Everyone in the Capitol knows that a major factor in the state's perennial budget crises is that revenues go up and down like a yo-yo, but its spending commitments have become increasingly rigid.

The volatility of the revenue stream stems from an incremental evolution in the state's taxation system, especially taxes on retail sales and personal income.

Over time, the sales tax's share of revenues has declined sharply, largely because of societal changes. Taxable retail sales were once the equivalent of 60 percent of Californians' personal incomes. They've dropped steadily to well below 40 percent as retail spending patterns have shifted from taxable goods to untaxed services and as Internet retail sales, functionally tax-free, have expanded.

At the same time, the share of revenues from the personal income tax has risen sharply, due to both the sales tax's declining status and the income tax's progressive brackets.

Income taxes now account for about half of the state's revenues, and half of them are paid by about 150,000 high-end taxpayers.

This makes the budget dependent on how a relative handful of wealthy people are doing in capital investments, which are very sensitive to even tiny changes in the economy.

A couple of years ago, Gov. Arnold Schwarzenegger and legislative leaders appointed a blue-ribbon commission, headed by businessman Gerald Parsky, to study ways to reduce volatility.

The Parsky commission spent months on hearings and often prickly negotiations. It finally hammered out a report recommending a massive overhaul of taxation that would lessen the state's dependence on personal income taxes and expand the sales tax into a European-style value-added tax with a much broader reach.

It went nowhere. Economic sectors that would shoulder the expanded sales tax reacted negatively. Liberals disliked the de-emphasis on income taxes, saying it would unfairly benefit the rich. The Legislature simply ignored it.

The Legislature's Democrats have proposed their own tax overhaul to close the budget deficit. Their plan goes in the opposite direction, cutting sales taxes and increasing income taxes.

Darrell Steinberg, the Senate's top Democrat, calls it "intelligent tax reform," arguing that the deductibility of income taxes on federal returns would more than offset the net extra tax burden. (That contention doesn't add up, the Legislature's own budget analyst said Wednesday.)

Schwarzenegger, who still backs the Parsky proposal, categorically rejects the Democrats' plan, saying – accurately – that if adopted it would increase revenue volatility by making the state even more dependent on income taxes. He called it a "sad story."

It is a sad story. Reducing revenue volatility is vital to long-term budget reform, along with changes on the spending side of the ledger.

© Copyright The Sacramento Bee. All rights reserved.

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

• Read more articles by Dan Walters