Dan Walters: California's tax system violates basic tenet

08/06/2013 12:00 AM

08/06/2013 8:13 AM

When Jerry Brown began his first governorship in 1975, the general fund budget was under $10 billion and the sales tax was the largest source of revenue.

By the time Brown returned to the governorship 36 years later, the general fund budget was about 10 times as large, and the sales tax was running a distant second to the personal income tax in revenue.

The sales tax dominated the state's revenue picture in 1975 because purchases of taxable goods – cars, clothes, etc. – consumed roughly 50 percent of Californians' personal incomes.

But their habits began to change in the 1980s; they began spending less of their incomes on taxable goods and more on their housing and on services not subject to sales taxes and whose costs were rising fast.

Thus, taxable sales dropped from a peak of more than 50 percent of personal income in 1979 to scarcely 30 percent.

Although sales tax rates crept upward between Brown's two stints, they did not fully offset the relative drop in taxable sales, as a new report from Legislative Analyst Mac Taylor points out.

Income taxes now account for about 60 percent of the state's general revenue, while sales taxes have dropped to around 30 percent. Relatively few, very affluent Californians pay most of the income taxes and their taxable incomes vary greatly, depending on how stocks and other capital markets are faring.

The effect is to make the state's revenue more volatile, as several boom-and-bust cycles attest.

This phenomenon has been kicking around political, media and academic circles for years. Former Gov. Arnold Schwarzenegger and the Legislature even created a commission to recommend reforms that would reduce volatility.

The commission's divided recommendation was to apply the sales tax, with a name change, to services as well as hard goods and to reduce the state's dependence on volatile income taxes on the wealthy by broadening its middle-class impact.

The recommendation was immediately ignored. The state has since become even more dependent on taxing high-income Californians by raising their rates via a 2012 ballot measure sponsored by Brown, which means revenue has become even more volatile.

Consumer spending will probably continue, as Taylor notes, to move away from taxable goods, which should also worry local governments that have counted on increasing sales taxes. The state will become ever-more dependent on income taxes paid by a handful of wealthy Californians, if they don't move out of the state or devise strategies to avoid income taxes.

A bedrock principle of sound tax policy is a low rate applied to a broad base.

California has very high sales and income tax rates applied to ever-narrower bases, a recipe for continued fiscal angst.

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The Bee's Dan Walters is providing weekday video updates on Capitol policy and politics. Find "Dan Walters Daily" at www.sacbee.com/capitolalert .

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