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Friday, May 14, 2010

Spending cuts should include those in the tax system

Governor Schwarznegger's efforts to cut spending to address the California budget shortfall will avoid tax increases (see AP story in San Diego Union Tribune, 5/14/10). The problems with this limited approach include:

  1. Fixing some inequities in the tax law would legitimately raise some revenue even if the rate were lowered a bit too. For example, it is time to tax digital goods purchased by consumers. The sales tax base is eroding as some types of tangible personal property (such as music CDs) become intangible digital property. We should also start taxing some personal services such as hair salons, tanning salons, trainers, etc. The tax rate could also be lowered.
  2. There is a lot of spending buried in our tax law. For example, there is no reason for California to allow a tax deduction for mortgage interest on a second home or a mortgage exceeding $500,000 or on home equity debt. The federal government offers these subsidies, but California doesn't have to as well. Also, the senior exemption should be changed to be based on income level rather than age - why give a tax break to a wealthy senior? I've got more on this here. Lawmakers should remember that some of the spending cuts we need are in the tax law. Unfortunately, when placed there, they are easily overlooked (they are not in some agency's annual budget that gets regularly reviewed) and they are subject to the 2/3 vote requirement to remove. Tax expenditures (spending buried in the tax law) can get out of control. Last year, Oregon lawmakers noted that the "cost" of the expenditures - over $30 billion per biennium, was greater than spending for education, health care and public safety combined. (see my 8/19/09 post)
  3. Look for spending inefficiencies. For example, can more things be done on line. A few months ago, in helping my parents get ID cards, I discovered that it could not be done online. I'm sure all agencies have ways they can cut costs and increase efficiencies (I include my employer in this too - the CSU).

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