California tinkering at edges of tax reform hardly enough 

When Jerry Brown served his first stint as California governor three decades ago, the state’s biggest generator of revenue was, by far, the sales tax.

At the time, taxable retail sales — cars, clothes, appliances and the like — were well over 50 percent of Californians’ personal income. Soon after, however, spending habits changed. We began spending relatively less on taxable goods and relatively more on untaxed services and investments, including our homes.

Why? Demography — particularly the aging of baby boomers — plays a role, but there are other factors involved, such as the surging service sector. Whatever the underlying reasons, it’s a fact of economic life.

Today, taxable sales are barely 30 percent of our personal incomes and that means, despite several boosts in sales tax rates over the years, it generates only about a third of the state’s revenue.

Meanwhile, the personal income tax, once a relatively minor source of general fund dollars, has soared to more than 50 percent of revenue.

This change contributed heavily to the state’s chronic budget woes because income taxes are much more volatile than sales taxes.

When the economy boomed and income taxes — especially from high-income taxpayers — were pouring into the state’s coffers, politicians tended to spend them all on permanent new programs and tax cuts. They pleased special-interest pleaders but then faced deficits when the economy cooled and revenue dipped.

One obvious remedy would be to overhaul the tax system to produce more stability and predictability in revenue.

A commission appointed by former Gov. Arnold Schwarzenegger and legislative leaders to recommend tax reforms urged that the taxable bases of both sales and income taxes be broadened and their tax rates lowered.

However, the commission was sharply divided, and its report was tossed in the trash can as soon as it was issued.

Meanwhile, politicians fiddle at the edges of the tax system. Assemblywoman Nancy Skinner, D-Berkeley, for instance, has reintroduced legislation to tax Internet sales, seeking a way around the federal rule that Internet sellers without a physical presence in a state cannot be compelled to collect sales taxes.

However, it may be unconstitutional, and even if implemented would generate only a relatively tiny amount of money. If California is to truly tame its budget beast, its politicians and voters must bite the bullet and realign its tax system with the 21st-century economy.

Dan Walters’ Sacramento Bee columns on state politics are syndicated by the Scripps Howard News Service.

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Dan Walters

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