Tax Plan Is Upside Down

Earlier this week, we wrote about a potential plan that would raise additional revenues by raising all but the state’s top income tax rate and lowering the state’s sales tax. Since our Tuesday post, additional details have emerged. Our post criticized the plan for its disproportionate impact on low- and middle-income Californians, and that view has not changed now that details have become public.

The basic problem with the plan Senator Steinberg discussed with the Los Angeles Times isn’t its structure – which has some merit – but the fact that it is upside down. And this has significant – and negative – implications for the California economy and for the fairness of the state’s tax system.

A better alternative would raise the top rates of the personal income tax and protect families who are struggling the hardest to make ends met. “Right siding” an income for sales tax swap would turn a proposal that runs counter to the arguments of prominent economists that we’ve previously cited into a well-targeted proposal. The current proposal would raise the tax rates at the bottom of the income distribution, but not at the top. The proposed increase would fall hardest on taxpayers who spend all that they earn in their local communities and who don’t benefit from the ability to deduct state income taxes on their federal returns. A “right side up” proposal would raise taxes at the top end – taxes paid by taxpayers who spend a smaller share of their earnings locally, while consuming globally and saving more, and who are far more likely to see savings on their federal return.

A “right side up” proposal would be consistent with the recommendations of prominent economists who argue that “tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits” during an economic downturn.

As we’ve said before and will say again, the solution to California’s budget crisis must be balanced and well targeted.

— Jean Ross

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