Last week I discussed Assembly Speaker Perez’s proposal to create a new “rainy day” budget reserve. He suggests capping the amount of capital gains tax revenues available for deposit in the General Fund. Capital gains revenues above the cap would instead be transferred to a reserve. Once the reserve was filled, excess revenues would be spent exclusively for one-time purposes, like infrastructure and debt reduction.
The true merit of this proposal will only be apparent when the details are released. But in the meantime, the Speaker’s focus on capital gains taxes reminds me that there are ways to reduce tax revenue volatility without the need to change the Constitution or even bother with a supermajority vote of the Legislature.
During 2009 debate over tax reform before a blue-ribbon state commission, Professor Kirk Stark of UCLA suggested 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.
Added bonus – this change in tax law could be passed this year by a majority vote of the Legislature. No messy ballot measure necessary.