The Time Is Ripe for Reform

Now that this year’s budget battle is temporarily behind us, our collective focus needs to shift to real structural reform in the way the state government is run. The single largest opportunity for true change will come from the California Commission on the 21st Century Economy (the Parsky Commission), the blue-ribbon panel of experts who have been charged by the governor with coming up with ways – in a revenue-neutral manner – to smooth out what has become an extremely volatile state tax system. There are a number of proposals the Parsky Commission is debating, ranging from flattening the state income tax brackets to scrapping the two-thirds voting requirement to increase taxes. Needless to say, some of these ideas are far better than others, and no one wants to raise taxes on the middle class.

The biggest problem in our current system is that our elected leaders move from crisis to crisis, with the obligatory special election thrown in for good measure, without seriously examining how to prevent the next crisis. Hence we understand that the current tax structure is too reliant upon the state’s top earners, who also happen to have the most volatile income sources, but very little is done to change that fact. Golfer Tiger Woods is the poster child of the need for serious tax reform, as he is a native Californian who has chosen to make his home in Florida -- one of a number of states without a state income tax. With a 2008 income of $110 million, Tiger saves millions not living in the Golden State.

The governor and legislature deserve substantial credit for assembling the Commission on the 21st Century Economy but there are signs that the Commission itself may be running into some stumbling blocks. Its report has been delayed twice, and with a recent request for another 45-day extension of its existence, consensus is proving difficult to achieve. There are now competing conservative and liberal plans, with the former focused on flatter income taxes, lower capital gains taxes and replacing the state sales tax with a tax on net business receipts. The latter includes some extremely misguided proposals such as imposing a pollution tax on gasoline and gutting key components of Proposition 13 by eliminating the two-thirds requirement for tax increases and creating a split-roll property tax scheme that would further discourage business investment in our state.

Assuming the Parsky Commission can reach a compromise agreement, the legislative leaders have pledged an up or down vote on its recommendations. Frankly, believe that when you see it. It’s nearly impossible to imagine a scenario in which whatever the Commission recommends doesn’t get subjected to the legislative sausage factory that is Sacramento, particularly if it doesn’t include the Democratic leadership’s desire to end the two-thirds vote on tax increases, to which no Republican legislator would likely agree. Ultimately, the will of the people should have the final say through yet another round of ballot measures.

Nevertheless, the time is ripe for real structural reform. With this year’s record budget deficit, it is becoming clear that the current system is remarkably untenable. The question is whether our political leaders will have the courage to stand up to special interests like the public employee unions and vote for real reform. If they do not, sky-high structural budget deficits unthinkable in years past will become an annual crisis which our politicians will regularly “solve” through an array of budgetary gimmicks, borrowing and more smoke and mirrors – but without true and much-needed reform.

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