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Knock Sense Into Taxes

REINVENTING CALIFORNIA

April 18, 2004

Just about everyone has washed his or her hands of state taxes for another year, but they're still painfully fresh in mind. It's a good time to get lawmakers' attention about the tax code. This will not be an argument for just raising taxes to help plug the $14-billion shortfall in next year's state budget. What California needs for the long term is smarter taxes. The current system is piecemeal, loaded with inequities and blatantly unfair to cities and counties.

For instance: The state technically has a high corporate income tax rate, at 8.84% of net profits, but it is reduced by hundreds of special deductions and credits that are applied like a crazy quilt. It is as much the complexity and unpredictability of the state tax code as the burden itself that drives businesses crazy. A highly progressive personal income tax unburdens the poor and near-poor but -- because of California's high cost of living -- comes down heavily on families still clearly in the middle class.

The state's workers' compensation costs are still sky-high but are being addressed. Energy costs are far too high, and some businesses suffer over-regulation. However, the state also has one of the nation's lowest commercial and residential property tax rates. There are a lot of issues that discourage businesses in California, but it is not quite the tax hell that some lawmakers and anti-tax groups contend.

The Tax Foundation, a research group based in Washington, D.C., that is generally anti-tax, now ranks California 26th in the nation in state and local taxes as a proportion of income. That's well below such states as Arizona, Utah and Idaho that are said to be draining California of businesses. California's overall tax burden (including income, sales and property taxes) averages 9.8% of income compared with the 11%-plus of New York, Maine, Ohio, Hawaii, Rhode Island, Wisconsin and Utah.

California was a higher-tax state during the high-tech boom, which created a lot of wealth -- and taxes in the highest brackets. Then, incomes -- and tax revenue -- withered with the dot-com bust. When other states were raising taxes, Gov. Arnold Schwarzenegger cut the car tax by two-thirds. Most other taxes are in the middle range among states. The gas tax is 29th, liquor tax 19th, cigarettes 15th and wine 41st.

These disparate numbers help us understand how piecemeal the system is now, riddled with credits and deductions carved out by special interests, from race-horse breeders to the fertilizer industry. There's never been proof that the generous manufacturing investment tax credit saves jobs or creates new business. Fixing tax inequities, inefficiencies and loopholes does not amount to a tax increase, as some legislators argue.

The sales-tax base has shrunk because of a shift in the economy from goods and manufacturing to service industries. The base could be broadened to such things as movie tickets, admission to amusement parks and computer programs, which would allow a reduction of the overall rate.

Local governments, which don't control local property taxes, depend on the kindness of the state for every year's budget and are shafted in downturns. This damages local services from schools to public healthcare to libraries. Localities' revenue has to be stabilized and guaranteed.

These are all logical changes and simplifications, easily defended to voters. Tax code reforms should be a priority of the governor and legislative leaders. Special interests will scream, but let them.

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