Aiming to fix tax woes before next crisis hits

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One severely broken part of California’s state government is the tax code. It’s antiquated and unreliable.

Government financing is too heavily dependent on the rich, who have good and bad years, causing roller-coaster tax trauma in the Capitol. And there isn’t enough help from the creaky old sales tax.

The volatility of the tax system keeps getting worse, making it increasingly difficult for policymakers to plan ahead.


New Assembly Speaker Karen Bass (D-Los Angeles) has taken up the cause and is bent on creating an independent blue-ribbon commission to overhaul the tax code.

“The economic crisis is national, but not every state is having the problems we are,” she lamented last week over a blackened salmon salad. “How have other states managed to weather this, and why can’t California figure out how to do it?”

She wants the commission to study other states’ tax codes and find out.

“I’d expect it to come up with more stable ways to generate revenue so we are not completely dependent upon the upper income brackets. Also, I envision the commission coming up with ways to incentivize the economy.”

OK, is this a plot to raise taxes? That’s what some Republicans fear.

Not directly, Bass responds, but the effort could result in a bigger take if the economy is stimulated by tax incentives.

“Some states have revised their tax codes in a revenue-neutral manner, but wind up producing more revenue in the long run,” she says, sounding somewhat like a conservative supply-sider. “I definitely want to see more revenue. But that doesn’t mean it can’t be revenue-neutral in the short term and -- especially if the economy is incentivized -- produce more revenue in the long term.”

Right now, Bass is concerned that “the guys” -- as she calls Gov. Arnold Schwarzenegger and the other legislative leaders -- aren’t fully committed to restructuring the tax system. They profess to be -- especially the governor, less so other Republicans -- but Bass says she’s “worried.”


The speaker had hoped to have the commission in place and cogitating by now. But the governor and other leaders, she says, asked her to hold off until the annual budget brawl ends, whenever that is. It will be in early August, unless the lawmakers are feeling politically suicidal. After that, the state runs out of cash and borrowing gets very expensive.

Bass has an uneasy feeling that the focus on budget negotiations -- necessary as it is -- “keeps the pressure off” creating the commission and moving ahead to finally up- date the tax system. After they’ve compromised on a budget deal, she concedes, “everybody’s going to be exhausted.”

Regardless, she continues, “my goal is that we tie down the commission and announce it right after the budget is signed. Because I really want the commission’s recommendations to impact the next budget year. It would be foolhardy to work on a budget this year and then not think about it again until January when we know well in advance we’re going to have another huge [revenue] shortfall.

“I think that stabilizing revenue is the most important thing we can do. I feel passionately about that.”

Schwarzenegger recognized the problem during his State of the State speech in January: “The rich in California, by far, pay most of the income taxes. But we only have so many rich people. The top 10% of the population . . . pay nearly 80% of the taxes. So our whole revenue system, its ups and downs, is based on whether the rich have a good year.”

Here’s another startling figure: The top 1% -- representing only 140,000 tax returns -- pay 48% of the income tax. In 1993, they were forking out just 33%.


Since then, the rich have gotten richer and those on the bottom rung haven’t kept up, according to the state Finance Department. One can argue the fairness of the tax bites, but it’s indisputable that the system wreaks budget havoc.

Here’s an illustration of the volatility: In 2000, during the dot-com bubble, the top 1% paid 49% of the income tax. Two years later, after the bubble had burst, deflating incomes, their share was down to 37%.

And this is how top-heavy the income tax is: The bottom 20% never -- at least since 1993 -- have paid more than one-tenth of 1% of the tax. In fact, a family of four doesn’t begin paying the tax until its adjusted income hits $46,000.

Meanwhile, Sacramento has become increasingly dependent on this erratic tax. It currently generates 52% of the total revenue for the general fund. In 1980, it provided only 35%; in 1970, just 28%.

California’s tax system has gotten way out of whack over the decades. The sales tax now contributes only 27% of the general fund revenue. In 1980, it was 37%; in 1970, 40%.

That’s because the sales tax was designed for the mid-20th century and ignores the fact that our economy increasingly relies on tax-exempt services, such as auto repairs and computer programming. Between 1981 and 2005, according to the legislative analyst, the taxable percentage of California consumption dropped from 48% to 38%.


“It makes sense to me that we’re missing out on lots of revenue,” Bass says.

She envisions broadening the sales tax to services but lowering the overall rate, which is among the nation’s highest.

What about the property tax? “I don’t want the commission to go there,” she says. “Proposition 13 is so polarizing.”

The speaker also has one other pet project: sponsoring a 2010 ballot initiative that would produce at least $300 million annually for foster care programs, her longtime cause. She has chosen a revenue source: taxing candy.

Bass is a short-timer who will be termed-out in two years.

“If I can get this tax reform and that foster care funding,” she says, “I can walk away in 2010 and say it’s been pretty terrific.”

More ballot box budgeting that ties lawmakers’ hands might not be so terrific. But finally updating California’s ancient tax system surely would be.