Governor-elect Gavin Newsom says he hopes to amend the California tax code to lessen its dependence on income and capital gains taxes paid by the very rich. Yet the last two serious attempts at tax reform were both dead on arrival, and the political dynamics since their failure appear unchanged or even more unfavorable.

With the state overdue by historical standards for another recession, Newsom is well aware of the revenue nightmare that is looming. After the Great Recession hit a decade ago, state revenue plunged nearly 20 percent – leading to harsh budget cuts in education, public health and social services. Since income and capital gains taxes generate about two-thirds of state revenue, volatility is common.

The revenue decline a decade ago led then-Gov. Arnold Schwarzenegger to create a commission that in 2009 recommended slashing taxes on income and capital gains while imposing taxes on broad categories of services including legal work, haircuts and tickets to sports and entertainment events. The goal was a tax code rewrite that was initially revenue-neutral but that could end up creating considerable new revenue because of provisions designed to promote economic growth.

Democrats see income-tax cut as gift to rich

Yet while commission heavyweights like former Treasury Secretary George Shultz and many economists touted the wisdom of the proposal, the commission’s tax-overhaul blueprint was blasted by both parties from the moment it was released.

Democrats said the plan was a giveaway to the rich. Republicans knocked it for expanding government taxation to new areas.

The scheme – dubbed the Parsky plan because Rancho Santa Fe GOP businessman Gerald Parsky chaired the commission – never even came up for a committee hearing.

Six years later, in 2015, state Sen. Robert Hertzberg pushed a similar proposal, but with a twist. Instead of being revenue-neutral, has plan would yield $10 billion in new revenue a year. Yet Hertzberg’s plan was also DOA in the Capitol for the same reasons as Parsky’s.

Now, with the progressive wing in more complete control than ever of Democrats, their antipathy toward the idea of tax relief for the rich may never have been stronger. That was reflected in the recent Sacramento Bee story about Newsom’s interest in revamping the state tax code.

Jessica Bartholow, policy advocate at the Western Center on Law & Poverty, told the Bee that the tax code shouldn’t be changed to help the rich and big business.

“Capital gains is money earned by people who didn’t earn it,” Bartholow said. “If wealthy corporations and people are having an upswing in their interests, then why shouldn’t the poorest people?”

Republicans fear reform would prove bait-and-switch

The strongest voice in support of tax reform the Bee cited was Rob Lapsley, president of the California Business Roundtable. But the basic sentiment conservatives expressed about the Parsky and Hertzberg plans – Sacramento wants to tax even more human activities? – is at least as intense as in 2009 and 2015. There is considerable suspicion that any reform plan would end up as a Trojan horse for much higher taxes.

This is fueled by evidence that Democrats are gearing up for a huge push to hike taxes even though state revenue is at an all-time high. The most high-profile gambit is qualifying a measure for the 2020 ballot that would end Proposition 13 protections against property tax hikes of more than 2 percent a year for commercial and industrial properties.

This tax-hike fervor is already evident in local governments, including some under Republican control. As CalWatchdog reported last month, more than 150 local governments asked voters to raise taxes in the June and November elections. While most of the tax hikes were adopted after campaigns depicting them as crucial to public safety and to maintaining government services, by far the fastest-growing category of local spending is on pension costs, which are predicted to roughly double for California cities from 2015 to 2025.

President Trump’s release last week of a one-page list of his principles for

Because among the deductions Mnuchin seeks to zero out is one that allows taxpayers to deduct state and local taxes from their federal taxable income, some coverage is framing it as a way for Trump to punish liberal “blue” states that both have among the highest state taxes and which voted heavily for Hillary Clinton.

This list starts with California, New York and New Jersey. Yet the notion of this being some sort of partisan payback has a twist: Some of the 28 House Republicans from the three liberal states could be as likely to resist the targeting of the deduction as House Democrats. The Committee for a Responsible Federal Budget estimates that Californians would have to pay some $10 billion more in annual income taxes without the deduction, the most of any single state.

The IRS reports that more than 80 percent of taxpayers making more than $100,000 take advantage of the state and local taxes deduction and more than 45 percent of taxpayers making between $50,000 and $100,000.

But other provisions of Trump’s tax plan, such as doubling the standard deduction, would minimize the hit on those making under $100,000 and very affluent taxpayers would stand to gain from the killing of the alternative minimum income tax.

While trying to figure out how the framework might help or hurt their districts, so far California’s 14 House Republicans have generally stayed out of the tax fray.

Some GOPers leery of ending state tax deduction

But not Republicans in other blue states. Rep. Chris Collins, R-New York, said he opposed ending the deduction. He told Bloomberg News he saw his decision not as being about partisanship or helping or hurting Trump but as about whether he would “stand up for New York.”

New York and New Jersey don’t have Proposition 13-style protections against rapidly rising property taxes, as California does. Being able to deduct property taxes from federal income helps lessen the blow of soaring real-estate values, Rep. Tom Reed, R-New York, told Bloomberg. Reed said he was open to Trump’s plan but wanted to know more about how it would affect his state.

But the property-tax deduction still saves California billions, according to Tax Foundation estimates. Even though increases in annual property taxes are capped by Proposition 13 at 2 percent, the state still has the 17th highest effective property tax rate, according to wallethub.com.

Mnuchin’s main argument for a much simpler tax code with lower rates – that it would lead to explosive growth – echoes a tax-policy debate nearly a decade ago at the state Capitol.

In late 2008, Gov. Arnold Schwarzenegger appointed a high-profile group of academics, business figures and politicians to serve on his Commission on the 21st Century Economy. The bipartisan panel – chaired by Rancho Santa Fe investor Gerald Parsky – produced a report in September 2009 that sought the creation of a much simpler tax code with lower income taxes that addressed the state’s traditional reliance on volatile capital-gains tax revenue by broadening what could be taxed to include services.

Parksy depicted the proposed tax code as the first in history designed specifically to promote economic growth by removing tax provisions that encouraged tax avoidance and discouraged attempts to expand business operations. He stressed it would be initially revenue-neutral before eventually producing what he said would be a tax revenue bonanza.

Push for similar tax reform in California went nowhere

What happened next suggests the difficulty Trump could face in getting House and Senate majorities for sweeping tax reform. Despite high-profile support from Schwarzenegger and former Treasury Secretary George Shultz on the right and former Gov. Gray Davis and UC Berkeley author-professor Christopher Edley Jr. on the left, the proposal was dead on arrival in the Legislature.

Democrats couldn’t stomach its income-tax cuts for the rich. Republicans didn’t like new taxes on services and feared that attempts to overhaul the state tax code could be hijacked in the Legislature as a way to sharply increase taxes as state revenue plunged during the Great Recession.

Trump’s framework wouldn’t add a broad new category of taxes, so it may fare better than Parsky’s plan did with Republicans. But the harsh reception the California plan got reflects the leeriness about changing the status quo of taxation among powerful vested interests. That’s one reason that Congress hasn’t made a serious effort at tax reform in more than a generation – since the 1986 package pushed through Congress with the guidance of Reagan White House Chief of Staff James Baker and House Ways and Means Committee Chairman Dan Rostenkowski, D-Illinois.

Senate Bill 8 would change the tax code to reduce the reliance on topsy-turvy income tax revenues by adding taxes on services and reducing them on personal income. Here’s a description of it from the LegInfo official site:

California’s two trillion dollar economy has shifted from being mainly agricultural and manufacturing in the 1950s and 1960s, when the framework of today’s tax system was set, to one based on information and services, which now accounts for 80 percent of all economic activities in the state. To achieve a future as promising as California’s past, we need a tax system that is based on this real economy of the 21st century while ensuring that new revenue is invested in strengthening the ladder of mobility for all our residents.

The second, SB155, would better integrate California into the Western region’s electrical grid to promote a more resilient system and show how California’s embrace of more renewable sources of energy can be emulated by other states. There’s no bill analysis available, but the intent is to offer up the Golden State as both a model and a partner for states considering more ambitious renewable mandates.

But the twist is that while Hertzberg’s bills are broadly lauded by an East Coast group, in Sacramento they barely made a wave. Neither has ever been voted on, even at the committee level.

Refining tax code proposed — and rejected — before

It’s not clear why other Democrats in the Legislature are cool to SB155. But the central ideas driving SB8 — that we have an outmoded state tax code that poorly serves residents and the business community — have been around for years. They were the driving force behind a 2009 report issued by the Commission on the 21st Century Economy, a panel set up Gov. Arnold Schwarzenegger whose supporters included both Republican luminaries (former Treasury Secretary George Shultz) and Democratic ones (former Gov. Gray Davis).

The report proposed what commission chairman Gerald Parsky called the world’s first tax code specifically designed to promote economic growth; one that reduced many current taxes while imposing new taxes on a wide range of services. Parsky, a Rancho Santa Fee businessman and high-profile behind-the-scenes Republican player, predicted it would lead to a broad California economic boom even without the regulatory reform that business groups have long wanted.

The private Think Long Committee for California, with a more liberal pedigree, made similar recommendations in 2011. The committee chairman, billionaire businessman Nicolas Berggruen, predicted a smart tax code could yield a wave of vast new funding for K-12 and higher education.

Neither got anywhere. Democrats objected to lowering income taxes on the wealthy, while Republicans objected to adding big new areas of commerce for government to tax.

Hertzberg appears to be finding the same resistance.