COVID-19 pandemic provides a great opportunity for California to reform tax system

California leads the world in innovation and unicorn companies but, unfortunately, we also lead the country in roller-coaster swings in our state budget. A soaring stock market and recent IPOs like Airbnb’s $100 billion offering last quarter have turned an expected $54 billion gap in the state’s budget into a $15 billion tax surplus.

But we can’t forget that it took just six months to erase California’s last surplus. In the face of the massive deficit we expected when COVID-19 hit last year, the governor proposed cutting services and raising taxes on businesses to make up some of the gap. The failure of Proposition 15 made it clear that most people don’t think higher taxes are the solution. Silicon Valley IPOs and special purpose acquisition companies saved the state’s coffers this time, but the market will eventually see a decline. When it does, it’s going to wreak havoc on our schools, our public safety and our taxes.

We have to make changes now and get off the roller-coaster while we still can.

How did we get here? The reason elected officials passed laws that put roughly 50% of the state’s income tax burden on 1% of the population is that it’s popular to tax the wealthy. Most Californians support a progressive tax system, but when you become so dependent on a small subset of the population, California’s state income takes a nosedive if their returns go down.

How do we fix that? The solution is to broaden the tax base so we’re not so dependent on vicissitudes in the stock market. Here are three solutions to help get us there.

▪ Sin Taxes: Increasing “sin taxes” is a good start. We already tax alcohol and add $2.87 to every pack of cigarettes in California. This provides the double benefit of increasing revenues and providing a disincentive for smoking and excessive drinking. We would also be smart to follow New York City’s lead and begin taxing sugary drinks that target kids and cause skyrocketing rates of obesity and diabetes. Reducing our deficit while enabling a healthier public is a good start.

▪ Begin Taxing Services: Second, we need to follow the lead of a growing number of US states that tax service industries. In an information age, taxing goods alone is outdated and inadequate. In most American states, the service sector already drives more revenue than manufacturing. Some states, like Hawaii and New Mexico, are already taxing some services by default. There must be clear exemptions for industries like healthcare. Business services like telephone answering services and credit reporting are great places to start. We’re lucky to have a 21st Century economy. Now we need a 21st Century taxation system that reflects the new sources of revenue.

▪ Taxing polluters: Third, global warming is not a hoax and it’s not going away. We’ve all seen the effects of forest fires on our state. One way to address this is to join the 34 other states that charge an oil extraction fee. We should also encourage consumers to purchase fuel efficient vehicles by putting a tax on any gas-guzzling personal vehicles. No car sold in 2021 should get less than 20 miles per gallon, and even the Ford F-150 gets 25 mpg now. These are just two simple ways to keep our budget balanced and clean up our air.

Mikhail Gorbachev could have gone down as one of history’s great villains for his mishandling of the Chernobyl nuclear disaster. But he chose another path. He acknowledged the shortcomings of the Soviet system and moved the country toward a period of openness and Glasnost. Our legislators have a similar opportunity.

The “Coronavirus Recession” could provide the impetus to broaden our tax base and reduce the roller coaster effect in our taxation system. It won’t be easy, but it’s important to reduce the “boom and bust” budget cycles that disproportionately hurt the poorest among us. It’s time for the legislature to turn a crisis into an opportunity.

This story was originally published February 5, 2021 at 6:00 AM.