Right & Left Squeeze Tax Reform Idea

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Like a vice pressuring from both sides, interests on the political right and left are trying to crush the idea of reforming the California tax code by taxing services. That makes the prospects for success daunting. Sen. Bob Hertzberg, who is leading the effort, should at least be given credit for recognizing that California is doomed to ride the revenue roller coaster under the current tax system. Spending that happily anticipates never ending good budget years accelerates that wild roller coaster ride – something the legislative majority is wont to do.

The Los Angeles Times appears to be cheering for tax reform in the manner in which Hertzberg’s SB 8 is considering – that is fashioning a tax code that more closely reflects the current California economy and its reliance on services.

Earlier this month, the Times editorialized that now is the time to re-do the tax code while the state is flush. The editorial noted that the state has the highest income tax rates now but cannot rely on the highly volatile income tax to cover budget needs when the economy dips.

Recently, Times columnist George Skelton praised state Controller Betty Yee for advocating a change in the tax code that would consider a tax on services.

Yet, the discussion about tax reform has corralled few followers who toil in the trenches of Sacramento politics.

Conservatives ask of Hertzberg’s tax plan why put in $10-billion in new revenues when the state enjoys a large surplus?

In a policy brief on taxing services, the business-oriented California Taxpayers Association concluded a tax on services would “stifle the state’s economic growth in the long term. California businesses would be put at a competitive disadvantage … Jobs and investment opportunities would be lost as employers seek to relocate or expand in lower cost states. Small businesses and working families would be disproportionately affected.”

That last point concerning the affect on working families, or low-income families, has attracted the attention of liberal groups. As reporter Anthony York put on his Twitter account, Jean Ross, former head of the California Budget Project, which advocates for the poor, noted: “If you wanted to exacerbate inequality, Hertzberg’s SB 8 is a really good way to do that.”

Hertzberg’s basic approach of lowering rates and expanding the base is a proper economic approach. However, expanding the base means raising taxes from those who don’t pay as much in taxes now. Politics most often trumps economic theory.

Defining fairness in taxes is a tricky thing. One might argue that the fairest system is one in which every taxpayer pays the same share of his or her income for the welfare of the state. However, progressive tax policy has taken precedent in this country. That makes it more difficult for the reformers to find some common ground to change the system.

As the tax reform proposal gets more attention, the vice will tighten. Lowering taxes on the high end taxpayers, raising taxes on the low end taxpayers and increasing tax revenue by an additional $10 billion for spending has allowed people from opposite political viewpoints to nod in agreement that they do not want this kind of tax reform.

Can Hertzberg build a coalition to push back?

Follow Joel Fox on Twitter @1JoelFox1

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