The sales tax would drop below the current rate at a later date.
The governor first floated the sales tax increase idea in May as a second choice to his lottery reform plan.
"The good thing about this is after the tax increase ends, the money gets automatically rebated to the taxpayer," said Governor Arnold Schwarzenegger (R-California), on May 14, 2008.
The governor would apparently back off the tax hike if he didn't get budget reform in return: Reforms such as a permanent state spending cap and a rainy-day fund, ideas Democrats have been reluctant to support.
"I'm glad the governor has come around to saying publicly what we've known all along. We have to have a tax in order to correct the problem that we're in right now. So, I say it's a start," said California State Senate President Don Perata (D-Oakland).
Republicans hold the key to the passage of any tax increase. Two senators need to cross over, as well as six assemblymembers. However, they are no mood to close a multi-billion-dollar budget deficit with a tax hike.
"I don't think there's any votes in our caucus," said State Senator Jeff Denham (R-Merced). "We believe we need to reduce spending."
With the state budget now more than a month late, political watchers say the governor's leadership is facing yet another test.
"He will be criticized for breaking his pledge on taxes and that will hurt him with a number of voters. On the other hand, he'll look like he was a problem solver too, which will help offset some of the damage that will cause," said Republican strategist Kevin Spillane.