Despite the high expectations set for the Commission on the 21st Century Economy (a.k.a. the “Tax Commission”), it is more likely than not that their recommendations for tax changes will be relatively modest. The Commission meets this Thursday and possibly again the following Monday, September 14.
How can modesty prevail when the stakes are so high and the key proposals surfaced in the Commission are so far-reaching? For starters, the Commission comprises serious scholars, business leaders and policy experts whose reputations enhance the Commission – not the other way around. These Commissioners did not build their resumes by endorsing half-baked proposals and were not selected for their talents at horse trading.
But perhaps more revealing is the growing resistance by Commissioners to addressing the state’s budget volatility through the tax system. Remember: fixing volatility was the ostensible reason the Commission was created in the first place. For example, Legislative appointees have opined that:
My belief is that volatility of the General Fund, to the degree it is a problem, is due to the governor and Legislature with regard to spending. That can be solved by way of an appropriately designed rainy-day fund or lockbox. (Commissioner Fred Keeley)
I have argued, and continue to believe, that volatility, which is a feature of every state’s tax system, is a spending problem and not a tax problem. (Commissioner Richard Pomp)
In terms of addressing volatility, a rainy day fund may be more effective than shifting the burden to middle- and low-income residents by reducing revenue from personal income tax and raising more regressive taxes. (Commissioner Jennifer Ito)
I have repeatedly argued that volatility should be addressed in a balanced fashion addressing both revenues and expenditures, but done so in a way that does not amount to a covert reduction in trend-line resources available to support public programs. (Commissioner Christopher Edley)
These comments are of recent vintage. Earlier this year, Commissioner Bill Hauck sought to bring the issue to a head by recommending the Commission support the Administration’s budget reform proposal, Proposition 1A – which was intended in major part to address budget volatility. The Commission at the time declined to become involved in the electoral controversy.
As regards the substantive proposals, clearly no consensus has yet emerged that will achieve some of the commissioners’ expressed interest in gaining votes from appointees of both Republican and Democratic appointing authorities. This threshold could be as high as 10 votes, with a minimum of four votes from both the Democratic and Republican appointees. Given the lack of enthusiasm evinced by Republican appointees for Commissioner Keeley’s detailed proposal for a “petroleum fuels pollution tax,” (in effect an initial 18 cent-a-gallon fuel tax increase with annual escalators), this plan is likely DOA. Mr. Keeley’s proposal for a split roll property tax seems to have dropped off the table. Democratic appointees have expressed reticence over proposals to flatten the personal income tax. They do not want either to reduce its progressivity or weaken its revenue raising capabilities.
Which leaves the new, untested business net receipts tax. While the Commission has successfully introduced this novel revenue source (is it a value-added tax? is it a services tax?) into the California public policy mix, the proposal is clearly not yet ready for prime time. Advocates from both the right and the left have raised substantive policy, implementation and fairness issues and have pleaded for more time for thorough analysis. In their workshops and correspondence, commissioners have expressed sincere interest in the idea, but also a healthy recognition of the difficulties with upending the California tax system with few competent examples in other states upon which to rely. It is difficult to imagine the serious members of the Commission recommending a major overhaul of the state’s tax system in the face of such uncertainty.
Better to float a specific, detailed proposal that can be comprehensively vetted for its economic and industry-specific impacts, and perhaps reconvene the Commission when the results of the analysis are complete. Taxpayers, businesses and policy advocates would then have an opportunity to review the analyses and apply the lessons to their own circumstances.
But if the Commission feels compelled to place its weight behind a proposal to reduce revenue volatility, it could do much worse than endorsing a plan by Professor Kirk Stark of UCLA, who suggests letting taxpayers who incur capital gains taxes remit those taxes over a period of years rather than all at once. The state would collect all the money it is due (less its time value), but spread out over several years, rather than in large spikes. This modest proposal could smooth the state’s revenue stream without reducing income tax progressivity or reducing tax revenues.