Throw out the tax code
There's plenty of revenue to be had if California fixes its outdated, unfair system.
Politicians don't like to talk about taxes except to brag about cutting them. But with California's widening budget deficit threatening deep cuts in education and other public services, it's difficult to avoid discussions about raising taxes.
Unfortunately, what's likely to be lost in the upcoming partisan melee over whether new taxes are needed to close the $16-billion gap is an equally important tax issue -- California's aging and often unfair tax system needs to be overhauled.
The goal of tax reform should be twofold. One is to generate a more reliable revenue stream. The other is to make the tax code more reflective of California's changing economy, which in turn could stimulate more growth.
Gov. Arnold Schwarzenegger has tentatively embraced the idea of tax reform. "If it is property tax, if it is personal income tax, if it is sales tax ... if it is services, Internet," he said last week at a town hall meeting, "one has to look at all of those things together and say, let's bring it up to date, the system."
The major elements of the state's tax system were set in place during the Depression. The modern corporation and bank tax was enacted in 1929, the sales tax in 1933, the income tax (with a top rate of 15%) in 1935 and the statewide uniform vehicle license fee (the "car tax") in 1937. The big industries of that California -- agriculture, motion pictures, tourism -- relied on sunshine and produced mostly tangible goods, a lot of them sent to market in cans: peaches, sardines and movies.
The industries that drive today's state economy -- software, information services such as Google, high-tech, diversified manufacturing, movies, video games, professional and business services -- run on entrepreneurship, knowledge, creativity and technology. They produce more services and intangibles than hard goods. Operating in a global market, they face new competition from anywhere. And they can locate wherever there are fast broadband communications, good transportation, skilled workers and a high quality of life to attract and hold employees.
The state's tax system simply hasn't kept up with this transformation of its economy.
Although the overall state and local tax burden on California businesses is almost the national average -- and lower than in Florida and Texas, according to the Council on State Taxation, a nonprofit trade association -- the system, in general, treats new investment and new firms unfavorably. That doesn't promote economic growth.
