Dan Walters: Tax loophole closures on CA Legislature's agenda
12/05/2012 12:00 AM
02/26/2013 8:19 PM
It all depends, to paraphrase Bill Clinton's infamous line, on what your definition of "tax increase" may be.
California's constitution – thanks to Proposition 13 – effectively defines it as "any changes in state taxes enacted for the purpose of increasing revenues whether by increased rates or changes in methods of computation" and requires two-thirds legislative votes to make changes.
Republicans have embraced that view, and as long as they held at least a third of the seats in either legislative house, it prevailed.
The Legislature has imposed only two significant state tax increases, both temporary, since Proposition 13 passed in 1978. But with the advent of Democratic legislative supermajorities, the Republican grip on taxes has been loosened.
That doesn't mean that Democrats will immediately jack up sales or income taxes – especially since voters just did it by passing Proposition 30.
"Voters do not want us to burst out the gate to raise more taxes," Darrell Steinberg, the president pro tem of the state Senate, said as the Legislature reconvened.
But while talking to reporters, Steinberg adopted a narrow definition of "raise more taxes" by embracing a constitutional amendment that would lower the threshold of voter approval for local parcel taxes, a form of property tax, and potential elimination or reduction of some "tax expenditures," usually called "loopholes."
Potentially, there's a lot of money at stake in the latter, which would require two-thirds votes to change.
This year, the Legislature's budget analyst estimated that there are $45 billion in annual "tax expenditures," defined as exceptions to taxation for specific purposes.
The biggest, valued at $4.3 billion, is the personal income tax deduction for mortgage interest, followed by tax-exempt employers' contributions to pension plans ($3.5 billion) and to employee health care ($3.2 billion).
Those and other exceptions with broad application and high popularity, such as the exemption of Social Security income, are very unlikely to be touched.
But they could be limited for high-income taxpayers, and there is an array of business tax breaks that liberal groups have long targeted, such as the $600 million in tax credits for "enterprise zones."
EZs, as they are known, may become a test of the Legislature's appetite for loophole closure, since they have been widely criticized as lacking any demonstrable public benefit.
Steinberg argues – persuasively – that tax expenditures should be subjected to the same scrutiny as budgeted expenditures.
But he also knows that most of them were enacted by Democrats, such as a sales tax loophole for the custom software industry and the very recent tax break for the Democrat-friendly movie industry, so we'll see how far he gets.
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