Last
week, Governor Schwarzenegger set as one of the highest priorities for his last
year in office the elimination of California’s status as a "donor state." That
is, the Governor intends to end the current practice of California getting back
only 78 cents for every dollar it pays in federal taxes.
Without question, Schwarzenegger’s goal is important.
According to the Tax Foundation, between 1981 and 2005 California’s donor
status has led to a cumulative donor deficit of almost $490 billion. But as
Joel Fox and John Wildermuth pointed out in their commentaries last week, getting
the federal government to fork over more money isn’t going to be easy. The
federal government is facing its own budget problems and – as Nancy Pelosi confirmed
recently – isn’t inclined to help Californians solve ours.
What we need is a Plan B.
Interestingly enough, the makings of a Plan B have
been right under our noses. They exist in the form of the recommendations of
the 21st Century Commission on the California Economy (the Parsky
Commission).
Although the Parsky tax package is only a starting
point needing further refinement, it would allow California taxpayers to keep $24
billion over the next five years that they would have otherwise paid in federal
taxes and create about 60,000 permanent jobs in the process. And it can be
implemented without reducing state tax revenues or increasing California’s
already high tax burden.
How is this possible? Recall that the Tax Reform
Act of 1986, widely heralded by both Democrats and Republicans, greatly streamlined
the federal tax system. But one drawback was the elimination of the ability to
deduct state sales taxes and state
personal income taxes on federal tax returns. Today, California households
deduct only their state income taxes; the benefits of deducting our state sales
taxes remain out of reach.
By changing our state tax system so that state
sales taxes are subsumed into a reworked personal income tax or a corporate
income tax system – such as a net receipts tax – Californians could effectively
deduct state sales tax payments from their federal taxes. This would keep billions
of dollars in the California economy and out of the hands of Washington
bureaucrats.
What does this mean for the average household? This
year, an average California household would save almost $400 in federal taxes. That’s enough to cover a typical
household’s annual phone bill or DMV vehicle registration.
In economic terms, this additional money
circulating through California would support at least 59,000 new and permanent jobs
in the state this year. By 2015,
this tax restructuring would support an additional 63,000 jobs in the state. With
California unemployment topping 12.3 percent, these jobs are desperately needed.
In fact, the actual economic impact would probably
be even larger since our analysis does not include the surge in California
retail sales that would result from goods being 8.25 percent less costly in
California.
In
his transmittal letter to Gov. Schwarzenegger, Chairman Gerald Parsky noted
that the Commission’s work was not so much a final product as much as it was a
starting point. The Parsky Commission should be commended for devising a means
to recoup the taxes that Californians have been unnecessarily handing over to
Washington for years. No doubt
there are other options for making state taxes federally tax deductable – and
perhaps that is where the remainder of the political discussion lies. But without
question, the Parsky tax reform package will help make California competitive without
relying on the generosity of the federal government.