Study Sees Dangers in State’s Tax System

Even when its economy recovers, California still faces a troubled fiscal future unless the state spends enough to provide the kind of educated labor force and public works that businesses need to compete in global markets, a new study says.

That higher spending could be accomplished and the state’s multibillion-dollar deficits erased, the study says, by fixing inequities in California’s antiquated tax system.

The study, by the Center on Budget and Policy Priorities, a liberal, Washington, D.C.-based think tank, criticizes Republican Gov. Pete Wilson for spreading the belief that California is being overwhelmed by schoolchildren, immigrants and the poor.

A Wilson Administration spokesman dismissed the study as “essentially a blueprint for more taxing and spending.”

H. D. Palmer, assistant director of the state Finance Department, said an “out-of-state interest group” telling Californians they are paying too little in taxes is not likely to get a warm reception, especially as many in the state are rushing to file their annual tax returns.

“We are just beginning to see signs of economic recovery, and one of the sure-fire ways to strangle that recovery is to saddle Californians with more taxes,” Palmer said.

But the authors of the study said the higher taxes they advocate, if spent wisely by government, would boost productivity by relieving businesses of the burden of having to train and educate their workers and by making it easier for companies to move their goods to their customers.

“California is no longer making sufficient investment in areas considered necessary for economic growth,” said Iris Lav, director of state and local programs for the center. “It will be harder to go into the next century with poorly trained workers and inferior infrastructure.”

Lav’s study says the state could raise at least $9 billion more annually by restructuring the tax system in ways that would not require an increase in rates.

The state’s sales tax has failed to keep pace with changes in the economy, the researchers said. Today, people spend less of their money on goods than they used to, and more on services, which tend not to be taxed, resulting in a $1.9-billion drop in the tax’s annual yield. The center recommended broadening the sales tax to cover more services, as other states have done.

The property tax, as amended by voters with the passage of Proposition 13 in 1978, assesses property not at its full market value but at its value when it changes hands. The study recommends reassessing business property more often to raise at least $3.3 billion more per year.

Finally, the study says the state has let income tax deductions and credits proliferate without evaluating their long-term impact on state revenues. If the growth in these so-called tax expenditures had been limited to the rate of growth in the state’s general fund since 1986, the state would have $4.2 billion more to spend in the current fiscal year, the study says.

The study also is highly critical of a 1991 report by Wilson’s Finance Department, which argued that California was undergoing a “taxpayer squeeze” as more and more people needed services and relatively fewer people were working and paying taxes to support them.

Among other things, the Wilson report warned that the state’s ratio of taxpayers to school students--a measure of the state’s ability to finance public education--would drop from 2.6 to 1 in 1990 to 2 to 1 in 2000.

But Lav’s study provides a broader perspective, showing that the percentage growth in school enrollments in this decade is below average for the decades since World War II and well below the skyrocketing growth in the 1940s and 1950s. That was a time when California’s education system was building itself into the envy of the nation.

Furthermore, Lav said that in the 1960s and 1970s, California had only 1.5 workers paying taxes to support each student in public schools, far fewer than the state had in 1990 or will have in 2000.

“By every measure,” the study says, “California is better equipped today to finance education than when it invested heavily in education for baby-boom children.”

But Palmer of the Finance Department said the center’s analysis ignores the other demands that have been placed on state taxpayers since the baby boom years. Since then, he said, welfare and health services for the poor have grown tremendously.