July 30, 2009
Tax Foundation Summer Fellows Micah Cohen and Kiran Sheffrin Pen Op-Ed on California Tax Reform for San Diego Union-Tribune
"Solving California's budget problems"
By Micah Cohen and Kiran Sheffrin
Gov. Arnold Schwarzenegger and legislators are touting a compromise reached last week as a solution to the state's $26 billion budget shortfall, but the deal is woefully short of solving all of their problems. California is now so deep in mud that it is still issuing IOUs. So why is California, the state whose gross domestic product rivals that of entire nations, scrambling for stable ground? The answer is structural, and the solution is here.
The California Commission on the 21st Century Economy, better known as the Parsky commission for its chairman, businessman Gerald Parsky of Rancho Santa Fe, has crafted a winning proposal that includes a net receipts tax to replace the corporate income tax and the general fund sales tax, and a single-rate, progressive personal income tax. Enactment of such a bold plan would vault California into the national spotlight and start a wave of state tax reform that the country hasn't seen since Proposition 13 was adopted 30 years ago.
California now relies heavily on volatile tax revenue sources. The extremely progressive structure of the tax code creates business cycle "bracket creep." That is, during economic booms individuals move up in tax brackets and during recessions they move down. The result is the state's $26 billion budget crisis.
Personal income tax reform is politically feasible, as Maine showed recently by simplifying from four brackets to two. If California follows one expected suggestion from the commission—to go from seven brackets to one—its personal income tax would still be progressive and yet provide much steadier revenue.
