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Saturday, July 7, 2012

California's Troubled, Outdated Tax System

Three tax initiatives/propositions will appear on the November 2012 California ballot. This is a poor way to change the tax law.  Voters have to take the proposal as it with no opportunity for improvement. Fortunately, the two tax rate increase ones are temporary. The three initiaves are:
  1. Temporary Taxes to Fund Education. Guaranteed Local Public Safety Funding. Initiative Constitutional Amendment (No. 1578) - Governor Brown's initiative to help balance the budget.
  2. Tax for Education and Early Childhood Programs. Initiative Statute. (No. 1574) - Molly Munger's proposal to get more funding for schools.
  3. Tax Treatment for Multistate Businesses. Clean Energy and Energy Efficiency Funding. Initiative Statute (No. 1550) - proposes to only allow the single sales factor apportionment formula and use the revenue generated for clean energy projects.
I will have more on these proposals later including suggestions for how to analyze them and their pros and cons.

What I want to note here is a statement in The Economist of 6/16/12 in an article "Not quite Greek, but still weak."
California's budget problems begin with a tax system that is out of date. For most of the last century, sales taxes, which are relatively stable, were the state's main source of revenue, whole more volatile income taxes were less important. But that was when California's economy was still based on making things. Today it is a service economy, and services are exempt from sales tax."
The Economist has it right.  The tax system is out of date. Elected officials and voters tend to make the problems worse by raising the tax rate rather than fixing the base (what is subject to tax) for the income and sales taxes. As I note in my paper on California's Tax Problems:
Most of the specific tax problems in California’s existing tax structure described below can be solved by fixing the tax base - they cannot be solved with a rate increase. A rate increase would make most of these problems worse."
For more details on many of these problems, please see my papers and op eds here.

What do you think about California's tax system and current proposals for the ballot?

1 comment:

Eliza Thorne said...

This is probably one of the best times to put something in front of voters. They are the most attended voter outings, and see all types of people, whether they owe back taxes, are being audited, or are in perfect standing. You get a solid opinion from everyone!