Among Californians who observe our tax system closely, a broad consensus has emerged in recent years: The system is broken. Unfortunately, that's where the agreement ends.
Some people, especially Democrats in the Legislature, believe that we tax business and the wealthy too little. They want to increase corporate tax rates and personal income taxes on the affluent.
Others, especially Republicans in the Legislature, believe we tax those same sources too much. By lowering tax rates on business and higher- income people, they argue, California could trigger more investment, which over the long term would mean a stronger economy, more jobs and, perhaps, more tax revenue for government programs.
Still others complain that our system is simply too volatile. Tax revenues spike in good economic times and then flatten when the economy slows, leading to persistent budget deficits. These folks would like to see the tax system broadened and diversified to smooth out those revenue flows.
Now comes a bipartisan commission that has been trying to hammer those competing views into a single plan for overhauling the way California taxes its residents and businesses. The Commission on the 21st Century Economy, whose members were appointed by the governor and legislative leaders, has arrived at a tentative plan and will likely submit it to the Legislature in the days ahead.
The proposal would reduce the personal income tax and eliminate the corporate income tax and most of the state sales tax. It would then replace most of that lost revenue with a new tax on business net receipts – the difference between what a company pays for its raw materials, including services, and what its products and services sell for.
The package appears to shift some of the tax burden from the wealthy to the middle class. That concept seems certain to be a non-starter in the Legislature, where the majority Democrats have been trying to do just the opposite. Democrats might be more open to replacing the corporate income tax and the sales tax with a business receipts tax, since the new levy might capture more revenue, depending on where the final rate was set. But it's unclear how that change would benefit either the economy or the state's fiscal condition.
The commission's tentative proposal, not yet endorsed by a majority of its members, also includes a new rainy-day fund for the state. This proposal would limit spending growth to no more than the average of the previous ten years, and deposit any revenues greater than that amount into a special reserve. The reserve could be tapped only to respond to natural disasters and, in bad economic times, to maintain spending at the previous year's level plus growth to match changes in population and inflation.
We applaud the commission's members for spending the time to delve deeply into California's complicated tax structure and propose some creative, far-reaching changes. But their proposal won't be the end of this debate.
Instead, their ideas should spur the Legislature to undertake its own serious, bipartisan review of our tax code and budgeting rules with an eye toward paying for the government this state's people desire while still encouraging the kind of economic growth we need for the long haul.
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