A Recipe for Future Shortfalls Revisited

We’ve blogged before on the distributional impact of proposals under consideration by the “blue ribbon” Commission charged with reviewing California’s tax system and we’ll no doubt do so again. While the body has not agreed upon a final set of proposals, it’s clear that they are moving in the direction of recommending changes that would significantly shift the cost of financing state government from high- to low- and middle-income Californians. While we’d argue that this fact alone provides sufficient grounds to send the Commission back to the drawing board, proposals under consideration would also likely lead to larger, not smaller, budget gaps in the future, thereby worsening the very problem the Commission was established to address.

How would this occur? The package of working recommendations would reduce the state’s reliance on the personal income tax, particularly taxes paid by those at the high end of the income distribution, and eliminate the state’s corporate income tax. Revenues lost as a result of these changes would be replaced – the Commission is striving to develop a “revenue neutral” package – with a new tax on the net receipts of businesses and a tax on carbon fuels. The latest draft also proposes to reassess corporate property to market value, although many observers suggest that this proposal may prove controversial among Commission members and that, unlike other proposals, would require voter approval to change the state’s Constitution.

Wider budget gaps would likely arise because these changes would reduce reliance upon or, in the case of the corporate income tax, eliminate the two taxes that have posted the strongest average annual growth rates over the past four decades and replace them with taxes that are likely to grow more slowly.

The Commission’s proposals would provide the largest breaks to those at the top end of the income distribution, which would depress revenue growth by cutting the amount paid by those whose incomes have posted the strongest growth over the past decade.

We’ll be looking deeper into the Commission’s recommendations over the next several weeks as more details become available. For now, however, we see little to cheer about with respect to addressing California’s long-term budget challenges or the state’s widening income gap.

— Jean Ross

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