What California faces when the Proposition 30 temporary taxes run their course was a question addressed by a couple of panels, one on which I participated, at Governing Magazine’s Leadership Forum in Sacramento yesterday.
Proposition 30 passed by voters last November increased sales and income taxes temporarily. The quarter-cent sales tax portion is scheduled to expire in 2016, the income tax piece runs through 2018.
What happens then? Will there be a huge hole in the state budget when all those taxes go away? The idea expressed by proponents of Prop 30 was that the economy would stage a comeback over the time period in which the temporary taxes are in effect. But, if that’s the plan, the timing might not be so good.
State Controller John Chiang pointed out that the longest post recession period in California’s history lasted ten years. Given that the most recent recession ended four years ago, Chiang said equaling that record period would mean another dip in the business cycle could be expected around the time or even before the taxes disappear.
Director of Finance, Michael Cohen, called Proposition 30 “a gift from the taxpayers” but warned that the state had seven years to get it fiscal house in order. State auditor Elaine Howle said that the legislature must be visionary in considering the end story for Prop 30.
All well and good if the legislature responsibly deals with controlling spending and acts to help create jobs–on more importantly, just gets out of the way and not discourage job growth — but let’s face political reality. Spending interests are not likely to let Prop 30 die a quiet death. While my panel at yesterday’s conference considered if the end of Prop 30 and a resulting hole in the state budget presented an opportunity to restructure the state’s tax code, I suggested a different approach would be followed by powerful interest groups.
Factions interested in more spending would likely favor keeping the Prop 30 taxes in place by making them permanent. Alternatively, they would go after business by attempting to raise commercial property taxes or creating a tax on products such as oil. The slogan “tax the rich” or “tax corporations” is easier to fit on a placard than trying to explain a tax restructuring that would be healthier for California’s economy.
I concluded my panel discussion by paraphrasing United States Supreme Court Justice Oliver Wendell Holmes: The history of the law is not logic but experience.
Our experience in California is that there will be a tussle over tax increases rather than the logic of tax restructuring when the Prop 30 taxes end.