After several months of hearings, California's Commission on the 21st Century Economy, charged with modernizing the state's rickety tax system, is approaching the end of its term. In a few weeks, the commission's chairman, Gerald Parsky, will deliver a package of recommendations to be taken up by the Legislature during a special session on tax reform.

Fashioning a "21st century tax system that fits with the state's 21st century economy" is no small undertaking, especially since the charge is to "stabilize state revenues and reduce volatility" while ensuring a "fair and equitable tax system." The task is complicated by the fact that the chief culprit in revenue volatility is the state's progressive tax system, especially capital gains taxes paid by the state's richest taxpayers.

It appears that the commission faces an inescapable trade-off. Either learn to live with a boom-bust revenue cycle or reduce taxes on the wealthy to stabilize revenue. Neither option is likely to garner bipartisan support, which is why the search for solutions that transcend the trade-off is more important than ever. Here's one solution that should be on the table: Let taxpayers who incur capital gains taxes remit those taxes over a period of years rather than all at once.

This is how it would work. Assume that Mickey purchased Disney stock several years ago for $10,000, and he later sold that stock for $30,000, resulting in $20,000 of long-term capital gain. Normally Mickey would owe a capital gains tax in the year of the sale. To keep the math simple, let's assume that the state tax rate is 10 percent, so that the capital gains tax is $2,000.

Under current law, Mickey must remit this $2,000 to the Franchise Tax Board when he files his income tax return for the year in which he sells the stock. The same is true, of course, for everyone else who sells stock at a gain that year.

Given market dynamics, state tax revenue from capital gains typically comes in surges during bull market years and then plummets with the onset of the next bear market. This is the boom-bust revenue cycle the Parsky commission is charged with addressing. So far, the commission has focused principally on proposals that would reduce the state's reliance on volatile revenue sources, such as capital gains taxes.

But rather than reducing taxes on wealthy investors, why not just unhitch the timing of their tax payments from the boom-bust cycle of the market? This could be done quite simply by giving taxpayers who incur capital gains taxes the option of claiming a "capital gains tax credit" that would be recaptured over the ensuing three years.

As an example, let's assume that the amount of the credit is 75 percent of the capital gains tax otherwise owed in the year of the sale. In our example above, Mickey would be entitled to a credit of $1,500 (i.e., $2,000 multiplied by 75 percent) in the year that he sells his Disney stock. His tax liability for the year of the sale would be $500 ($2,000 minus $1,500) rather than the full $2,000. This credit would then be recaptured (i.e., paid back) in three equal installments over the next three years, with the result that Mickey would add $500 to his tax bill for each of the next three years. The bottom line is that a $2,000 tax bill would be paid over a period of four years.

The net effect of this system - i.e., combining an upfront tax credit with a recapture rule - is that capital gains tax revenue would drip into the state in smaller increments rather than surging during the boom years and later drying up completely. It also bears noting that this system offers something of a preference for capital gains, since it operates like an interest- free loan from the state to taxpayers who would otherwise have to pay the capital gains tax upfront all at once.

Tobe sure, there would be some administrative complications in this new system. Most obviously, special rules would be needed to ensure that taxpayers moving out of the state would make good on their continuing obligation to satisfy their tax liability. But this sort of trade-off seems more politically palatable than one that sacrifices progressivity for revenue stability. Moreover, the Franchise Tax Board has experience with systems similar to this in the context of allowing taxpayers the option of converting regular IRAs to Roth IRAs and paying the resulting tax over a four year period.

In an ideal world, state lawmakers would approach the issue of revenue volatility the same way a family or business would, i.e., by setting aside prudent reserves during the boom years to cover shortfalls when the economy slows. But the state's failure to adopt prudent budget practices doesn't mean we're stuck with a trade-off between tax progressivity and revenue stability. Using design features well established in other areas of the tax law, we can bring greater stability to California's revenue structure without sacrificing progressivity.

Kirk J. Stark is a professor of tax law and policy at the UCLA School of Law.