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Wednesday, December 5, 2012

Tax Reform Possibilities of California's New Super Majority

California's requirement for any tax increase to have a 2/3 vote of the state legislature makes tax reform difficult in California. The 2/3 vote requirement was created as part of the famous Prop 13 property tax reform effort in 1978. It was tightened further in 2010 with Prop 26 when the voters said that if even one taxpayer would have a tax increase from a legislative proposal, it needs a 2/3 vote. Thus, even a revenue neutral reform bill or even a conformity bill needs a 2/3 vote. With many legislators signing the "no tax" pledge, the likelihood of reform and conformity have been slim.

That might change starting in 2013 when the incoming legislature will comprise at least 2/3 majority of Democrats - in both the Assembly and Senate. Whether this will result in tax reform remains to be seen, but the possibility of it is improved.

Yet, the voters also said with the November 6 election that they were okay with high personal income tax rates and a high sales tax rate to balance the state's budget (these will be highest among all states with a 7-year top marginal rate of 13.3% starting in 2012 and a 4-year state sales tax rate of 7.5% starting in 2013). If lawmakers either must or prefer to respect these voter-approved high rates, tax reform efforts will be limited. I say that because California's tax problems are not with its rates which were already high before the recent increases. California's tax problems are with its tax bases, such as a sales tax base still tied to the 20th century consumption patterns. Base broadening will not work without lowering the tax rates.

I've got a guest post on this topic at the Bloomberg BNA SALT Blog (12/4/12) for more information.

What do you think will happen with respect to tax legislation in California in 2013-2014?


Greg Karnos said...

Those rates are unbelievable... I agree that just bumping them up isn't going to solve the problem.

Love reading your posts!!

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