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Taxes Can Preserve Our Quality of Life

January 14, 2003|Stephen Levy | Stephen Levy is director of the Center for Continuing Study of the California Economy in Palo Alto.

Gov. Gray Davis finally has proposed a budget that focuses attention on serious choices about state taxes and spending.

First, we need to agree on what happened during the last four years and stop the partisan blame game. A good economy and soaring stock market allowed the state to increase education spending by $10 billion a year, put additional funds into transportation investments and broaden health care and child care for low- and middle-income families.

In addition, tax cuts of nearly $7 billion a year on car licenses and business income were adopted.

Now, stock market-related taxes have fallen by $10 billion and the economy is weak. There is some blame for both political parties for avoiding the hard budget choices last summer when solutions would have been easier. This time, we need to solve the problem.

We need to stop posturing and agree that tax increases are reasonable as part of the budget solution. Past spending supported critical economic, quality-of-life and equity goals, and a tax increase to minimize cuts in these programs is a wise investment in our future. Despite recent spending increases, we are still below average in per-pupil spending and per capita investment in transportation. Moreover, local governments are under extreme fiscal pressure and we are not producing enough housing.

California cannot compete for new firms and jobs unless we are willing to invest in high-quality public institutions and infrastructure. Moreover, these investments improve the quality of life for Californians.

The tax increases should be temporary, not permanent. The $35-billion deficit estimate is probably too high, the economy should do better than the governor assumes, and permanent tax increases should be debated with much better information than we have now.

A temporary increase in taxes and fees of about $10 billion a year would represent less than 1% of the total annual income of all residents and repeat the successful bipartisan and balanced budget package of a decade ago.

Low- and middle-income families should be protected as much as possible. The demand for health-care and social service spending goes up in bad economic times, yet this spending will be cut severely even with tax increases.

The proposed income tax surcharge on families with incomes of more than $250,000 should be part of a fair budget solution. In addition, the cuts in vehicle license fees should be repealed temporarily as the law allows; we no longer can afford them.

The governor's proposed sales tax increase, however, is a poor choice as either a replacement for lost stock market- related taxes or a foundation for long-term fiscal reform. The sales tax is a relatively slow-growing revenue source and falls more heavily on low-income families.

A sales tax increase does not meet the governor's goal of adjusting to changes in how the economy operates and would compete directly with using sales taxes to finance local transportation improvements.

Broadening the sales tax base to include services would capture some high-growth areas of the economy (particularly if we were to capture all Internet sales) and is an idea worthy of consideration as a new permanent revenue source.

Long-term fiscal reform must include adequate revenue for local governments and strong incentives for housing. The governor's proposal does neither, although his idea of realigning services and revenues for local governments has merit.

Meeting the governor's objectives requires reform in property tax collection, including raising the assessed valuation of property but not raising property tax rates.

Finally, I support the governor's call for President Bush to give federal aid to states. How can we be serious about economic stimulus if we allow state and local governments to lay off teachers, cancel construction projects and decrease cash payments to poor families? A federal aid package of $50 billion to $100 billion would give $5 billion to $10 billion to California and avoid the most devastating layoffs and cuts.

The specifics of the governor's budget will change as the Legislature gets involved, but the key questions will not. Education and infrastructure spending were good investments when stock option income paid for them. They are still good investments even if we have to pay more taxes for a while.

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