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A taxing question

Would a plan to restructure the tax system shift too much of the burden to the poor and middle class?

September 22, 2009

It's too early to embrace or condemn a blue-ribbon panel's plan for reworking California's tax structure. After all, the report isn't finished; the Commission on the 21st Century Economy was still working on it as its Sept. 20 deadline slipped past. And that was after panelists got an extension from their July deadline. Which was itself an extension from their April deadline.

It's easy to sympathize with them for not getting their homework in on time. They're seeking an answer to a very touchy question: Who ought to bear the brunt of California's tax burden?

Although the report is not finished, drafts are circulating, and the main points have been discussed over months at commission hearings. Here's the gist: California's personal income taxes would be lowered and vastly simplified, from six brackets to two; the state's portion of the sales tax would be eliminated; and about half the state's revenue would come from a new business receipts tax, analogous in some ways (but not all) to a European-style value-added tax.

It's enough to raise some concerns that must be addressed after the report is in and can be thoroughly analyzed. First, is the plan perhaps a bit too innovative? A business receipts tax would no doubt be challenged by out-of-state service providers, and if it fails in court, half of California's revenue might go with it. Being creative is good. Being reckless is not.

It's perhaps positive that the plan would make state tax revenue less volatile -- that is, it subjects the state to fewer revenue feasts and famines by curtailing the treasury's dependence on the Wall Street gains of a relatively few super-rich Californians. But who pays for that new fiscal calm? If it's the poor and the middle class, as it appears to be, do we really want to make California's tax structure less progressive? How does that help the average resident? How does that help the economy?

Just as with water policy, governance and prison management, tax policy creates so many winners and losers and represents such a scary departure from the status quo that it's tempting to put off action to some undefined date in the hope that a future generation is smarter and braver, or perhaps just has less wiggle room. This generation should not take that irresponsible approach. But neither should it accept any new plan merely because it's new. The test of an effective tax policy is whether it improves on the status quo, not just whether it departs from it.

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