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Sunday, May 30, 2010

Who will fix California's tax weaknesses?

In a May 20, 2010 article in the San Francisco Chronicle - "Candidates' plans to solve $19 billion deficit," none of the three candidates (Brown, Poizner or Whitman) makes any mention of tax reform. The solutions include cutting 40,000 jobs (Whitman), cutting spending and hiring freezes (Poizner) and public forums (Brown). As noted in the article, none of these measures is completely feasible or realistic to solve the deficit problem.

The deficit problem has many causes and I'll just focus on structural tax system problems which I've been writing about for some time now. The weaknesses include:
  1. An out-dated sales tax system that only applies to tangible personal property (and not even all of it). For some time now, our personal consumption of taxable tangible personal property has declined while our consumption of non-taxable services, entertainment and digital items has increased. Thus, we don't tax the same amount of consumption as we did years ago and the situation continues to worsen with new ways of doing business and living (such as buying digital music rather than on a taxable CD). We need to modernize our sales tax system while also reducing the very high rate and transitioning away from imposing the sales tax on businesses.
  2. We need to transition out various deductions, exemptions and credits of our personal income tax that do not serve a valid purpose or are outdated. For example, there is no reason for California spending to include the cost of subsidizing individuals with interest on a second home, a mortgage greater than $500,000 or home equity debt. There is no reason to give all seniors a tax exemption regardless of income level.
  3. The gasoline excise tax should be increased and different funding model pursued. To meet the state's greenhouse gas emission reduction targets, we all need to be incentivized to buy less gasoline. And with cars getting higher mileage per gallon, we buy less gas so there is less gas tax revenue to maintain roads.
  4. We might as well have an oil severance tax. Oil companies are used to them because most other states impose them and the purpose ties to our ambitious GHG emission reduction targets and brings in needed revenue.
  5. We should reinstate the vehicle license fee that Governor Schwarzenegger reduced when he came into office. The tax is progressive in effect because the tax is higher for higher cost cars. The tax is easily administrable because it is based on the year and model of the car and assessed on the annual vehicle registration form.
  6. We need to review the application of Prop 13 property valuation rules as applied to businesses. The current valuation approach favors older businesses over newer ones and encourages companies to engage in buy-sell arrangements that avoid ownership changes as defined under the law.

I've got a short paper on California weaknesses - here, and papers on most of the topics I've noted above. The papers provide background on the issue, possible solutions and evaluates those solutions against the principles of good tax policy - here.

The longer politicians and elected state officials ignore the need to improve and modernize our tax system, the worse the problems will get and the harder they might be to fix.

What do you think?

1 comment:

Monica said...

I hope we can get the public spotlight on the problems with the tax system.

I'd love to meet you when I'm settled in the Bay Area -- do you teach any day seminars on tax reform for CPAs like me?