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Shortfall Can Spur Reform

January 19, 2003

The shock of California's budget crisis might actually jolt lawmakers to dare a fresh look at the state's tax and budget systems. The aim would be to control spending, broaden the tax base, reduce some tax rates and dampen huge year-to-year swings in revenue.

The governor should be able to trim specific program spending at midyear if revenue predictions prove to be way off. In unusually good years, rising revenues should be required to go to roads, bridges, park upgrades and other one-time projects that the state needs to keep itself economically attractive. Yearly spending caps should be tightened.

California often is called a high-tax state, but in fact it is right around the national average in taxes paid as a percentage of personal income. Property taxes are among the lowest in the nation, thanks to Proposition 13, which capped the tax at 1% of value and allowed upward reassessment only when property changes ownership.

No lawmaker would dare touch homeowner taxes. Other solutions ought to be open to exploration, but the Legislature is stuck in partisan gear. Republicans vow to block any tax increase, and if they stick together they can succeed. Even Gov. Gray Davis and his Democratic allies in the Legislature are at odds over what taxes to raise. Deep spending cuts are necessary, but even firing every state employee would only barely dent the multibillion-dollar shortfall, whether it's Davis' $34.6-billion figure or the state legislative analyst's $26.1 billion, a figure still being updated.

One often-suggested idea that Davis declined to tackle is charging sales tax on services as well as goods. The state could take in an additional $7 billion with a tax on services, from movie admissions to legal advice. With a broader base, overall sales tax rates -- which are high and which Davis wants to raise -- could go down. It's the sort of deal that Republicans anxious to avoid obstructionism should consider.

Davis also shied away from taxing Internet sales of goods and has mentioned but did not propose reassessing business property at current market value. Business property, also covered by Proposition 13, is less frequently reassessed because there is less turnover and there are ways to escape a new assessment when a business does change hands.

The personal income tax is indeed one of the highest in the nation at its current 9.3% top rate. The state had 10% and 11% rates off and on from the late 1960s through the 1990s, and Davis has proposed reinstating the higher rates now. If they are raised, the Legislature must make the increase temporary. This highly progressive tax would offset any regressive effect of a broader sales tax.

The right reform package would stabilize revenue and spending from year to year. It should also allow cities to cease battling for big-box stores and auto malls that provide sales tax, their major controllable source of income. The governor, lawmakers and voters have an opportunity to fix a system that adds too much drama to life in California.

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