Most analyst agree that California’s tax system is out of whack and needs major repairs but one thing that stands in the way is politics. Many interests are comfortable with what they’ve got with the current system and don’t want to change. Voters tend not to like tinkering with the tax system they know, fearing what they might face with a new tax structure. When times are relatively good, no one wants to make drastic changes. All this adds up to inertia on tax reform efforts while waiting for the next economic downturn that provides proof that the tax structure is not working well.
This situation is brought into clear relief with Proposition 55, the income tax extension on the November ballot.
So far 70-percent of the state’s newspaper editorials oppose Prop 55—not because they are against more money for schools and Medi-Cal where most of the Prop 55 tax dollars will end up – but because the measure exacerbates a system that relies too heavily on high end taxpayers, which is a ticket to a certain budget roller coaster ride when a recession hits. As the San Francisco Chronicle put it, “Prop. 55 represents another big patch for a precarious tax structure, and one big excuse for elected officials to continue avoiding a comprehensive tax reform…”
One of the leaders in recognizing the problems with the tax structure is state Controller Betty Yee. She authorized a council of advisors to study the problem and they produced a document titled Comprehensive Tax Reform in California, A Contextual Framework.
The first criticism of the current tax system Yee’s advisors highlighted was volatility brought on because the state relies so heavily on high-end personal income taxpayers who take a big hit during economic downturns.
Then why is Yee featured in television advertisements promoting Proposition 55, which, if passed, will perpetuate the current system and its volatility problem?
Yee answers that she has to pay the state’s bills while biding time waiting for tax reform to happen. She says reform won’t happen overnight and she doesn’t want the state to borrow money to cover obligations, which she expects will arise without the tax extension. The controller’s hope is reform will come within the 12 years Prop 55 would extend the income tax.
However, being a leading voice in the Proposition 55 effort will make it harder to lead a campaign to reform the system, especially when the beneficiaries of Proposition 55, mainly the teachers unions, will protect the measure against any changes.
If Prop 55 passes, it increases revenue to schools, which under the Proposition 98 formula sets a new floor for school funding. During a future recession, when dollars dry up, the state has to find revenue to meet the Prop 98 floor or the state would be required to repay any lost revenue to the schools during good economic times. In either case, more pressure is exerted on the state’s general fund.
The politics of tax reform becomes all the tougher if Proposition 55 passes, which is why most tax reform advocates don’t like it. But then a number of reformers also don’t want to offend the teachers unions, one of Sacramento’s most powerful interests.
Any reform attempt will require the governor to play a large role and the current governor has given no indication that he wants to take on this fight. The previous two governors, Gray Davis and Arnold Schwarzenegger, both created commissions to consider changes to the tax system. Both commissions produced reports then nothing happened.
All the talk of tax reform usually overlooks a key element to fiscal efficiency—the spending side of the budget. Change would not be complete without spending reforms.
And once spending reforms become part of the discussion the political hurdles grow even taller.