State

George Skelton
Capitol Journal
Fixing aged tax system is a job no one wants

Sacramento — Californians last week poured billions more into a warped state tax system that badly needs restructuring but leery political leaders won't touch.

Democrats are afraid to go near the apparatus for fear of being labeled tax-and-spenders. Republicans are prone to pander to the populace by advocating tax cuts, even while the state is spending billions more than it's taking in.

During a four-day period starting last Monday, Californians mailed in roughly $3.2 billion to the state Franchise Tax Board. Around $2 billion of that was personal income taxes, the rest corporation taxes.

The take from the personal income tax was down significantly from the same four-day deadline period last year, in the 20% range, sources say. That indicates more budget trouble. And it's illustrative of one huge problem with California's tax structure.

The personal income tax is a volatile roller coaster. It's top heavy, leaning too much on rich folks whose taxable incomes tend to reflect — if not exaggerate — the ups and downs of the economy.

Meanwhile, we've got a sales tax that was designed for the mid-20th century. It ignores the fact that California's economy increasingly has been relying on sales of tax-exempt services.

The property tax is blatantly inequitable.

The corporation tax is riddled with loopholes.

The entire system should have been redesigned 29 years ago, immediately after voters drastically cut their property taxes with the landmark Proposition 13. But then-Gov. Jerry Brown and the Legislature put it off. And their successors have been sidestepping ever since.

Back in 1978, Brown & Co. merely shoveled out $4.4 billion in state surplus to schools and local governments as "bailout" money to cover their property tax losses. The state still is paying, in one way or another. And because Sacramento pays, it also calls the tune and the locals lose control.

But let's take one flawed tax at a time:

• The income tax. The rich pay. The lower middle-class and poor skate.

The top-earning 1% of taxpayers paid more than 40% of personal income taxes in 2004, the last year for which there are solid figures, according to the Public Policy Institute of California. The nonpartisan legislative analyst says in that same year, taxpayers earning at least $200,000 accounted for only 5% of the tax returns, but more than 55% of the taxes.

Conversely, Californians with taxable incomes under $50,000 comprised 45% of the returns, but paid only 6% of the taxes.

Indeed, a single mother with one child wouldn't have owed any state income tax for 2006 unless she had earned more than $38,300, according to the California Budget Project, a liberal think tank. For a family of four to have owed anything, it would have had to earn more than $47,700.

Everybody should pay some income tax, even if it's $25. It might make them feel more like they've got a stake in the political shenanigans. Encourage them to read up. And vote.

But more practically, the "progressive" nature of California's income tax renders it precariously volatile for budget writers. That's especially true because of the extreme swings in capital gains and stock options in recent years.

Legislative analyst Elizabeth G. Hill, two years ago, suggested that the lawmakers consider cutting the income tax rate on capital gains and stock options. The state has no federal-like capital gains rate. Creating one would reduce the state's dependence on this revenue source. And it could actually generate a one-time windfall by encouraging investors to cash in.

Hill also suggested raising rates on lower- and middle-income folks and reducing rates for the higher income taxpayers. But nothing has come of it.

Meanwhile, the state has become overly dependent on the income tax. In 1965, it supplied 18% of the state's general fund. Today, it's up over 50%.

• The sales tax. It's a relic.

It was designed for a manufacturing and retail economy, not for consumers of service.

Hill says that between 1981 and 2005, the taxable percentage of California consumption dropped from 48% to 38%.

Because so many purchases are tax-exempt, she says, the sales tax rate — an average 8% — is higher than it need be to raise the same revenue.

Consider: There's a sales tax on tire repairs, but not on auto repairs.

Buy a clothes washer, you pay a sales tax. Take your clothes to a dry cleaner, you don't.

Rent a movie, there's a sales tax. Go to a movie theater, there isn't.

Rent a car, pay a tax. Hire a limousine, you don't.

Legal advice? Political consulting? Forget it. Very strong lobbies.

Typesetting is taxed. Software customizing isn't. Neither are Internet or cellphone services. There's a long list.

We should venture into the 21st century and tax many more services, at least the low hanging fruit, like TV repairs. And lower the overall sales tax rate.

• The property tax. It's low, but hardly fair.

"It's really hard to be fair with anything in taxation," concedes Joel Fox, former aide to the late Prop. 13 author, Howard Jarvis.

The problem is that property is taxed less on its value than on how long somebody has owned it. So there's often a dramatic difference in how two identical, side-by-side houses are taxed.

But I've never heard anyone offer a politically feasible fix.

"Are you willing to pay higher taxes so your neighbor can have her taxes lowered?" Fox asks.

I'd have to think about that. For about 10 seconds.

The other big problem with Prop. 13 is that commercial property — largely because of loopholes — turns over much more slowly than residential, so it's reassessed less often. Consequently, homeowners have been paying an increasing share of the total property tax.

The solution is to regularly reassess commercial property at market value. That is politically feasible within the next decade.

But none of this is on anyone's front burner. Or seemingly any burner.

Sacramento will keep cowering, propping up the twisted tax structure with loans in bust years and overspending in boom times — instead of erecting a solid, steady revenue-producing system.

L.A. Times 4/23/2007

I truly am a moron on these matters. I'm interested in hearing from others how we could generate the same tax revenue and make the taxation system equitable at the same time. I know that in NY taxation seems rampant. I know in other states property taxes can be 5X or more what we pay here. Then there are states that have no income tax at all and I don't know how they are able to provide any services? From where do those states get revenue? It's all a confusing, bumbling mess to me...

Cathleehn

The problem isn't generating more taxes it's how they spend what they get.

50% of california taxes are legislated to go into education...this leaves only 50% for everything else. Another 25 goes into human services programs (roughly), one of which is mandated as an entitlement, the Lanterman Act. If you have a disability or mental illness, this is the state to live in, and I am proud of that. But, the reality is that in truth only 25% is left over for the rest of the services and infrastructure needed to support the state. Question, where is the perceived waste? What would you do away with?

Cathleen

And a clarification...this thread did not start out speaking about an increase in taxes...it was about how to make the taxation system equitable. I for one, although personally am unaffected, find special interest or sin taxes (like cigarettes) vulgar. We are addicted to picking our favorite sin and taxing the heck out of it.

Cathleen

One of the problems the system has is an over reliance in income taxes. As the article points out, more than 50% of taxes collected are based on income, this reliance created a crisis a few years ago when the state became addicted to the huge taxes paid by the newly minted multi-millionaires created by the dot com boom. Needless to say, that boom went bust and the income taxes generated by the high flyers dried up. That created a huge deficit in our budget due to the fact that those Sacramento politicians thought that money would keep rolling in. Since that time, it has become apparent that income tax revenue is too volatile and hard to predict for budgetary reasons.