Capitol Journal

A smart California tax bill points the way to needed reform

A California state senator introduces a smart tax bill that points the way to needed reform

He's a freshman state senator showing no fear, no hesitation and seemingly no political sense. His first bill is a huge, historic tax hike.

Sen. Robert M. Hertzberg (D-Van Nuys), of course, is no ordinary babe-in-the-woods, backbench freshman.

He's a former Assembly speaker and lifelong political junkie who grooves on public policy.

He's also a certified reformer — previously active in government reform groups — and a human dynamo who always seems to run rather than walk.

Hertzberg's tax increase — introduced as SB 8 immediately after he was sworn in Dec. 1 — actually is long-needed tax reform, the kind that causes most politicians to avert their eyes.

The measure finally would extend the state sales tax to services, the fastest growth sector of California's economy.

Healthcare and education services would be exempt. So would small businesses with under $100,000 in sales — gardeners and babysitters, for example. But not Hertzberg's fellow lawyers or political consultants, among others.

At the same time, if enough money were generated by taxing services, personal income taxes would be lowered. Corporation taxes also would be reduced, tied to paying "a more reasonable minimum wage," the senator says.

"Ninety percent of corporations are small businesses — muffler shops, auto repair shops," Hertzberg says. "Maybe corporations of under $5 million wouldn't pay at all."

This is very much a work in progress. "I want to put everything on the table and think it through," he says.

The goal is to generate $10 billion more. "To me, if you can't raise $10 billion it's not worth the effort," he says.

He'd spend the money this way: $3 billion for K-12 schools and community colleges, $2 billion for the two university systems, $3 billion for local governments, and $2 billion for a new earned income tax credit for poor families.

Ambitious? Incredibly. Probability? Low.

Most lawmakers — Gov. Jerry Brown included — see polls showing that voters overwhelmingly object to taxing services and they back off. Voters do indicate they'd be willing to consider it if the sales tax rate — an average 8.4%, depending on the county — were lowered simultaneously. But Hertzberg's bill wouldn't do that.

However, he'd only extend the state portion of the tax rate, up to 6.5%, depending on what's included. Local governments wouldn't be allowed to raise their piece.

Isn't Hertzberg afraid of being viewed as a dreaded tax-and-spender? "Not at all," he says. "This is an area I'm interested in. It's why I ran — not to sit on the sidelines. I want to work on the tough stuff. That's the purpose of being in government. I'll shy away from no discussion. I'm 60 years old.

"Will I be successful? I have no idea. But I've got to step up to bat."

Hertzberg will need a two-thirds legislative vote to raise taxes. Good luck with that, let alone securing the governor's signoff.

But broadening the sales tax to services will ultimately be needed if California is to ever stabilize its revenue system to match the 21st century economy. The current tax code is an outdated relic of the post-World War II era.

Hertzberg's bill sets out the reason for taxing services:

"California's $2-trillion economy has shifted from being mainly agricultural and manufacturing in the 1950s and 1960s … to one based on information and services, which now accounts for 80% of all economic activities in the state," the measure reads.

"To achieve a future as promising as California's past, we need a tax system that is based on this real economy … while ensuring that new revenue is invested in strengthening the ladder of mobility for all our residents."

So Hertzberg calls it the Upward Mobility Act. Yes, that's a little cornball. But the bill's basics are right.

Back when California's tax system meshed with the times, the state could afford to invest in education and infrastructure, creating a growing economy and good jobs. But in recent decades, Hertzberg says, opportunities have diminished and income inequality has widened.

California is relying less on the sales tax, which applies only to purchased goods, while leaning heavily on the richest 1%, whose incomes fluctuate like a roller-coaster.

In 1950, the sales tax generated 60% of all state revenue, the income tax just 10%. Today, the sales tax brings in around 25%, the income tax more than 60%.

"Not only does it increase the uncertainty of tax collections," the Hertzberg bill asserts, "but there is evidence that California's high rates may be driving high income earners out of the state."

Hertzberg doesn't want to meddle with the property tax or Proposition 13. Not worth it, he says. It wouldn't raise enough money even if assessments were raised on commercial property, as many Democrats advocate.

But here's a subtle touch legislative historians might appreciate: Hertzberg numbered his bill after the landmark AB 8 that reallocated California tax revenue — bailing out local governments and schools — after Prop. 13 dramatically reduced property taxes 36 years ago.

Many believe that Hertzberg has more than tax reform on his agenda. They speculate the former speaker might try to oust new Senate leader Kevin de Léon (D-Los Angeles). "That's not my intention," Hertzberg says. What about after de Léon is termed out in four years? "Can't tell you."

Hertzberg did become more of a de Léon ally Wednesday. The leader appointed him chairman of the Governance and Finance Committee that will consider tax bills.

george.skelton@latimes.com

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