Much has been made about the mercurial nature of California’s current tax structure – most specifically the fact that a vast percentage of our state’s revenues are heavily reliant on income taxes – especially on those wealthiest Golden State residents. During times of “plenty” – such as the dot com boom, this system brought record amounts of taxpayer dollars into the state treasury. For the past few years, however, with the real estate bust, the collapse of the dot coms, and the country moving into a recession, we’ve seen state tax revenues plummet.
Governor Schwarzenegger signed an Executive Order creating a Commission on the 21st Century Economy – laying out the following mission for this group: “Stabilize state revenues and reduce volatility; Promote the long-term economic prosperity of the state and its citizens; Improve California’s ability to successfully compete with other states and nations for jobs and investments; Reflect principles of sound tax policy including simplicity, competitiveness, efficiency, predictability, stability and ease of compliance and administration; ensure that tax structure is fair and equitable.”
A tall order, indeed, and as we know, what comes out of a group like this depends in large measure on who is appointed to serve on it. I have to admit that I was less than impressed to see that this group would be populated by appointees of the Governor, the Senate President Pro-Tem, and the Assembly Speaker — A bit like asking the fox to design the security for the hen house.
Jon Coupal, President of the Howard Jarvis Taxpayers Association in a recent column summed up the appointments to the committee this way:
But the Commission — which has already blown through two deadlines to complete its report — also has its share of uber-liberals. Members like former legislator Fred Keeley who unabashedly has a pro-tax agenda. In addition to pushing for a "carbon tax," he also is seeking an amendment to Prop 13 which would increase property taxes on businesses.
If Coupal’s analysis wasn’t enough cause for concern, he does not even mention that Governor Schwarzenegger appointed to head up the Commission a notoriously liberal Republican, Gerry Parsky, who has for years waged battles against party conservatives.
This commission has already asked for and been granted an extension from their original timeframe in which they were to somehow develop the panacea for the ills of California’s unhappy tax code. They are due to come out with a final report shortly, and so I think that it is important to establish some important “markers” from which to judge the product of this Commission’s work.
Let me say, by the way, that there is a tremendous opportunity here to really spur on economic development in California and grow our state’s economy – but that is not likely to occur. This kind of positive change would come as a result of moving away from taxation in income and capital gains, and instead looking to more of a flat tax. What “warning signs” do we look for to see if this commission has taken a turn to the left?
1) Will the proposed changes, in the long run, lead to an increase in the size of California state government as a percentage of our state’s economy?
Or put another way, is this commission simply a foil to get Californians to sign off on increasing the amount of money that flows from the private sector into the public sector? Of course, the kind of analysis of the commission’s recommendations that would be required in order to be assured that this “marker” has not been violated would need to be undertaken by trusted, conservative economists, who are not a part of or beholden to the “insiders” that dominate California’s capitol.
2) Will taxes be transparent to taxpayers, or hidden?
It is absolutely critical that taxpayers understand their burden and what it costs them to support government at every level. You should be very alarmed at any proposals that seek to shift taxes away from consumers and taxpayers. One such proposal seems to figure very prominently in discussions of the commission – which is being called a Business Net Receipts Tax, is insidious because government would tax all businesses, leaving it to those businesses to then pass those costs along to consumers in the form of higher prices – and this would expand taxation from not only goods but to services as well.
Joel Fox of the Small Business Action Committee, and publisher of Fox and Hounds Daily, in a recent column, wrote that, “By including a tax on services through the business production and consumption cycle, the expenditure added at each stage will be passed on to the consumer in the final costs of goods without declaring that the end consumer has suffered a new tax.”
To sum up this point, if a Californian is suddenly seeing a drop in his or her income and sales taxes, but everything that he or she buys (and we mean everything) now costs more – one could feel like they are paying less to the government when in fact (because of the higher cost of goods and services) they are paying just as much as before, if not more. Hidden taxation is a death sentence for the commission’s report.
3) Are the taxpayer protections of Proposition 13 left intact?
Californians voted in 1978 to limit property taxation in this state, and put into place a 2/3 vote requirement to raise taxes. Some on the commission have advocated a “split roll system” which would increase taxes on commercial property — which would have a terrible, negative impact on California’s economy. A "split roll" proposal in the final product of the commission makes it DOA in the legislature I would think, and certainly with California voters.
4) Are there new taxes recommended that seek to push a left-wing agenda?
Santa Cruz County Treasurer Fred Keeley, one of many left-wing ideologues on the commission, has been pushing hard for the final work product to include a taxation on carbon emissions. We would remind Keeley and other liberals that the science behind the question of whether there is a nexus between the carbon emissions caused by human beings, and the temperature of the Earth, are in serious debate. Liberals push this issue because it fits into their goal of increasing the size and scope of the government. This kind of “activist agenda” taxation does not belong in a serious report from the commission.
5) Will the changes discourage economic growth?
As I mentioned in my opening thoughts, there is a lot of potential for this commission to recommend proposals to that will lead to an increase in jobs and an improvement in the economy – and to a strengthening of California’s competitiveness both nationally and around the globe. Late last week the California Chamber of Commerce and dozens of other groups signed a letter to the commission expressing concerns about, among other things, a proposal to for an energy tax (referred to as a “pollution tax” by Keeley and company) and they bring up that had this tax already been in place, “California motorists would have paid billions more in additional gasoline taxes and millions more in new taxes on domestically-produced crude oil. Fuel-dependent industries such as transportation and aviation also would have seen significant fuel tax increases. Finally, the proposed refundable income tax credit would likely make our state’s income tax system even more dependent on high-income earners, which would further increase revenue volatility.”
If proposals like this energy tax, which so obviously would harm rather than help the California economy appear in the commission’s final recommendations – you should urge your legislator to reject the commission report.
There may be other important factors that some may want to consider when reviewing the recommendations of the commission, but the five I have mentioned above are a great basic starting point for concerned California taxpayers.
I think that it is important that I conclude this column by talking a bit about process. We have watched in just the past five months the California legislature vote on two major budget deals (one of which hammered Californians with massive tax increases) where the process of consideration of these major budget issues has been atrocious. The proposed legislation was not publicly vetted – in some cases legislators barely had a chance to review the bills, and in other cases, I think that legislators had no opportunity to review actually legislative language at all.
I bring up these examples of terrible process because before one can even properly critique the substantive proposals of the commission, one has to feel comfortable about the process by which they will be reviewed by the legislature. The Governor has “set the table” by saying that he will call a special session of the legislature, and will ask that the Senate and Assembly consider the commission’s recommendations in one up or down vote. But will enough time be granted so that proposals immensely complex and impactful to all Californians can be fully reviewed and studied by independent economists and fiscal experts? This is critical to the process.
If we see the legislature quickly convened to try and “jam through” the commission’s proposals in a quick vote, that perhaps more than any of the five markers above would be an indicator that taxpayers are at serious risk.
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