Dan Walters: California is overdue for tax reform

01/21/2013 12:00 AM

02/26/2013 8:19 PM

Mention "tax reform" to a liberal Democrat, and the talk immediately turns to raising more revenues. Mention it to a conservative Republican, and he or she sees it as a way to cut taxes.

Real tax reform, however, is not about increasing or reducing revenues, but about making taxation fairer, simpler, more stable and more aligned with economic reality. And by that standard California is in sore need of real reform.

A few years ago, a blue-ribbon commission appointed by then-Gov. Arnold Schwarzenegger and the Legislature tackled tax reform – especially the corrosive volatility of state revenues – and after much internal angst proposed an overhaul of sales and income taxes. Its report was promptly relegated to the circular file.

If anything, the need for reform has increased since.

While Gov. Jerry Brown and his fellow Democrats are relishing the sales and income tax revenues produced by Proposition 30, it will have the counterproductive effect of making the state even more dangerously dependent on how well a handful of wealthy people are doing in their investments – increasing the volatility that the tax commission was trying to decrease.

With newly minted supermajorities in both legislative houses, Democrats are talking a lot about "tax reform" these days. Characteristically, however, they mean changes that would make it easier to raise state and local taxes, such as reducing the vote margin for school and local government parcel taxes.

Brown, meanwhile, is proposing to shrink one of the more indefensible loopholes, called "enterprise zones," which provide hefty tax credits to employers for locating in and hiring workers from communities with high levels of poverty, unemployment and welfare dependency.

Every independent study of the state's 40-plus local enterprise zones concludes that they do little or nothing to create more employment but are milked for more than a half-billion dollars in tax credits each year, some accruing retroactively to companies that hire consultants to work the system.

Brown initially proposed to kill enterprise zones altogether, just as the state wiped out local government redevelopment agencies, for the same reason: The money they cost would be better spent elsewhere.

However, that went nowhere. His new approach is to tighten up the requirements to end "retroactive vouchering" and require firms to offer more documentary proof that they are hiring those most in need of work. The new rules would reduce the state's cost by about $50 million a year.

That's small potatoes in a nearly $100 billion general fund budget – not even enough, one might say, to pay for the tax loophole that Brown and the Legislature punched in the tax code for the movie industry, which is a big backer of Democratic campaigns.

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