Wilson Knits a Tax Cover Out of Whole Cloth : The governor wants a windfall for the wealthy, but it won’t help our parlous financial straits.

There’s nothing unusual about economists ignoring their basic intellectual craft in order to be of service to wealth and power. Last month’s California state tax “reform” recommendation is yet another depressing example, in which Gov. Pete Wilson has persuaded several economists of the Reagan-Bush era to engage in the most specious of justifications for tax cuts for the wealthy.

The proposal by the Governor’s Task Force on California Tax Reform and Reduction looks suspiciously like the Reagan tax cuts: $30,000 per year for the average California millionaire, $300 per year for the average middle-class family of four, plus a rate cut for corporations. It’s a highly regressive proposal: In the income tax, a 15% across-the-board cut gives 40% of the tax benefits to the top 4.2% of the population.

Tax cuts for the rich are nothing new for Republicans; it’s the dressing-up that is so intellectually dishonest. In their report, former Secretary of State George Shultz, former Reagan adviser Martin Anderson and former Bush adviser Michael Boskin have tried to demonstrate that giving billions more in tax breaks to business and the wealthy is beneficial to the California economy. In doing so, they first ignore basic facts and then ask and answer all the wrong questions.

California’s top tax rates on the wealthy are too high, they say, as is our corporate tax rate. Why, Washington and Nevada have no income tax at all, and our corporate income tax ranks high among the Western states we compete with. They state unequivocally, “California’s high taxes put it at a disadvantage.”

Any public-finance economist knows that the rate by itself does not matter. A comparison of taxes between jurisdictions must look beyond the rates to the tax base and the total tax burden.

So how does the tax burden in Los Angeles compare with taxes in Seattle, in the no-corporate-tax state? According to a study done by KPMG Peat Marwick, every kind of business pays lower taxes in Los Angeles, as much as 70% lower in some cases. Many types of companies in Phoenix and Denver pay twice as much in total taxes than firms do in Los Angeles. In fact, Los Angeles and San Francisco consistently rank at the bottom in total tax burden compared with other major cities.

The reason is that the property tax, by far the largest tax business pays, is extremely low in California compared with other states.

These economists certainly know that pointing to a high marginal rate on a relatively small tax without looking at an excessively low rate and depleted base of a large tax is the type of mistake they use to fool students on economics exams.

Then there’s the gross error that economists who have worked for the federal government instead of the states are prone to make: spending money they don’t have. We can make these tax cuts now, they say, because California’s recovery will be so rapid that enough new revenue will be generated to pay for the cost.

The problem here, of course, is that California is still in debt, the money is not yet in hand, and schools, universities, infrastructure and a host of public needs have gone begging for a long time. But even if a tax cut might be justified on the back end of the recovery, it makes no sense to suggest one before we’ve paid our debts--unless, of course, you’re used to running the federal government.

Finally, such a large tax cut for the very wealthy sends money out of the California economy, not into it; 40% of the cut for the wealthy will flow to the federal government. Thus, 9,000 millionaires will receive a cut that costs the state $330 million, but the wealthy will only get to keep $200 million of it, with the rest going to higher federal taxes.

To be fair, Shultz’s group had been asked only to look at tax rates, not anything more meaningful or in-depth about California’s tax and fiscal picture. And that’s what’s really going on here: preemptive politics by Wilson.

The top brackets on the very wealthy--added in 1991--are due to expire at the end of 1995, just as the wealthy are due to recover from the recession and earn some real money. Wilson needs cover for such a gross tax cut in the face of a budget deficit and pressing budget needs, so he asked these economists to look only at this issue and design a justification for the cut. Thus the meager break that the rest of us get becomes a windfall for the wealthy. California deserves economic advice that is tailored to the needs of its people, not the governor’s short-term political interest in justifying more breaks for the rich.