Time to Re-Think the California Tax Structure?

TaxesIncome taxes are due today, which should give us pause to think about the state’s rickety tax structure built on a narrow foundation of a few high end taxpayers. ForgetAboutIt! Hardly anyone seems to care, not while the current tax system is raining dollars into the state treasury like manna from heaven.

The latest figures from State Controller Betty Yee’s office show nearly $62 billion has been collected in personal income tax through March with the biggest hit yet to be calculated through the month of April. The March figure was already 3.1% more than anticipated by Governor Brown’s budget, and the overall collection of personal income taxes is over $7 billion ahead of last year’s collection on the same date at the end of last week.

The personal income tax last year provided nearly 68% of all General Fund revenues, with the top 1% of the state’s taxpayers providing about 50% of those funds.

With the help of a tax increase on those high end taxpayers Gov. Brown helped drive through at the ballot, he has seen a 45% increase in the state budget since he took office with this year’s budget enjoying billions in reserves and surplus.

In such an intoxicating fiscal environment, who wants to try to rearrange the feathers on the Golden Goose?

But that is something that needs consideration. Relying on high-income taxpayers to anchor the state budget comes with both the potential for dramatic revenue growth that the state has witnessed in recent years, but also the volatility of depending on this group of big earners. In down economic times, the state budget takes a dive.

Controller Yee authorized a council of advisors to study the problem of reforming the tax system and they produced a document in June 2016 titled Comprehensive Tax Reform in California, A Contextual Framework. The first criticism of the current tax system Yee’s advisors highlighted was volatility brought on because the state relies so heavily on high-end personal income taxpayers who take a big hit during economic downturns.

As I have noted previously: Many interests are comfortable with what they’ve got with the current system and don’t want to change. Voters tend not to like tinkering with the tax system they know, fearing what they might face with a new tax structure. When times are relatively good, no one wants to make drastic changes. All this adds up to inertia on tax reform efforts while waiting for the next economic downturn that provides proof that the tax structure is not working well.

So we merrily roll along during these flush times. Gov. Brown has warned what will happen when the next recession hits California hard. While he has put money into rainy day reserves to counter the negative effects on the budget, a hard downturn would still likely put the state’s budget underwater.

Brown will say, “I told you so,” yet he didn’t spend any political capitol to try to re-do the tax system. No question, it will take a Herculean effort and may only be forced on a governor and legislature during a time of crisis, much as the current tax structure was created during the Great Depression.

In the meantime, the state officials and interest groups will fight about how to spend all that manna.

ditor and co-publisher of Fox and Hounds Daily

This article was originally published by Fox and Hounds Daily