Chris Van Es NewsArt

Editorial: Can we burst the balloon of tax havens?

Published: Sunday, Feb. 24, 2013 - 12:00 am | Page 6E

California's tax system needs serious work.

Gov. Jerry Brown and legislators should not ignore that reality simply because California's budget is in the black. Indeed, this would be the ideal time to focus on state tax inequities.

In last Sunday's Forum, journalist David Cay Johnston, who has built a career by writing about flaws and unfairness in tax law, wrote that corporations and wealthy individuals in California avoided $7.15 billion in taxes in 2011-12, money that the rest of us end up paying.

Federal and state tax law allow such avoidance. That won't change any time soon. However, the point remains: Nothing is free. If one taxpayer gets a break, another taxpayer pays.

California tax rates are among the nation's highest. Wealthy couples pay 13.3 percent on earnings of $1 million or more, and California's corporate tax rate is higher than all but eight other states, according to the California Taxpayers Association.

The Bee's editorial board does not often agree with the Howard Jarvis Taxpayers Association or the libertarian Reason Foundation on tax policy. But in a report last month, the groups cited "egregious California tax breaks" written to benefit Hollywood, technology, agriculture, timber, commercial airlines and others.

While each break has its justification, Jarvis and Reason make a point worthy of serious discussion: If all such tax breaks were eliminated, the overall corporate tax rate could fall by more than 20 percent, and that would benefit all business.

Complicating matters, states compete for glittery industry. New York allocates $420 million in tax breaks to encourage movie and television production there. That adds to pressure on California lawmakers to raise California's $100 million-a-year film tax credit. The movie industry is a major source of high-paying jobs. But many tax experts question whether that $100 million is well spent.

Likewise, the high-tech and biotech industries are vital to California's future. The Legislature certainly believes that. Tech companies will collect $1.3 billion in the coming year from California's research and development tax credit.

Sen. Mark Leno, a San Francisco Democrat, compares tax breaks to a "Roach Motel." A simple majority of legislators can slip tax breaks into the code. But they never leave, because state law requires a two-thirds majority vote to kill tax breaks.

Leno might find unlikely common ground with Jarvis and Reason, which recommend in their report the creation of a sunset commission to evaluate tax breaks every five or 10 years. That makes sense. Reason and Jarvis also called for a tax commission modeled after the federal commission established to determine which military bases to shutter.

The commission would study tax breaks and recommend modification or elimination. A simple majority of the Legislature would cast an up or down vote on the entire recommendation. That's an excellent idea.

California's tax system needs an overhaul. Tobacco and alcohol taxes are modest compared to other states, which benefits users of their products but also cigarette makers and the alcohol industry, including California's valued wine industry.

Property tax rates are low, which is fine for homeowners, but gives inordinate benefits to certain corporations. Unlike other major oil states, California doesn't impose an oil severance tax. Without a doubt, high-earning individuals and sophisticated corporations avoid high taxes by sheltering earnings, using lobbyists to protect their breaks, and, yes, relocating to low-tax havens.

Some politicians glibly say no crisis should be wasted. Perhaps, but we Californians have seen many bad decisions come from budget crises. The state is in an unfamiliar place in which there is no budget crisis. It won't last. Lawmakers should not let the opportunity presented by the lack of crisis pass.

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