The day before Halloween Governor Schwarzenegger announced the formation of a bipartisan Commission on the 21st Century Economy to re-examine and modernize California’s out-of-date revenue gathering laws that contribute to the boom and bust state budget cycles.
The premise underlying the formation of this commission in undeniable. As stated in the Executive Order creating the commission "California’s antiquated revenue system is a major contributor to our feast-or-famine budget cycles." That is because California in addition to having the highest personal income tax rates also has the most steeply progressive rates meaning that half of all income taxes come from just 1% of residents. Moreover this disturbingly discriminatory structure has driven millions of employers entrepreneurs and highly educated workers out of California for states with a less hostile tax and regulatory environment.
These boom and bust cycles wouldn’t be such a bad thing — obviating the need for changes — if the Legislature were a responsible institution. But it isn’t.
In the boom cycles the tax-and-spend lobby convinces the Legislature to spend every penny that comes in the door usually for new programs which are difficult to unwind when the revenue spigot shuts off. Despite repeated warnings from Republicans — especially budget mavens like Tom McClintock — that maybe just maybe the state should save that money for later those in the Legislative majority have demonstrated as much discipline as a toddler left in a room with a cookie jar.
So what are ordinary taxpayers in the Golden State to think of this idea to form a commission to address the problem of revenue volatility? While such a commission could provide real value to address a real problem we’ll have to wait to see how it is structured before we pass judgment.
No doubt anti-taxpayer interests are seeing the commission as a huge opportunity to raise taxes. After all what better excuse would it be to increase revenues under the guise of "fairness" or "smoothing out volatility?" If the commission is dominated by those seeking more ways to extract taxpayer dollars from citizens and businesses it should receive an immediate death sentence and dissolve on the spot.
One proposal being bandied about illustrates this real fear. In order to smooth out sales tax revenue some have discussed expanding the sales tax to include services. Now given the historic shift in the nation’s economy away from sales of hard goods to a more service oriented economy perhaps there should be such a discussion — but if and only if we are talking about revenue neutral changes. If California policy leaders from both sides of the aisle want to engage in a legitimate policy discussion of consumption taxes fine. But any expansion of the base must be accompanied by rate reductions.
Some good news is that Republican leaders have already let it be known that Republican participation in the process is predicated on the understanding that any structural changes be revenue neutral. And in fact the Republicans (being far more sensitive to tax competition among the states) will be pushing for tax cuts as a means to stimulate the economy.
Whether the commission will listen to the input from fiscally responsible participants depends entirely on the makeup of the twelve member commission. As reflected in the Executive Order six appointees will be selected by the Governor three from the Senate Pro Tem and three from the Assembly Speaker.
What is glaringly obvious from this structure is that ALL TWELVE members will be chosen by elected leaders who have actively sought tax increases as recently as two months ago. If this doesn’t make taxpayers and businesses immediately suspicious of the process it should.
The only way to overcome the doubts of the taxpayer community is to make doubly sure that taxpayers or their allied interests make up at least half of the commission. Stated another way why should anyone even pay attention to this commission if over half of its members are made up of special interest tax-receivers government bureaucrats and/or labor leaders?
Fortunately California is blessed with many talented experts who have a real grip on the scope of the problem and what can be done about it. A quick list of worthy individuals and groups would include Bill Leonard currently on the Board of Equalization; Dave Doerr of CalTax who literally wrote the book on California taxation; representatives from Pacific Research Institute the Hoover Institute Reason Foundation and others.
The point is simple. In order to be a viable process and not just another commission that produces a report that will gather dust on the shelf — there are dozens of those already — the process must be fair transparent and taxpayer interests must be fully represented.
There is another good reason to listen to taxpayer interests on the matter of tax volatility. The vulnerability of both our income tax system and sales tax structure to boom and bust cycles is well known. But the revenue source with the least volatility is property taxes. Because of Proposition 13 and the fact that property tax revenues can increase even in a declining market California’s budget problems — especially at the local level — are far better than they would be otherwise.
Although constantly derided by the intelligentsia and the media it turns out that Jarvis and Gann knew what they were doing after all.
Jon Coupal is President of the Howard Jarvis Taxpayers Association — California’s largest taxpayer organization — which is dedicated to the protection of Proposition 13 and promoting taxpayers’ rights.
This column also appeared on the FlashReport website on October 31 2008.