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Five Tax Options for the Democrats

Joe Mathews
Connecting California Columnist and Editor, Zócalo Public Square, Fellow at the Center for Social Cohesion at Arizona State University and co-author of California Crackup: How Reform Broke the Golden State and How We Can Fix It (UC Press, 2010)

Democrats are now back in power, and many are saying they are not going to do anything more on taxes.

Don’t believe them.

It’s not merely that fish gotta swim, birds gotta fly, Democrats gotta tax. It’s that there are good reasons to change the state’s tax system. The question is: which path will Democrats take?

Here are five potential paths:

5. Big tax reform. The ideal would be something like the Think Long Committee promised: lowering rates, extending taxes to cover the service economy, producing $10 billion in sustainable revenues, and maintaining progressivity. It’s not easy to do that, but designing a new tax system along these lines makes sense. DRAWBACKS: Politically poisonous and tricky to get the policy right.

4. Go after Prop 13. This means a split roll on property taxes and a lowering of the supermajority requirement for local votes on parcel taxes. DRAWBACKS: Political disaster likely when you take on Prop 13 head-on, and split roll change doesn’t produce all that much revenue.

3. Getting rid of deductions. There are many plans for getting rid of deductions, which was a focus of Phil Angelides’ campaign for governor in 2006. Some deductions seem like easy marks – especially the tax deduction for punitive damages. DRAWBACKS: The special interests will fight bitterly to preserve their deductions, and ending deductions doesn’t produce that much money. Just ask John Boehner.

2. The Sins. California doesn’t have an oil severance tax, and its tobacco tax is below the national average. Changing those two facts would be popular – and easily done by Democrats. And even some Republicans like the idea of taxing things you want less of. Taxes on sugary drinks and alcohol also make some sense.  DRAWBACKS: Oil and tobacco industries would spend tens of millions to fight them off.

1. Make Prop 30 taxes permanent. This hasn’t been talked about much in the media, but making Prop 30’s taxes permanent may be the easiest tax policy for Democrats to push through, as a political matter. Voters just approved temporary tax increases under Prop 30 by a 10-point margin. The problem with those taxes, however, is that they are temporary (someone should remind Democrats of this since they keep talking about the end of the structural budget deficit). Prop 30 would be less problematic as a budget fix if those increases were made permanent. DRAWBACKS: Not many. Though this is a poor substitute for broader tax reform.

What will Democrats do? I suspect we’ll see attempts of some kind on all five. But most likely are 1 and 3.

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