California targets budget-busting tax code
Gov. Arnold Schwarzenegger is expected to call for a special legislative session to consider a new tax reform plan. But the overhaul faces skepticism.
Los Angeles
It was intended to help reform California鈥檚 tax system and avert the wild revenue swings that have caused the state鈥檚 crippling deficits. But the tax overhaul plan proposed by a blue ribbon commission could just arrive dead in the water.
Just under a year ago, Gov. Arnold Schwarzenegger and state legislative leaders created the 14-member, bipartisan 鈥淐ommission on the 21st Century Economy鈥� to find ways to modernize state tax laws. The idea was to achieve a more stable revenue stream and one reflective of the world鈥檚 eighth largest economy. California鈥檚 $1.8 trillion Gross Domestic Product (GDP) is 13 percent of the US GDP, but the state makes headlines year after year for its giant budget deficits.
The commission鈥檚 final report is not yet in (it was due Sunday), but the draft reforms floated at the commission鈥檚 public hearings have already been widely criticized.
The reform plan involves phasing out the corporate and sales tax and flattening income tax to just two levels: a 2.75 percent rate for married couples making up to $56,000 annually and 6.5 percent for those making more. Itemized deductions would remain only for mortgage interest, property tax, and charitable contributions.
The resulting reduction in revenue from personal income tax 鈥� from 44 percent of revenue to 31 percent 鈥� would be made up by expanding the business tax to include new sectors such as lawyers, engineers, business consultants. The business tax is one of the more controversial proposals, in part because it is untested.
Dramatic shift
鈥淭hese proposals represent a stunning sea change in state tax policy that would increase California鈥檚 budget deficits and shift the cost of financing public services onto low-and middle-income Californians,鈥� said Jean Ross, executive director of the California Budget Project in a statement.
鈥淲ith budget gaps expected for the foreseeable future, we should be working to solve our state鈥檚 problems, not creating larger ones,鈥� she added.
More time is needed to study changes to the tax system, say some lawmakers. 鈥淸W]e want this reform to get it right,鈥� says Jim Evans, communications director for state Senate President Pro Tem Darrell Steinberg (D). 鈥淲hat we need to do with an issue of this magnitude is take our time and study carefully the changes we intend to make.鈥�
One problem with the commission , say some experts, may be that the commission suffers from the same problem as the state legislature: gridlock.
鈥淪ome members clearly want to raise more revenue, while others are trying to deal with the volatility issue,鈥� says Jon Coupal, president of the Howard Jarvis Taxpayers Association, which has 200,000 members. 鈥淭rying to get consensus in this state is going to be very, very difficult.鈥�
Mr. Coupal says he thinks the state鈥檚 existing tax structure could smooth out the bust years with money from the boom years, if there was just spending discipline.
Getting reforms through
The governor may call for a special session to deal with the proposed tax reforms, but analysts say they won鈥檛 be easy to pass.
Californians now disapprove of Governor Schwarzenegger鈥檚 performance by a two-to-one margin and they disapprove of the legislature by a three-to-one margin, says Jack Pitney, political scientist at Claremont McKenna College.
鈥淪o passage of tax reform depends on an unpopular governor persuading an even more unpopular legislature to take a politically risk move,鈥� says Mr. Pitney. 鈥淪uch things seldom happen on this planet.鈥�
Other reforms in prisons, water policy, and education are also crowding the legislative agenda.
鈥淭hey [state lawmakers] have got a lot on their plate and these are very complex issues in very tough times,鈥� says Mark Baldassare, president of the Public Policy Institute of California in Sacramento.