Tax reform: Not now, but maybe later

Loren Kaye
President of the California Foundation for Commerce and Education

In his recent and provocative post, Joel Fox suggested that the
time may be approaching for a "big deal to solve California’s budget problems."
The big deal would include both tax and budget reform, although Fox cautioned
that voters may not look kindly on a complicated measure rushed to the ballot.

I would add another caution. Like Spring, the coming
of a new Administration breeds hope and optimism – which is a good thing. But
tax reform can be nasty business, and should only be attempted during
propitious circumstances. Governor Schwarzenegger’s experience with his Tax Commission
showed that even the best minds producing a creative and worthy proposal were
doomed to failure. Why? The environment lacked two key preconditions for
success.

First, the state was broke. Tax reform should never
be attempted when the budget is seriously out of balance, otherwise every
proposal will be viewed as a way to get well, rather than promoting equity,
efficiency or growth. The temptation to use a legitimate reform effort as a
smokescreen for more net revenues becomes too great, and opponents of reform
can too easily make that accusation, even if not true.

Second, there was no federal precedent. The best
recent example of state tax reform was nearly a quarter century ago, when
Governor Deukmejian and the Democratic Legislature streamlined credits and
deductions and lowered rates for both personal and corporate income taxpayers.
This legislation followed the precedent established by President Reagan and
Congress in 1986, who accomplished the last great federal tax reform.

Economic
recovery and relief from budget woes will probably not take hold in California
for at least several years. But President Obama has signaled his Administration’s interest in
possibly attacking federal tax reform to promote growth and reduce the deficit.
Maybe the seeds are being sown for eventual tax reform in California.

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