Tax Fault Lines in California

New fault lines are forming on California’s political map that could crumble a long-term alliance between the business community and taxpayers. Any shaking along those lines can only encourage those seeking higher taxes.

A number of business leaders and business associations feel that government is right to chafe under some taxpayer protections that citizens have put in the state Constitution. To improve business in California, they argue, education and transportation infrastructure must be upgraded, which they say will take many more public dollars. To get that money, they want to make it easier to raise taxes.

A major fight is shaping up over California’s requirement for a two-thirds vote of the people to raise many taxes at the local level. A two-thirds vote provision on taxes was added to the California Constitution by Proposition 13, the 1978 property tax-cutting initiative, and reaffirmed with Proposition 218 in 1996. A two-thirds vote to pass any local general obligation bond backed exclusively by property taxpayers has been state law since 1879.

The state Chamber of Commerce and the California Business Round Table, made up of the CEOs of California’s biggest companies, are on record for lowering the two-thirds vote provision for bonds. Also, an initiative has been introduced by Reed Hastings to lower the two-thirds vote for local school bonds. While Hastings and other high profile Silicon Valley entrepreneurs support making it easier to raise these taxes, the high tech industry is vigorously supporting moratoriums on Internet taxes and seeking R&D; tax credits. Taxpayer groups, who would normally line up on their side, could think differently when the moratoriums end.

The alliance between taxpayer associations and the business community is a post-Proposition 13 phenomenon. During the campaign for Proposition 13, the state Chamber of Commerce was a leading opponent of the measure. Since it passed, however, the business community has generally come to embrace it.

Some business leaders’ desire to make it easier to raise local taxes could come from the recent changes in the state’s political landscape. Gray Davis, the first Democratic governor in 16 years, has declared himself business friendly, but having large majorities of Democrats in both houses of the Legislature, along with a Democratic governor, makes business leaders nervous.

For the time being, tax increases through the Legislature require a two-thirds vote, another taxpayer protection added by Proposition 13. This is a provision most businesses like. However, the business community is very concerned about a court-created provision under which fees targeted to mitigate the negative effects of products can be enacted by a simple majority vote. There seem to be few limits on the use of these fees. To assuage those who control the power in the Legislature, business is becoming more accommodating on reducing the local tax vote requirements.

This does not sit well with grass-roots taxpayer groups. Their response is: If business believes taxes should be raised, then let business pay them. Plans are being discussed by the groups to increase business taxes or split the property tax roll, increasing the tax rate on the business side of the ledger if voters are convinced that more taxes are needed.

The argument for looking at business for any tax increase was strengthened recently by a report noting that during the 1990s, the tax burden on business in California dropped while the tax burden on families and individuals increased.

California’s tough tax laws have in part assisted the state’s booming economy. Raising taxes could put a damper on the economy. But, because of this fight, tax increases seem inevitable one way or another.

There are some solutions to the concerns business cites that do not require tax increases. Business should have more faith in market-friendly answers to infrastructure and education problems, demanding, for example, school voucher experiments. Taxes collected on automobiles and gasoline, which now go to the state’s General Fund, should be redirected to transportation infrastructure.

Finally, if the voters are convinced money is needed, they will support tax increase measures even with a two-thirds vote requirement.

Unlike the natural earthquakes that strike California, the tax earthquake has been detected early. The question is what will be done to prevent it.