Someday, some way and somehow, California will overhaul the way it finances services because the current system is unsustainable.
We cannot continue to depend on a few thousand high-income Californians as the core of the state revenue structure. Their taxable incomes are increasingly erratic, and sooner or later, many will flee California's high marginal tax rates to states such as Florida, Nevada or Texas that have no income taxes.
Did Tiger Woods, the first billion-dollar athlete, relocate from California to Florida because of better weather or nicer golf courses? Somehow, one doubts those were his motives. Getting his mail in Florida saves Woods millions of dollars a year.
California gets a quarter of its general fund revenues from fewer than 200,000 wealthy taxpayers whose incomes, tied to capital markets, vary greatly from year to year. That's why California's revenues go up and down like a yo-yo and, in turn, why the state periodically wallows in money, overspends and suffers from huge deficits as tax revenue declines.
It's called "volatility," and it's a fairly recent phenomenon. Once, sales taxes were the state's fiscal backbone. But changes in spending patterns – shifting from taxable goods to untaxed services – and the progressive nature of the income tax dramatically shifted the burden to that tax, which now accounts for well over half of state revenues.
A 14-member commission appointed by Gov. Arnold Schwarzenegger and legislative leaders to recommend ways to reduce tax volatility delivered its complex proposal, signed by nine members, last month. On Thursday, the Assembly Revenue and Taxation Committee staged an initial public hearing.
The proposal would eliminate the corporate income tax and the state's portion of the sales tax, flatten the personal income tax to two brackets and substitute a new "business net receipts tax" – a change of about $50 billion a year in all.
The wealthy would get a big income tax cut, and more of the remaining burden would be shifted to middle- and lower-income taxpayers. But commission Chairman Gerald Parsky insisted to the committee that because the new tax would be partially paid by out-of-staters and, unlike the sales tax, be deductible on federal tax returns, Californians' overall taxes would decline.
The commission's proposal is probably a non-starter. Democratic legislators shun a tax shift from the wealthy. So do liberal commissioners who refused to sign the final report. One, Fred Keeley, told legislators that as Parsky pushed the business tax, alternatives such as a carbon tax were ignored and "the commission didn't know where it was going."
However, liberals also tend to oppose a spending limit that would be another way of avoiding boom-and-bust budgeting. And if California doesn't find a way off the fiscal roller coaster, the mostly poor recipients of services that liberals espouse will suffer the consequences.
Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters.
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