While academics and editorialists are urging the legislature to deal with tax reform (see this week’s L.A. Times editorial), changes to the tax system will likely be a reaction to federal tax moves or economic slowdowns. At a tax forum put on by the California Chamber of Commerce last week, experts gave their opinions about the opportunity to change the state tax system. The consensus: reform will take time.
Despite Proposition 55 passing, for which she advocated, state Controller Betty Yee told the forum that she doesn’t expect to get the 12 years of revenues promised by the measure’s passing because economic cycles and increased spending pressure will gnaw away at the tax money.
This latter not unexpected event can be classified under an immutable law when it comes to government finance: spending rises to the level of revenue collected. A lot of interests will be after increased revenues.
Senator Bob Hertzberg warned that an economic recession would produce devastating hits to the non-Proposition 98 side of the state budget. Proposition 98 protects K-12 education and community colleges. The recently passed Proposition 55 mostly supports the same services. So if a downturn hits, other budget items will take the brunt of revenue shortfalls. Hertzberg warned of court closings among other problems.
Hertzberg told business leaders that any shortfall in revenue that hurts the budget might lead to more business taxes. Sen. Hertzberg continues to work on his plan for services taxes to improve California’s tax structure by lining up the tax system more compatibly with the state’s economy. Hertzberg objected to the focus on “volatility” in discussing the state’s tax code because of the ups and downs the current structure brings by relying so heavily on the rich who see drops in income during recessions. Hertzberg said the emphasis should be about “modernizing” the tax code.
Still, smoothing out the budget ups and downs means reducing reliance on the upper income taxpayers who make up the biggest portion of the tax revenue collected. As Gov. Jerry Brown’s Director of Finance Michael Cohen said, reducing taxes on the rich means you have to tax the middle class more. Not a politically strong position.
Hertzberg’s agreed any tax changes had to deliver for the middle class. He noted that 78% of businesses have 10 employees or less. He said, give a tax cut to those guys.
Yee argued for a tax system that supports a robust private sector economy, economic development and job creation while helping local government offer amenities business looks for in safety, education and housing.
Brian Meighan, of PricewaterhouseCoopers, follows federal tax issues. He suggested that pressure to change California’s tax system could come from federal tax changes, which are uncertain as the Trump Administration takes over. Director of Finance Michael Cohen said that California couldn’t go its own way ignoring the federal government tax changes. State officials must be nimble reacting to whatever comes out of Washington.
Despite all the conversation about tax restructuring, it’s a topic politicians treat like hot coals. They want nothing to do with it. It seems likely any tax changes will be forced on the state by outside forces from Washington or economic cycles.