Dan Walters: It's time for a state tax overhaul

Arnold Schwarzenegger has been spouting a lot of nonsense lately about the state's chronic budget travails. But he said something about taxes the other day, during one of his many "town hall" meetings, that makes sense and is worthy of serious consideration – especially on April 15, the day that income tax returns are due.

Schwarzenegger, who came into office four-plus years ago promising to end "crazy deficit spending" but found that it was easier said than done, has concluded that the state needs to overhaul its hopelessly convoluted tax system, not necessarily to generate more revenue, but to bring some stability to the income stream.

Although it would have no impact on this year's budget imbroglio, Schwarzenegger said, "If it is property tax, if it is personal income tax, if it is sales tax, if it is taxes that we are not taxing, if it is services, Internet – one has to look at all of those things together and say let's bring it up to date, the system. And not meaning that you should try to get more money from people, but just maybe make it revenue-neutral, but just a better way of taxing."

Translating from Arnie-speak, he's adopting a concept that has been kicking around political, journalistic and academic circles for years – that California's state and local tax system, especially property, sales and personal income taxes, bears no relationship to economic or social reality. It's not only riddled with special interest loopholes that cost tens of billions of dollars a year, but contributes mightily to the state's chronic budgetary woes through its volatility.

Demographic change and various decrees by voters and politicians have transformed what was once a system that was roughly equally apportioned among property, sales and income taxes into one that's utterly dominated by income taxes. The vast majority of income taxes are paid by a relative handful of high- income Californians whose incomes are increasingly tied to stock market trades and other forms of capital gains, creating boom-and-bust budgetary cycles because the spending side of the budgetary ledger has much less flexibility.

Closing outrageously unjustified tax loopholes is one reform that should be pursued, but so would altering taxes on a larger scale to bring rationality and transparency to a system that's irrational and opaque. Ever since voters enacted Proposition 13, the iconic property tax limit measure, 30 years ago, those on the left have railed against its provisions and demanded that it be changed – removing its protections from commercial property, for example. But taxing real estate is a medieval concept based on the theory that such property equaled wealth. If we're going to tax wealth, why should we tax land and buildings and exempt other forms of wealth, such as stock holdings and gold coins? It makes no sense.

What sense does it make to impose sales taxes on hot takeout food but not cold food? We tax the sales of tangible property, such as clothes or cars, and exempt sales of intangible services, which also makes little sense. Why should we tax a homeowner who buys a lawnmower but not tax one who spends money, instead, on a lawn maintenance service?

The income tax system, as noted earlier, is terribly skewed toward high-income taxpayers. Some want to increase that burden, but that would exacerbate the volatility of the budget. Real reform would increase income taxes on middle-income Californians, who tend to get their money from wages, and thus bring more stability to a dangerously unstable system – or reduce the overall income tax burden and put more emphasis on sales and other consumption taxes.

Controversial? You bet, but California is way overdue for an overhaul of its impossibly distorted tax system.

About the writer:

• Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.