap over the current and next fiscal years was more a firecracker than a bomb.

After rallying sharply in August and September, the California muni market has given back some of those gains since early October. Amid a flood of new bond sales by the state investors have demanded higher yields, which in turn has pushed prices of existing bonds down.

California is back in the market this week with a $1.34-billion revenue bond offering from the Public Works Board to finance infrastructure projects. Yields on those bonds will be set today.

All in all, though, the damage to the market from the supply glut has been relatively modest, at least for muni mutual fund investors who have the benefit of wide diversification. Case in point: The per-share net asset value of the Franklin California Tax-Free Income fund, which holds $14.2 billion of state and local debt, was $6.90 on Wednesday, a drop of 4% from the 52-week high of $7.19 on Oct. 5.

That’s unfortunate for anyone who bought near the high, but year-to-date the fund’s total return (share price gain plus interest earned) still is a hefty 15.6%. And that’s even better than it looks, given that the interest earned is exempt from state and federal income tax.

The muni market nationwide has been suffering a bout of indigestion since September, driving yields higher. But nationally and in California the market has been stabilizing over the last week or so.

Despite the dire fiscal outlooks for many state and local governments, there are three main reasons to believe that the muni market is unlikely to fall off a cliff from here and wipe out all of its recovery from the worst of the credit crunch:

--- Big investors just don’t buy the idea that actual defaults by muni issuers in 2010 will match the doomsday predictions that are out there.

"There is going to be a lot of ‘headline’ risk in the market over the next 12 to 18 months," said Chris Sperry, co-manager of the Franklin California fund. But local governments of any size know, he said, that the decision to default would make it impossible to get the basic credit they need to function. The market clearly believes that the vast majority of politicians will get out the cleaver and hack expenses further, not bond payments.

--- Muni yields still are historically high versus yields on taxable bonds. A 10-year California state general obligation bond now yields about 4.55% tax-free, compared with 3.36% for a 10-year U.S. Treasury note that is federally taxable. Muni bond yields normally are below Treasury yields.

"In order for muni yields to get a whole lot [higher] you’re going to have to see the Treasury market sell off," said John Carbone, manager of the Vanguard California Long-Term Tax-Exempt bond fund. That could happen, of course, but it probably would require the backdrop of a robust economic recovery or an inflation surge -- neither of which seems likely in the near term.

--- Many muni investors figure that tax rates at the federal, state and local levels can only go up as governments struggle to close deficits. That would boost munis’ appeal for yield-hungry investors. "Munis are going to become more attractive from a pure income standpoint," Sperry said.

Yes, he’s talking his book. But raise your hand if you think taxes are more likely to go down than up.

-- Tom Petruno