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Ten simple tax reforms could save $20 billion

Merely reinstituting the top state income-tax rate to 11 percent for the highest 1 percent of earners would yield billions



Governor Schwarzenegger stated that all the “low-hanging fruit” in the budget—that is, the easy cuts—have been removed. But tax loopholes, untaxed windfalls, tax breaks that yield no benefits to the state, taxes on the very rich, and sin taxes (taxes with little or no impact on economic recovery) have not been seriously considered by the administration. With the state facing a current deficit and on-going yearly deficits of $20 billion, the survival of basic services and a healthy public sector are at stake. The following list summarizes 10 measures to help close the deficit that would have the least impact on economic growth and recovery: the low-hanging fruit in the tax system. The Legislative Analyst’s Office calls for a long-term workout, and these revenues would provide that.

1. Enact an oil severance tax at 9.9 percent ($1.2 billion):  California is the only state, and the only place in the world, that does not tax oil production.  The 9.9-percent rate is the rate proposed by Governor Schwarzenegger. Contrary to oil-industry propaganda, California has the lowest tax on oil in the nation—about 60 cents/barrel—when it should be $6 to $7 per barrel at current prices. This tax will have no effect on the price of gasoline or on oil production.

2. Eliminate secret corporate tax loopholes ($1.7 billion):  As part of the September 2008 and February 2009 budget agreements, the Legislature passed new corporate loopholes in secret—loss carry-backs, credit sharing, and elective single-sales factor. These take effect in 2011. Contrary to the Governor’s rhetoric, it is not a “tax increase” to repeal these before they go into effect, and they are egregious new loopholes, benefiting mostly the largest corporations.

3. Broaden the sales-tax base to include untaxed commodities ($2 billion or more): There is virtually unanimous agreement that our sales-tax base is too narrow. The Governor has supported broadening it, and the first steps should include entertainment, admissions, parking, golf and skiing, hotels (in other words, the temporary rental of space), and digital products—all of which are commodities easily subject to tax. Beyond that, sales taxes on telecommunications, cable, and satellite would generate $2 billion more.

4. Reinstate the top income tax bracket to 11 percent ($4 billion now, growing to $6 billion in out-years): The top 1 percent of earners receive an unprecedented 25 percent of all the income in California!  Though that may diminish a little due to the recession, the recovery of the stock market means capital gains for the wealthy are likely to recover, while ordinary incomes in a slow economy are not. State income taxes have no impact on the location of the wealthy or investment in California, and this revenue will grow faster than economic recovery.

5. Close corporate property tax loopholes ($2 billion): Statutory definitions of change of ownership are thoroughly loophole-ridden. Research by the California Tax Reform Association has identified numerous cases where properties have not been reassessed at market value following a change in ownership. CTRA estimates that tightening corporate property-tax loopholes would raise $2 billion. The legislature can act by statute to close this loophole, potentially by a majority vote in a two-step approach.

6. Maintain the vehicle license fee (VLF) at 1 percent ($1.3 billion): The VLF is supposed to be an in-lieu property tax but was cut from 2 percent to 0.6 percent.  A long-term resolution of this issue would put the VLF at the Prop. 13 rate—1 percent—slightly below the current 1.15 pecent temporary rate, beginning in year 2011-2012.

7. Close useless corporate tax loopholes ($1 billion): Enterprise zones have been demonstrated to have no impact on jobs ($500 million).  Avoidance of capital gains on commercial property sales—so called like-kind exchanges—are driven by federal, not state considerations ($350 million).  Placing offshore tax havens in the water’s edge stops blatant tax manipulation ($150 million).  Impact on economic decisions: zero.

8. Increase tobacco and alcohol taxes ($2.4 billion): Taxing products with negative impacts on society has positive effects. Enacting a tax at 10 cents/drink would generate $1.4 billion, and proposals for increased tobacco taxes have been keyed at generating $1 billion.

9. Improve tax collections ($2 billion initially; less ongoing):  Governor Schwarzenegger vetoed majority vote legislation that would have provided an initial $2 billion in improvements in collections, including withholding on independent contractors and a bank records match. 

10. Lower the current sales tax by one half cent ($2.5 billion): The temporary one-cent sales tax
increase will expire July 2011. Instead, lower the sales tax by half of that amount. The tax could phase down by one quarter cent per year as the state’s fiscal condition recovers.

 Many of these tax changes would have little or no negative economic impact. To the extent there would be any negative impact, it would be vastly overwhelmed by the negative impact of a state unable to finance infrastructure, that allows its higher education system and schools to deteriorate, that forces cutbacks in local government, and that shreds its safety net for its poorest citizens.

Lenny Goldberg is Executive Director of the California Tax Reform Association. Send comments via the editor at [email protected].

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