Democratic lawmakers will risk bruising their hands by exuberantly patting their backs this week for a well-done budget.
There’s much to commend in the $172 billion-plus spending plan, not the least of which is that legislators will meet their deadline for having a budget in place by the July 1 start of the 2016-17 fiscal year.
Gov. Jerry Brown and Democrats who control the budget will spend $95 million to eliminate an unfair welfare restriction, $100 million more for child care, $2 billion to house poor and mentally ill people, and squirrel away another $2 billion for a rainy day.
But nagging questions persist: When will the next downturn come, and will the state be prepared? The rainy-day fund will help, but there must be more. Controller Betty Yee issued an 80-plus page report urging an overhaul of the state tax system. It is a task past due.
“At its heart,” the report says, “a tax system is a social compact detailing how to pay for the common good. Definitions of what constitutes the common good may vary. However, people across the political spectrum agree that California’s current tax structure does not reflect the times.”
Voters approved the last significant change in 1978, in the form of the property tax-slashing Proposition 13. Huge though that was, Proposition 13 didn’t fundamentally alter California’s reliance on sales, income and property taxes. The structure has not changed much since the middle 1930s when California started taxing income and sales.
In the years since, legislators and voters have increased tax rates – often by too much – and carved loopholes, only rarely removing them. And the system has come to reflect an economy that existed decades ago.
Yee’s report, which doesn’t offer many recommendations, could be destined to dwell on the state controller’s website, gathering the electronic version of dust, like so many other reports that urged tax reform. It shouldn’t.
Like Yee, Sen. Bob Hertzberg, a Los Angeles Democrat, who is working on a parallel track, notes that the economy is less based on manufacturing, and more on services, few of which are taxed.
Yee lists the amounts the state could generate by taxing the scores of services at the current sales tax rate, which averages 8.42 percent. Barbering and cosmetology: $200 million. Auto repair: $480 million. Software publishing: $3.9 billion. Lawyers’ services: $3.5 billion. Commercial banking: $4.3 billion. Physicians’ services: $5.2 billion.
Services taxes would exceed $111 billion, at the current rate. But California’s sales tax rate is one of the nation’s highest, and should be lowered. To make up for any increased taxes imposed on low-wage workers, the state could expand its new earned-income tax credit program – something it ought to do any way.
Florida and Texas, states that aggressively court California employers, have no income tax. California’s income tax rate is 13.3 percent for the highest earners, the highest among states.
The state relies heavily on income taxes paid by high earners, which leads to peaks in good times and crashes in economic downturns. Lowering the high-end income tax rate and levying taxes on services used by wealthy people could help lessen volatility.
None of this will be easy. But it’s instructive that the last major restructuring of California’s tax system came about when two guys named Ray Riley and Fred Stewart came up with an idea to improve state and local financing. Legislators placed it on the 1933 special election ballot.
Stewart, like Yee, sits on the Board of Equalization, which oversees taxes. And Riley was the controller who tackled what might have seemed like a quixotic challenge. It was and is worth the effort. Then, as now, the issue is fundamental to our well-being.