Capitol Alert:
Dan Walters: It may be time for tax reform

(Published Jan. 24, 2000)

Californians cough up more than $100 billion a year in taxes for state and local governments and schools, and over 80 percent comes from three sources: state personal income taxes, state and local sales taxes, and local-only property taxes.

Changing political, social and economic conditions have altered the way these basic sources of public revenue interact with one another. And there is increasing interest in the Capitol in some sort of reconfiguration.

Taking the three legs of the revenue stool one by one:

• The personal income tax generates about $37 billion a year and has been growing dramatically. A record number of Californians are employed, and affluent taxpayers, who pay most of the income tax, have enjoyed huge income gains in recent years, much of it in the form of capital gains and stock options. While politicians like the revenue surge as personal income rises above $1 trillion a year, they're worried that a downturn in the economy and/or the stock market could send revenues plummeting.

• The sales tax produces about $30 billion for state and local governments each year, but has been relatively flat. The diversion of sales to hard-to-tax Internet and catalog sources is one worrisome aspect, as is the tendency of Californians to spend less of their income on taxable goods as they age, shifting more money to services and investments. Taxable sales used to amount to 60 percent of personal income, but now, at $400 billion a year, they're just 40 percent. Local governments have, however, become increasingly dependent on sales taxes.

• California voters froze property tax rates and gave themselves a whopping property tax cut 22 years ago with the passage of Proposition 13. Property tax revenues have climbed slowly since then, mostly as new buildings are added to tax rolls. The property tax now pumps about $23 billion a year into schools and local governments, but taxes on new homes, local officials say, usually don't offset the cost of services.

Californians' overall state/local tax burden falls somewhere in the middle of the states, but they pay above-average income taxes, sales tax rates are among the highest in the nation, and property taxes, limited by Proposition 13, are among the lowest.

One factor in the interaction of taxes is that property and income taxes are deductible for federal tax purposes, while sales taxes aren't. Another is that sales taxes are considered to be regressive -- falling the hardest on the poor -- but are the most popular form of taxes with voters.

To state Sen. Steve Peace, D-El Cajon, who is trying to generate interest in tax reform, this is backward. "We're sort of addicted to the sales tax," says Peace, even though it's growth is flat and it's non-deductible. Peace would ratchet down the sales tax and increase property taxes, whose deductibility would soften the impact on taxpayers.

Others talk about extending the sales tax to services, which would reflect the changing nature of consumer spending, or recasting the sharing of revenues among state and local governments, perhaps changing the "point of sale" return to local governments or giving cities and counties a portion of the income tax.

These and the many other options are fraught with consequences for the affected interest and taxpayer groups and there's a great reluctance to tamper with the status quo, no matter now illogical it may be. But it's a discussion that should take place because it's central to any hope for creating a rational system of governance for a very fast-growing and fast-changing state. And an expanding economy would be the best time to make a change.

DAN WALTERS' column appears daily, except Saturday. Mail: P.O. Box 15779, Sacramento, CA 95852; phone: (916) 321-1195; fax: (781) 846-8350; e-mail: dwalters@sacbee.com

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