As reported today, the current version of the California budget does not include the renewal of earlier tax rate increases, but relies on spending cuts and expected increased tax collections. (See Mercury News article and LA Times article (6/28/11).) The budget would also include a law change to try to get Internet vendors to collect California sales/use tax rather than relying solely on customers to self-assess use tax (see my post (and comments) of 6/27/11).
I'm glad to see the increased revenues (from improvement in the economy, but amount is still uncertain) and no tax rate increases. I have suggested for some time now that California's tax problems lie with the tax base rather than the rates (which are among the highest of states other than our property tax rate of 1%). For example, rather than increasing the already high sales tax rate that applies to an eroding tax base (tangible personal property), the rate should be lowered and the base broadened (modernized) to include many types personal services, digital downloads and entertainment. Revenue from the broadened base could be used to both lower the rate and start creating exemptions for business equipment (to avoid pyramiding and improve the state's business tax climate). The personal income tax can be improved by removing unnecessary and ineffective deductions, exemptions and credits. For example, reduce the home mortgage deduction so it only covers interest on a loan on your principal residence (not also a second home and an equity loan) and only up to loans better tied to the median home price (rather than $1.1 million). For more on improving the personal income tax - click here.
Remember, a tax system is more likely going to meet principles of good tax policy if it has a broad base (so few deductions, exemptions and credits) and a low rate. Unfortunately, is it usually easier to increase the rate, which exacerbates the base problems, rather than remove special deductions, exemptions and credits. But the hard work needs to be done.
What do you think?
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1 comment:
This is an informative post about the tax system. AHMSI complaints shows the tax system affecting home mortgages. Everyone should be made aware of these changes.
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