Time is Ripe for California Flat Tax

MAY 18, 2011


Now is the time for the innovative Gov. Jerry Brown of the 1970s to step forward and push aside the union hack who has impersonated him in the governor’s office since the January 3 inauguration.

With the unexpected windfall of $6.6 billion in additional revenue for the California state budget, this is the time for comprehensive reform of the budget process. The positive revenue development is coupled with the continued dire straits of the overall budget.

The 1970s Gov. Brown would have embraced the challenge — and run with it. But like a cheesy 1970s zombie movie — “Omega Man” was a classic — his body is still there but his original mind isn’t.

The additional revenue is projected in Brown’s May Revise, released Monday, to his January budget proposal. Brown originally called for $12 billion in tax increases to help close the state’s budget deficit. With the $6.6 billion windfall in new revenues, he could have reduced that to $5.4 billion in new taxes — or even $5.4 billion in additional budget cuts, with no tax increases.

Instead, he wants to use the windfall partially to fund $3 billion in more spending for schools — and for future bond projects the state doesn’t even need.

He also is projecting continued strong revenues well into the future, making the same mistake governors keep making in assuming that we won’t get stuck in another recession. But the with the housing market still declining, and inflation taking off, the current “recovery” is like a castle built in the Malibu sand.

The problem, as many have observed for decades, is that California depends too much on the revenues of rich people. When the economy roars, rich folks’ incomes and investments soar, with California raking off heavy revenues from the state’s top tax rate on those activities of 10.3 percent. (Last year it was 10.55 percent.)

But when markets crash, the rich see their investments and incomes drop sharply. Which in turn crashes state revenues.

Prop. 13

Numerous solutions have been put forward over the years. Many in and out of government continue to pine for the property tax revenues lost because of 1978’s Proposition 13. But Prop. 13 retains vast support across the state. Few people want to go back to the conditions of the mid-1970s, when retired folks were losing their homes due to soaring property tax levies.

Sometimes what’s called a “split roll” is advanced by tax-increase advocates. It would keep Prop. 13 in place for residential properties, but cancel it for business properties.

As my colleague Steven Greenhut wrote on CalWatchDog.com earlier this month, “There’s already a low-level push in the Legislature for a split-rolls property tax that would remove Prop. 13 protections from nonresidential properties.”

That’s unlikely to happen. But if it did, among other problems it would vastly increase lobbying in the Capitol as businesses worked for exemptions to the higher property taxes — and many would get them. Defense businesses would plead, “We need the regular property tax rate or prices would be higher on our equipment and weapons. That would lead to fewer of our great products being used by the troops, meaning more brave young American heroes would come home in body bags. You would have their blood on your hands.”

Environmentalists would be next in line, pleading, “Unless we get the old Prop. 13 tax rate, our products won’t be used enough, and the environment will be polluted much more. The planet will be doomed.”

Tax Jiu-Jitsu

In this environment, what Brown needs to do is perform tax jiu-jitsu. He needs to flip the debate on its head.

The best way he could do that would be to bring up a tax reform idea he’s familiar with: the flat tax. He knows the reform well because he campaigned for a national flat tax in his 1992 presidential bid.

Reported the San Francisco Chronicle:

As a 1992 Democratic presidential candidate, Brown advanced the idea of a flat 13 percent tax rate for all Americans. Brown took some criticism from the media back then for allowing no low income exemptions for the poor in his plan — but the Democratic presidential candidate insisted then that “with it, stock markets will go through the roof, businesses, will thrive and millions of Americans will get back to work.”

Brown’s 1992 flat-tax reform was authored by Arthur Laffer, the economist who helped devise the 1981 Reagan tax cuts that produced almost 30 years of prosperity for America. Laffer also has devised a flat-tax plan for California. Although Brown has not embraced the plan, I wrote about it last year here on CalWatchDog.com:

“A flat tax would stop all these companies from moving from California,” he told me, by simplifying and lightening the tax load on both businesses and persons. It also would end the boom-bust volatility of tax receipts, which in boom times leads to wild spending that, in bust times, must be paid for with higher taxes that punish income producers. The days are long gone when California’s balmy climate was enough to prevent companies from leaving for Nevada, Texas and other states with better tax rates.

Laffer’s Flat Tax Proposal

Laffer’s proposal is simple. It would be enacted through a constitutional amendment passed by a majority of voters. The details:

1. Get rid of all other state and local taxes: property taxes, sales taxes and gas taxes.  The only exception would be “sin” taxes, such as those on cigarettes, because those are designed to change behavior.

2. Institute two taxes:

A flat income tax of between about 6.4 percent and 6.9 percent. The only deductions would be for a mortgage or rent in the place of principal residence, and for charitable contributions.

A tax on business net sales calculated this way: total sales less purchases from other companies. Its rate would be the same as for income: between about 6.4 percent and 6.9 percent. The tax is the same as a value-added tax(VAT). But Laffer told me that there’s this big difference: In Europe and other places, a VAT is imposed on top of other taxes, so it’s a mess. In California, it would be the only state business tax of any kind.

Unique Opportunity

This is the time for the 1970s Jerry Brown — the real Jerry — to step forward and embrace this unique opportunity for instituting a flat tax in California. He is uniquely positioned to lead the state out of the boom/bust cycle of elation and despair that wrenches the budget and economy every few years.

Right now, the state is enjoying a rare period of an even keel, where things are getting better — but not too much better.

Moreover, it’s unlikely that Brown’s successor as governor will have the same chance he does to get thing straight — and flat — on the budget. As another former California governor once declaimed: If not us, who? And if not now, when?










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