Wasted chance at tax reform

Last week's release of the final report by a blue-ribbon panel on tax reform for California was accompanied by all the ceremonial obeisance customarily paid to groups of public-spirited citizens completing a difficult task.

There was praise for their public spirit and donation of unpaid time. Their report was hailed in Sacramento as a judicious foundation for a necessary reconsideration of our crumbling tax system.

I have another view: It was a shamefully squandered opportunity.

The 14-member Commission on the 21st Century Economy, appointed by Republican Gov. Arnold Schwarzenegger and the Democratic Legislature, could have confronted all the hard issues our elected politicians have dodged for years.

They could have subjected the manifold inequities of the post-Proposition 13 property tax to close examination. They could have assessed how much of our budget crisis derives from the legislative supermajority requirement to enact a tax increase.

They could have insulated the consideration of tax policy from such popular misconceptions as the one about Californians being the most heavily taxed humans beings in America. (Buried in the final report, indeed, is an acknowledgment that as a percentage of personal income our state and local tax load is only a smidgen above the national average.)

They did none of this. Instead they produced a plan that -- surprise! -- would shift the burden of state taxes away from the wealthy and toward the middle class and the poor.

The commission's proposal combines a cut in the top income tax rates with the creation of a novel and unbelievably complex "business net receipts tax."

This would replace the corporate income tax and some sales taxes. In practical terms it resembles a sales tax expanded to cover food, medicine and services like child care and medical treatment -- which are tax-exempt today and represent a relatively larger share of expenditures by lower-income households than the wealthy.

Modernizing the sales tax by applying it to some services is a perfectly reasonable goal. But it should be done openly, not by subterfuge -- not by hiding it within a tax so untested that it's certain to have many unanticipated, and possibly negative, economic effects.

"Why in the world would you shoot craps with the California economy?" asks Richard Pomp, one of the commissioners who refused to sign the final report.

Pomp is perhaps the country's leading expert on state taxation. To hear him talk about his nine months' service on the panel, he found his colleagues about as well-grounded in the realities of tax policy as creatures from Mars.

He believes the panel was hijacked by a conservative bloc intent on awarding a tax cut to the wealthy dressed up as a radical reworking of the tax system. "This is about as callous, insensitive and tone deaf a package as I've seen in 35 years," he told me last week.

Commission Chairman Gerald L. Parsky, a Southern California investment executive, begs to differ. He notes that under the majority's recommendation program all brackets get an income tax cut, not just the rich.

That's true, as far as it goes. Commission figures show that under the proposal, which collapses today's six brackets into two and drops the top marginal rate to 7.5% from 10.55%, those making more than $1 million would get an average tax cut of 31.5%, or $109,291.

Those making $20,000 to $50,000 would get a tax break of about 1.5%, worth an average of $3. (All others fall in between.)

Yet, in the judgment of many tax experts, by rendering so many currently exempt goods and services taxable, the new business tax would load back onto poor and middle-income Californians all they might gain from the income tax cut, and then some.

Its real impact would be hard to judge, however, because it won't be paid directly by individuals but by businesses. They'll pass it through to customers via price increases if they can. That means consumers will have no way of knowing how much they're truly being taxed -- murkiness within which lots of costly mischief can be hidden.

The futility of the panel's work is hard to overstate. Despite the honeyed words of praise heard in Sacramento, almost nobody in the capital, whether Democrat or Republican, likes the result, in part because the new business tax is too weird and incomprehensible. Five of the commission's own members (four Democratic appointees and Bill Hauck, a business lobbyist named by the governor) refused to endorse the recommendations.

At the root of the commission's failure to deal realistically with tax policy is its preoccupation with two fetishistic bugaboos unique to California: the supposed danger of tax "volatility," and the sanctity of Proposition 13.

"Volatility" simply means that the state periodically experiences a surge in income tax revenues. These come chiefly from capital gains, stock options and bonuses filling the pockets of high-income taxpayers in good times. Gov. Schwarzenegger and other conservatives argue that's bad, because the Legislature tends to spend the excess on the spot. Their solution is to remove the temptation by cutting the tax rate applied to the bounty.

This approach always brings to mind the words of the conservative economist Herb Stein, who wrote that he was "annoyed at the sight of political leaders saying that they have to cut taxes because if they don't, 'politicians' will spend the money."

It's a grave disappointment that the commission majority bought into this absurdity, which only ensures that the state will be denied its fair share of boom-time profits and its fiscal health will lag behind any economic recovery. That's especially so since the panel also recommended an intelligent approach -- requiring that the cyclical bounty be placed in a rainy-day fund, where it would be available to cover budget gaps in lean years.

The biggest hole in the commission's program is its failure to address Proposition 13. Trying to rewrite our tax laws without dealing with the property tax is like trying to win a horse race with a three-legged horse. Proposition 13 has been the heart and soul of the state's taxation and budget morass for three decades, in part because shortfalls in local and school budgets caused by the property tax ceiling have to be made up from income and sales taxes, hopelessly complicating fiscal policy from the smallest cities and counties all the way to Sacramento.

One can understand why a politician might want to avoid taking on Proposition 13. But the whole rationale for appointing a citizens commission is to place its deliberations above politics.

By that measure, Parsky tried to do too much and too little. He explains he was determined to be "bold -- tinkering around the edges is not an alternative." Yet real boldness would have meant taking aim at our political shibboleths point-blank, and laying them to rest once and for all.

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Michael Hiltzik's column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read him at www.latimes.com /hiltzik, and follow @latimeshiltzik on Twitter.

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