Overall, Democrats deserve credit for being forthright about intending to close much of the state's budget deficit with new taxes, in contrast with Republicans who say they want deep reductions in spending but refuse to say what should be cut.
That said, the details of how Democrats would generate more than $10 billion in tax revenues, roughly two-thirds of the projected 2008-09 deficit, leave much to be desired – even if one accepts the underlying premise that the state's fiscal problem is essentially a lack of revenues.
The plan's core is tapping the most affluent Californians through higher income taxes, an approach with obvious political appeal since the number of those who would pay higher income taxes is tiny, but one that could backfire.
It would, however, make the state even more dependent on how well those wealthy Californians are doing in the stock market and other investments, increasing the revenue system's boom-and-bust volatility, and thus the likelihood of future fiscal crises.
That's assuming, of course, that giving California the highest marginal income tax rates in the country would not induce a mogul migration to states with low or no income taxes, such as Nevada, to avoid new levies. Democrats contend that mass tax escapism is unlikely because the wealthy can deduct the new state taxes on their federal tax returns, but ignore another fact of tax life: the alternative minimum tax that can erase such deductions.
Another questionable aspect of the Democrats' tax plan is a new version of a gimmick that the state used six years ago – suspending for three years the ability of businesses to carry forward operating losses on corporate tax returns to offset future profits.
To make the move more acceptable to business executives, the plan would double the period in which losses could be deducted after the three-year hiatus. While it would be scored as more than a billion dollars in revenue, however, the scheme is, in reality, a short-term, high-interest loan from business to the state, just as the 2002 version turned out to be.
A third questionable feature of the Democrats' tax plan is also a rerun of a gimmick – an "amnesty" to allow taxpayers to settle up past-due accounts without penalties that supposedly would raise more than a billion dollars.
This is another loan masquerading as revenue. Past experience indicates that the vast majority of the money from such an amnesty would be "protective" payments from businesses with outstanding tax disputes. They pay to escape future penalties should they lose their tax cases, but as much as 80 percent of the money must later be returned to taxpayers when the cases are resolved.
Furthermore, tax experts say, frequent amnesties change big taxpayers' behavior, making them less willing to pay taxes up-front and more willing to wait for the next amnesty period.
Relying on new taxes to solve the deficit is an intellectually honest position. Doing it the way Democrats propose, seemingly all gain and no pain, isn't.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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