A Tax Break to Make an Unfair System More So

Gov. Pete Wilson’s proposal for a further 10% cut in the rate of the state bank and corporation tax would continue a policy of recent years that has primarily benefited a small group of big businesses and the wealthiest of Californians.

After failing to win a 15% rate reduction for all income taxes last year, Wilson settled for a 5% business tax cut. Now, he says it is essential to California’s business climate that the state reduce the bank and corporation rate by another 10%, at an annual cost of $654 million when fully in effect.

But Elizabeth G. Hill, the Legislature’s nonpartisan fiscal analyst, notes in her new budget report that the great bulk of the savings, about 80%, would be enjoyed by fewer than 2% of the state’s biggest businesses.

And while Hill acknowledges that business tax cuts can spur economic activity, she says California’s business tax rate is not necessarily a major factor when a firm decides where to locate or whether to expand.

Wilson has always maintained that California business taxes make the state uncompetitive. But considering California’s lower property tax and other factors, the overall tax load on business in California ranks just about in the middle of all 50 states.

Hill also noted that Wilson’s plan would create a disparity between big and small businesses within California. Of the 1 million firms in the state, more than half are partnerships and sole proprietorships that pay personal income taxes on their earnings. Under Wilson’s plan, the big corporations would wind up with a tax rate that is 15% lower than the maximum personal rate of the smaller firms. A state tax system that is riddled with inequities would become even more unfair--and byzantine.

Just this past year, the state’s wealthiest taxpayers enjoyed an $800-million break with the expiration of a temporary income tax surcharge enacted during the recession. But modest-income people, who also sacrificed during the recession, would not get back their own tax break--the $60 renter’s tax credit--under Wilson’s budget.

And in the past decade, sales tax receipts have increased three times as fast as business taxes. That puts a heavier relative burden on low- and moderate-income families.

If the Legislature is going to consider further changes in the tax code, it should look at comprehensive reform that would eliminate the glaring disparities that now exist.