The Conversation: Thinking long about state's future
11/20/2011 12:00 AM
11/18/2011 10:21 PM
What should be the top priority in fixing California’s system of governance? To comment, please use our comments section at the end of the story or go our facebook page at www.facebook.com/sacramentobee.
A dispiriting gridlock continues to grip Washington and Sacramento, undermining the public's faith that democracy can solve our problems. As we write, the so-called supercommittee of Congress, convened to figure a way out of the nation's fiscal crisis, remains hopelessly paralyzed along familiar partisan lines. Everyone knows the sad story in Sacramento.
However, an independent group of dedicated California citizens – from retired California Chief Justice Ron George to former U.S. Secretary of State George Shultz to Antonia Hernandez, former president of the Mexican-American Legal Defense and Education Fund, to Google chairman Eric Schmidt and former Gov. Gray Davis – has succeeded in breaking out of the untenable status quo. Along with other members of the Think Long Committee for California, they have put politics aside, bridged philosophical divides and agreed to a bipartisan plan to reboot California's dysfunctional democracy.
Unlike many other piecemeal reform efforts over recent years, the Think Long Committee plan seeks to modernize California's system of governance by installing a new civic software more suited to the realities of the decades ahead.
Our integrated set of recommendations range from common sense practices such as a "rainy day" reserve fund to multiyear budgeting; two-year legislative sessions with one year dedicated to oversight; transparency on initiative funding; K-12 school reform; aligning the skills and educational outcomes of California's master plan institutions with the needs of our cutting-edge industry; and speeding up regulatory approval to foster job creation.
But the core of our proposal has three parts:
Local empowerment: Returning decision-making power and resources where appropriate from Sacramento to localities and regions where the real economy functions and government is closer to the people – and thus more responsive, flexible and accountable.
By helping to cover the costs of devolving public safety from the state to the counties, our plan will also help reduce the high costs associated with prisons – on which we absurdly spend more than on higher education. The Think Long plan would dedicate new revenues annually to counties for public safety and as block grants to cities for infrastructure and other locally determined uses.
An independent citizens watchdog: Creating an independent watchdog for the long-term public interest as a counterbalance to the short-term mentality and special interest political culture that dominate Sacramento.
This impartial and nonpartisan Citizens Council for Government Accountability, which would be empowered to place initiatives directly on the ballot for public approval, will ensure that the public's priorities – excellence in education, world-class infrastructure, a sustained quality of life, opportunities for good jobs and the strengthening of a vibrant middle class through boosting the state's competitiveness in today's global economy – remain at the top of the public policy agenda over the long term. As a non-political quality control body, the Citizens Council will ensure that California taxpayers get their "return on investment."
A modern broad-based tax system: Updating California's tax system to mirror the real composition of our modern service and information economy and provide a stable, broad-based tax system that is sustainable over the long term.
The ideologically rigid will have a hard time putting the Think Long proposal in any box. It is essentially a pragmatic response to the October 2011 report on California's budget woes by the nonpartisan Legislative Analyst's Office. That report points out that the boom and bust "volatility" that continuously wreaks havoc with state finances has increased in recent years due to the narrow reliance on personal income taxes. In 2008-09, personal income only grew at an anemic 3 percent, and, as a result, general fund revenues plummeted by 19 percent.
In 1970, the LAO report points out, personal income taxes accounted for 27 percent of revenue while sales and use taxes accounted for 40 percent. By 2011, reliance on the personal income tax was 57 percent and sales and use taxes only 22 percent. In those same years, the California economy has been transformed from a mainly manufacturing and agricultural economy to one increasingly dominated by services and information. Nearly one-half of California's $2 trillion economy is composed of services – none of it taxed.
If you eat a doughnut in a coffee shop, the sales tax on goods applies. If you use a legal or financial service, it is not taxed. In other words, the doughnut subsidizes lawyers, accountants and other services.
The Think Long Committee's plan proposes to rebalance and update California's tax code.
While maintaining California's progressive income tax structure, we would reduce rates across the board for every bracket and reduce the sales tax on goods from 5 percent to 4.5 percent while broadening the sales tax at a 5 percent rate to apply to services, which are more discretionary. Education and medical care would be exempted.
Those with low income would receive a sales tax rebate. Those earning $45,000 or less would pay no income taxes. The working middle class with incomes up to $95,000 would pay only 2 percent. The homeowners and renters credit would be doubled. Those making more than $95,000 would pay 7.5 percent. Because of the 1 percent surcharge on mental health on millionaires, they would pay a top rate of 8.5 percent.
A family with income of $90,000 that would have paid $1,449 in personal income taxes under the current system would now pay $832.
This combination of cutting the personal income tax and broadening the tax base will help stabilize the boom and bust cycle of the budget in a fair way while generating $10 billion in new revenues annually to start paying down the state's "wall of debt," for K-12 schools, higher education and for local public safety and other locally determined needs.
Our tax incidence analysis shows that any overall increased tax burden would be 0.6 percent or less for any income category. The top 5 percent of earners would still pay 62 percent of direct and indirect taxes.
Small and medium-size businesses are the backbone of the California economy. Unlike large corporations, profits and losses are "passed through" and taxed at the personal income tax rate. Therefore, a personal income tax cut will boost job-creating business prospects. For example, a business with a taxable income of $500,000 that would have paid $36,510 in income taxes will pay $30,262 under the proposed system.
Further, the mandatory single sales factor would be imposed on corporations while, at the same time, California's corporate tax, one of the highest in the nation, would be reduced to make it competitive with other states and foster an improved business climate.
A bipartisan effort
Bipartisanship is very hard work. The committee did not come to its conclusions lightly.
In our deliberations, we have been tirelessly served by the unprecedented collaboration of some of the best minds in California with decades of experience in state government. These advisers include former Republican and Democratic directors of finance Mike Genest and Tim Gage – often at partisan loggerheads in past years – as well as Brad Williams, who was chief forecaster for the Legislative Analyst's Office for 15 years.
The committee also heard from dozens of other expert witnesses from labor, business and social services. Over the course of our yearlong deliberations, we met with Gov. Arnold Schwarzenegger and Gov. Jerry Brown to hear them out.
We weighed the other alternative plans out there – further raising the income tax on the rich or further slashing the budget and insisting on no new tax revenues. Many of us were sympathetic with one or the other of these approaches.
But, as necessary as these alternatives may be as short-term fixes, and as personally sympathetic as some of us were to these ideas, they simply do not face up to the real issues and solve the long-term problems of the state.
The Think Long Committee was not appointed by any official or sponsored by any special interest lobby. We came together only as an independent group of concerned citizens who believe in California's promise and who want to get the state back on the right track.
We will seek to qualify our plan in two initiatives and place them before the public on the November 2012 ballot. We have made our best effort in good faith and hope the public agrees. It will be up to the voters of California to decide.
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