Dan Walters

Exempt diapers and tampons from taxes? Nice idea but poor policy

A much-publicized bill that would exempt diapers, tampons and other feminine health products from sales taxes – and pay for it with a liquor tax hike – stalled in committee this week, and its sponsors are understandably upset.

However a nice idea isn’t good tax policy.

Gov. Jerry Brown had vetoed an earlier version of the measure, citing revenue loss, and the liquor tax was inserted in the new bill to placate the governor, but ran into fatal opposition from the liquor industry.

“We knew going into this that poor babies don’t have a lobbyist,” Assemblywomen Lorena Gonzalez Fletcher and Cristina Garcia said after the Assembly Revenue and Taxation Committee blocked their measure, Assembly Bill 479.

“Unfortunately, hard liquor companies have plenty of lobbyists. The governor asked us to find a revenue source to make repealing the diaper tax revenue neutral, and we did – an almost negligible 1.5 cent-per-drink increase in hard liquor excises. This was a very clear choice, and it’s disappointing that the majority of the committee chose booze over babies.”

Without questioning their sincerity, a new loophole is bad tax policy.

The state’s tax system is a mess. California’s budget is hugely dependent on income taxes from a relative handful of wealthy residents, which makes revenues unpredictably volatile. Meanwhile, limiting the state/local sales tax to tangible goods such as diapers, when the consumer economy has made a giant shift to services, makes it obsolescent and declining, in relative terms, as a revenue source.

A bedrock principle of rational tax policy is to have broad bases and low rates. Our system is just the opposite – very narrow bases and very high rates.

The tax system’s shortcomings are well-documented and widely acknowledged, but the state’s politicians have historically been unwilling to do something about them.

Brown’s predecessor, Arnold Schwarzenegger, and legislative leaders appointed a blue ribbon commission to recommend reforms, but after months of study and debate it submitted a report only to see it quickly dropped in the wastebasket because implementation would have been politically difficult.

Since returning to the governorship, Brown has been candid about both acknowledging the need for tax reform and his reluctance to attempt the heavy political lift tax reform requires.

Measures such as AB 479, singling out particular commodities for tax exemptions or new taxes, just make the inanity of the system worse.

If diapers and tampons were to join food and prescription drugs as necessities that should be tax-free, it would touch off even more efforts by other advocates to exempt supposed necessities and distort an already irrational tax system even more.

Serious sales tax reform would close loopholes and reduce rates, which are among the nation’s highest, on all tangible commodities, while extending it to services to maintain revenue and align it with economic reality. And comprehensive reform probably would increase California’s taxes on liquor, which are among the nation’s lowest.