Progressive taxes can solve state’s fiscal uncertainty

Despite a huge budget deficit, California’s tax system leaves out opportunities to increase revenue through the closing of loopholes, exclusions, and the implementation of progressive taxation alternatives. When Governor Arnold Schwarzenegger cut billions in revenues and borrowed to cover the previous deficit, the burden of cuts was shifted to the state’s vital services, including education, health care, public safety, and programs for the poor.

Though the state always faces deficit problems during an economic recession, the vast scope of this year’s $16 billion deficit stems directly from the governor’s cuts in revenue and the resulting costs of borrowing. So, where are the revenue sources to make up the difference?

Taxing oil already shot down
California is the only state in the country without a production tax on oil, and the state taxes oil at a far, far lower rate than any state—less than any place in the world, our research shows. Two weeks ago, Assembly Democrats tried to do just this but were shot down by Republican legislators.

In the past, the argument against an oil production, or “severance,” tax was that it was a declining resource, and “only” brought in $300 million or so. But with oil prices in California at $85 per barrel, an oil severance tax based on the price of oil would bring in more than $1 billion.

And at these oil prices, production is going to continue for a very long time. Over the years we have left billions in oil tax revenue in the hands of oil companies. We can no longer afford to do so; this tax should still be considered an option.

Equitable income taxes
California’s top income tax rate of 9.3 percent begins at income levels of about $90,000 for a working couple. In the Reagan and Wilson administrations, the top brackets were 10 percent and 11 percent for the highest income earners, but those have flattened out. Now working families pay the same as far wealthier families.

Adding higher brackets at $400,000— the top 1 percent—and $800,000 would bring in about $4 billion yearly. Most of the revenue would be from the very wealthy—the top 0.3 percent who earn 17 percent of all income. We should restore the rates of the Reagan and Wilson eras.

Close corporate loopholes
Then there are corporate loopholes. Businesses fight hard to maintain their tax advantages, usually with the argument about driving jobs out of California. But the legislative analyst has taken a straightforward approach to this issue, similar to an approach the California Tax Reform Association put forward along with Senator Martha Escutia several years ago: Limit the amount of corporate income that can be sheltered through the use of these credits.

The legislative analyst has identified approximately $700 million in revenue from limiting the amount that research and development credits, and loss carry forwards, can shelter income. She also argues, and the CTRA agrees, that the state’s enterprise zone program is wasteful and ineffective. Eliminating it could save another $100 million.

CTRA would add to that limiting the use of the Subchapter S form of organization to small companies, which is what it was intended for, not so large companies can avoid corporation taxes. There’s another $300 million.

And, while the state has cracked down on abusive tax shelters for personal income taxpayers, better information disclosure could add another $100 million—at least—from corporate tax evaders. So, we should add another $1.2 billion in corporate-loophole limitations, which have far more to do with tax sheltering than with real business decisions.

The largest business loophole in the state’s tax system, by far, is the failure to reassess commercial property, which is protected by Proposition 13. The failure to tax nonresidential property on the basis of market value is loophole- ridden and economically counterproductive, harms land-use decisions, and fails to generate revenue from economic growth.

Reassessing commercial property would generate $4 to $5 billion for cities, counties, and schools—at least. It requires a constitutional amendment, but it must be part of any long-term revenue solution to the state’s fiscal problems.

Smaller ticket items
There are many, many additional sources of revenue. The sales tax base could be broadened to include such things as admissions to sporting events and amusement parks, cable TV, and digital downloads, to raise well over $1 billion, and perhaps much more. Pollution charges and other “green” taxes can raise additional billions.

There are smaller but egregious loopholes, like the ability to avoid sales tax on yachts (closing the loophole would generate $26 million), and the incentive for commercial property owners to buy out-of-state property and avoid capital gains ($50 million).

The truth is, there are many billions of dollars from progressive revenues that should form the basis of a solution to our state’s daunting but closeable budget deficit.

By Lenny Goldberg - California Tax Reform Association

Lenny Goldberg is executive director of the California Tax Reform Association, a nonprofit organization based in Sacramento that advocates for fair taxes to build a healthy public sector. To learn more, go to www.caltaxreform.org.
—California Teacher, Feb/Mar 2008. Reprinted with permission.