You know that real reform is about to happen when opponents let loose their menagerie of hobgoblins and boogeymen.

Today’s LA Times was the forum for the tax raisers to complain about common sense tax policy. But they had to dress it up as a give-away, because that’s what you do when common sense is not on your side.

The common sense part: taxpayers pay taxes on income (profits) and can write off losses. But for many business taxpayers, their business cycles do not conform to the arbitrary dates of a tax year. Federal tax law has long recognized this fact of economic life, and has allowed taxpayers to write off losses going back two tax years and forward up to 20 years. (The latter is particularly helpful for businesses with long gestation periods, like biotech firms.)

California only recently agreed to partially conform to federal law, allowing write-offs of losses prospectively for ten years. But as part of their initial $8 billion tax increase to close the budget gap, Democrats proposed to suspend the ability to write off these losses for two years, but offered to extend the carryforward to 20 years. The suspension would amount to a $1.5 billion increase on business taxpayers.

To ameliorate this enormous tax increase – affecting businesses suffering losses in the midst of an economic contraction – some budget negotiators are suggesting that California conform completely to federal law by allowing a two-year carryback.

Conforming to common sense has sent the tax raisers into orbit. They’ve responded – not on the merits, of course – but by inventing a villain: in this case, the subprime industry. Five years ago their villain would have been Enron and the energy producers; twenty years ago it would have been the savings and loan industry.

The fact is, if a company suffers a loss, it doesn’t – and shouldn’t have to – pay taxes on that loss. This is what the debate should be about, not whether you like these taxpayers’ line of business.

And that they are objecting to fixing a defect in California’s tax law while at the same time raising a billion and a half dollars shows just how insatiable is their appetite for higher taxes.