California Forum

California desperately needs a tax system for the new economy

Gov. Jerry Brown explains a chart showing unpredictable capital gains tax revenues from the wealthy as he discusses his revised 2016-17 state budget.
Gov. Jerry Brown explains a chart showing unpredictable capital gains tax revenues from the wealthy as he discusses his revised 2016-17 state budget. AP file

When the economy is booming, most politicians like to pretend that the good times will continue forever – until they don’t. The inevitable recession has always led to equally inevitable spending cuts and tax increases.

Denial clearly doesn’t work. The more thoughtful option is to establish budget reserves to cushion the nasty impact of a sharp drop in budget revenue. Gov. Jerry Brown deserves credit for maintaining his commitment to a more fiscally cautious approach, even in the face of consistent pressure from his own party.

But even Brown’s stack-the-sandbags approach has its limits. A rainy-day fund can only keep you dry for so long. When the flood waters keep rising, at a certain point, you simply grab as much of the furniture as you can and head to the roof.

Opinion

California relies heavily on a high income tax rate for the wealthiest earners; one percent of taxpayers pay almost half of all of state income taxes. There is certainly a social justice argument to be made in favor of a steeply progressive tax rate, but the practical impact is to exaggerate budgetary peaks and valleys.

Dan Schnur.JPG
Dan Schnur

Because high-income taxpayers tend to make much more of their money from investments rather than salaries, the natural volatility of the stock market results in much more uneven tax revenues for the state. That, in turn, can lead to shifts from lavish budget surpluses to panic-inducing deficits at alarming speeds. And that wreaks havoc on public education, law enforcement and virtually every other part of state and local government.

Steve Westly.JPG
Steve Westly

Fixing this broken tax system would protect us against this type of roller-coaster budgeting. The next governor and Legislature should consider these four important steps:

1. Diversify our tax base: We should reduce our dependence on the state income tax and spread out taxes more evenly across business, real estate and sales. The state should also broaden the base of people who pay income taxes.

2. Adapt to the 21st century economy: California is shifting from manufacturing to an information and service economy. The idea of lowering the overall sales tax rate but expanding it to cover services is periodically raised – and dismissed – in Sacramento. It’s time for the Legislature to follow the lead of other forward looking states and take this necessary step more seriously.

3. Reduce the state sales tax – but balance it by taxing online sales at a comparable rate. This move is similarly overdue. The current ban on online sales taxes was instituted when e-commerce was a curiosity rather than the driving force in a retail economy. There’s no reason we should be disadvantaging brick and mortar retailers.

4. Cut tax loopholes: One unnecessarily extends Proposition 13 protections to inherited property. No one wants to see seniors evicted from their homes because of rising property taxes. But giving the same break to heirs who don’t even live in their parents’ or grandparents’ homes but rent them out for great profit is inappropriate. Let’s close that loophole for non-resident heirs and require them to pay their fair share.

There is a necessary and ongoing debate about the overall level of taxes in California. But we should be able to agree that it’s overdue to update the state’s tax code to reflect the realities of a changing economy.

We don’t tax buggy whips and 8-track tape players. Let’s fix an outdated system of taxation for the 21st century so when the next recession comes, we’ll be ready.

Dan Schnur, the former chairman of the California Fair Political Practices Commission, is director of the The Sacramento Bee/McClatchy California Influencer series and can be contacted at dan.schnur@mindspring.com. Steve Westly, the former California state controller, is the managing partner of The Westly Group in Silicon Valley and can be contacted at steve@stevewestly.com.

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