Senate Holds Select Hearing on Tax Reform

As the debate continues around Governor Brown’s temporary tax extension proposal, a bi-partisan Senate Select Committee on Recovery, Reform and Realignment held its first hearing on tax reform strategies that would permanently reduce the volatility of state revenues and make California a more competitive job creator.  The Committee, which has even representation of Republicans and Democrats, is focused on the development of innovative reform concepts that, if implemented, could address the current structural impediments to job creation, budgetary stability, and accountable governance.  The committee serves as an environment where Legislators from both sides of the aisle can come together to discuss innovative ideas that can help break down established partisan divisions.

At the hearing, Legislative Analyst Mac Taylor presented a PowerPoint overview of how the tax system currently works, explaining how personal income taxes, corporate taxes, sales tax and property tax effect the state’s budget.  He explained that California’s main problem is volatility of the personal income tax and high marginal tax rates.  Capitol gains taxes also play a large part in the volatility.  In order to deal with the volatility, Taylor said California needs to have a strong reserve.  He suggested that the state could revise the system by reducing the personal income tax on capitol gains, reduce the progressivity of rates, or rebalance away from the reliance on personal income tax.  He also pointed out that California has a declining sales tax base that could potentially be remedied by a tax on tangible goods, but excluding business to business transactions.

Joseph Henchman, Tax Counsel & Director of State Projects for the Tax Foundation, provided the committee with some examples of other states tax reforms.  He cited Florida is an example of where the expansion of the sales tax to services did not work.  In 1987, Florida expanded the sales tax to services such as legal, advertising, construction industries and more.  The state later repealed the service tax and now serves as a warning as to why the sales tax should not be expanded to services.

The biggest surprise at the tax reform hearing was Democratic Senator Rod Wright, D-Inglewood, who gave many examples of manufacturing and industry in his Southern California district which had closed down, and all but disappeared.  And according to Wright, it is the fault of overreaching tax and regulatory state policy leaving businesses with the inability to financially plan on a long term basis.

Wright said, that operating a business in the state just doesn’t pencil out, which is why his district, once a thriving hub of auto manufacturers, rocket and shuttle manufacturers, and airplane manufacturers, is now mostly slums, and rundown.  The people in his district used to work – now they are poor.

Of particular interest to Wright are the repeated attempts by Democratic legislators to pass an oil extraction tax.  Wright said most oil extraction in the state goes to asphalt and not gasoline, which is imported offshore.  So the tax would affect the prices of other products and not oil in the state, only hurting mostly small, independent businesses.  By contrast, Wright asked, “What happens if Standard Oil leaves Contra Costa County?  They are the biggest employer in the county.  Are we going to chase them out too?”

Wright suggested that the state fix the volatility issue by reducing personal income taxes but expanding the base of who is taxed, since only 50 percent of Californians pay income tax, and the other 50 percent receive state provided services.  He stated that people are either going to be taxed or lose services and he believes that his constituents would rather pay a couple hundred more in taxes than lose their vital services such as day care.  It is also his belief that expanding the sales tax to services would be an impossible feat.  Lastly, he suggested that the state should look at other options for revenue, such as taxing satellite companies at the same rate as cable companies. 

The committee plans to hold some additional hearings in the future on related issues.