Re­vamp­ing Cal­i­for­nia’s tax code

It’s past time for law­mak­ers to re­form the state’s volatile, un­pre­dictable tax sys­tem.

Los Angeles Times - - OPINION -

The Cal­i­for­nia tax code is like a handy­man’s rick­ety steplad­der, as un­trust­wor­thy as it is es­sen­tial. It’s also prov­ing to be hard to fix. Two blue-rib­bon com­mis­sions have pro­posed sweep­ing re­forms to shore up the tax code’s weak­nesses in re­cent years, only to get lost amid the Leg­is­la­ture’s strug­gle to make ends meet dur­ing the down­turn. Nev­er­the­less, there may be no time like the present for law­mak­ers to try to make the state’s rev­enue more re­li­able.

Cal­i­for­nia’s cof­fers have long been filled mainly by sales, in­come and cor­po­rate taxes. The bal­ance among th­ese sources has shifted dramatically over the last 60 years, how­ever, as man­u­fac­tur­ing and farm­ing have given way to ser­vices. Sales taxes, which tend to be steady and pre­dictable, once ac­counted for more than half the state’s rev­enue; they now make up about a quar­ter. Mean­while, per­sonal in­come tax rev­enue, which rises and falls much more sharply than the econ­omy, has grown to more than half to­day from about 10% in 1950.

One rea­son for the in­come-tax volatil­ity is that so much of it is de­rived from cap­i­tal gains, which fluc­tu­ate with the stock mar­ket. Here’s an ex­am­ple: In the fis­cal year that be­gan in July 2008, the state’s econ­omy was 3% larger than in the pre­vi­ous year. But state rev­enue had plunged 19%, re­flect­ing the stock mar­ket’s col­lapse in the wake of the sub­prime mort­gage melt­down.

In the throes of the most re­cent bud­get cri­sis, two pan­els of ex­perts — the Com­mis­sion on the 21st Cen­tury Econ­omy and the Think Long Com­mit­tee — pro­posed tax­code over­hauls that aimed to smooth out state rev­enue while also pro­mot­ing growth. Both sought to tax the ser­vices sold and con­sumed here, which would lessen the state’s re­liance on per­sonal in­come taxes. But Gov. Jerry Brown went in the op­po­site di­rec­tion in 2012 with Propo­si­tion 30, tem­po­rar­ily rais­ing the top in­come tax rate by al­most a third while hik­ing the sales tax by only about 3%.

Cal­i­for­nia now boasts the na­tion’s high­est per­sonal in­come tax rate and one of the high­est sales taxes, which is not much of a wel­come mat for en­trepreneurs and grow­ing busi­nesses. But re­form­ers face a prob­lem too: Any move to sta­bi­lize rev­enue by de-em­pha­siz­ing in­come taxes would ap­pear to shift the bur­den from the wealthy onto ev­ery­one else. In a blue state acutely sen­si­tive to in­come in­equal­ity, that’s a non-starter.

Some Democrats also ar­gue that the state’s up­graded rainy day fund will help man­age the volatil­ity by set­ting aside money in good times that can be spent in bad ones. And the fund is cer­tainly a good thing to have. But it’s no sub­sti­tute for more sta­ble and pre­dictable rev­enue, which would make it eas­ier to plan for the long term. More omi­nously, the sav­ings that ac­cu­mu­late could lead law­mak­ers to take steps that would de­feat the pur­pose of the fund: Democrats will cite the rainy-day bil­lions as a rea­son to spend more freely, and Repub­li­cans will say they’re proof that taxes are too high.

Re­gard­less, events are con­spir­ing to force the Leg­is­la­ture’s hand. The sales tax hike in Propo­si­tion 30 is set to ex­pire in Jan­uary 2017, in the mid­dle of the bud­get the Leg­is­la­ture adopts next year; the in­come tax hike ex­pires two years af­ter that. Brown has said he op­poses any ex­ten­sion, but pow­er­ful groups are lining up be­hind a pro­posal to re­new the taxes any­way. Oth­ers are work­ing on bal­lot mea­sures to raise taxes on cig­a­rettes, oil and gas drilling, and com­mer­cial real es­tate.

Such a scat­ter­shot ap­proach might raise more rev­enue, but it won’t solve the volatil­ity prob­lem. That’s why the Leg­is­la­ture should try to pre­empt those mea­sures by mov­ing first to fix the tax code. Granted, that would re­quire some tough votes, be­cause any change would cre­ate win­ners and losers. Nor will it be a sim­ple mat­ter to pre­serve the pro­gres­sive qual­ity of the state’s tax sys­tem, which the Leg­is­la­ture must do. But it can be done; Sen. Bob Hertzberg (D-Van Nuys) has some in­trigu­ing ideas on that front, and the Leg­is­la­ture could cer­tainly come up with more if it looked for them.

Now is the ideal time to start that work. The state is climb­ing out of the deep hole the Leg­is­la­ture dug in the pre­vi­ous decade, and its econ­omy is grow­ing, al­beit not nearly as fast as it should be. The elec­tion is more than a year away. Law­mak­ers need to get se­ri­ous about re­form now, be­fore the spe­cial in­ter­ests start push­ing their own tax poli­cies on Cal­i­for­nia vot­ers.

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