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Peter Schrag: Is California ready to talk tax reform?

(Published Jan. 26, 2000)

In California public life, it's pretty hard to get consensus on anything, much less unanimity. That's especially true if the people in the room include everybody from taxpayer organizations and major business leaders to public employee unions, minority group activists, local officials and representatives of cities and counties.

But there is near-unanimity at the Speaker's Commission on State and Local Government, that the state's fiscal system is broken -- that rather than fostering rational policies, smart growth, public accountability and citizen understanding, it does precisely the opposite.

The commission, which winds up its year of work next week, will make only modest recommendations. The most important is a proposed swap of tax revenues between state and local governments: Cities and counties would give up a chunk of the sales taxes they now collect in return for a bigger part of the property tax, which the state now gets and redistributes to schools. As local property tax revenues grow in succeeding years, the locals would get a proportional share of that growth.

The object is simple -- and it's one on which virtually everyone on the 34-member commission agrees. Since the property tax has, in essence, become a state tax, the locals have engaged in a frenzied beggar-thy-neighbor pursuit of shopping malls, auto malls and other retailers that offer a rising stream of sales taxes revenues. That means that, as Chuck Nathanson, a San Diego community activist, put it, "San Diego is still siting retail, not businesses offering high-tech jobs, despite the need for better jobs." The same is true in Los Angeles where, according to Lee Harrington of the Los Angeles Development Corp., 40 percent of the commercial space that had once been industrial is now commercial.

The commission will also ask the Legislature to find ways to foster what it calls "the transparency" of local government through performance measures and accountability standards. It wants to clarify "the state-county relationship so that roles and responsibility are clearly understood"; to study ways to reduce funding imbalances and increase parity between have and have-not communities; and to seek ways to encourage greater regional planning and decision-making.

Everyone on the panel knows that their proposals are no more than a beginning in fixing a governmental structure that seems almost designed to foster inefficiency and public frustration.

Even those limited recommendations face an uncertain future. The Legislature, Assembly Speaker Antonio Villaraigosa told the group a couple of weeks ago, "has a growing consensus that something needs to be done" about California's tangled state-local fiscal relations. But it's not likely that anything will happen this year -- or in any election year.

And yet it may be their very modesty that gives the commission's proposals their best chance. The other day, Sen. Steve Peace, D-El Cajon, appeared before the group with a grand plan to end the state's "heroin addiction to the sales tax," whose consequences, in his view, are a lot worse than just distorting local planning decisions. Because individuals can't deduct the sales taxes they pay on their federal tax returns, he said, they produce an unnecessary "impoverishment of the citizenry."

Peace says it's time to "be honest about Proposition 13," reduce the sales tax, increase the property tax (which individuals can deduct) and thus lower the average tax burden on everybody. As a business person himself, he said, he'd trade a higher property tax for a lower sales tax in a minute. "If we can't have a mature conversation about Proposition 13, we'll have failed."

Failing all else, he said, he'll go to the ballot in 2002 and show voters "how you're getting screwed by the sales tax."

Even if Peace's numbers worked, the chances of having a "mature conversation" about Proposition13, the holy icon of the California tax structure, are slim. And so far, there are no numbers. For business, sales taxes are deductible. Property taxes, moreover, are deductible on state income taxes as well. To the extent they increase, the state would suffer reductions in its income-tax receipts.

In addition, there may be much more glaring problems within the property tax system itself. Lenny Goldberg, a lobbyist and consultant for labor and liberal organizations, says that homeowners are bearing an increasingly large share of the property tax burden. For older businesses, increases in commercial building and land values are never reflected in the property tax. But new businesses pay a disproportionate share of the business taxes because machinery and equipment are subject to taxation. With respect to "commercial property, that stands good economics on its head."

Because it's possible to talk about that problem without raising the specter of higher property taxes on homeowners, Peace's conversation may be possible.

And if groups such as the speaker's commission can show the vital link between the tax structure and the citizen's quality of life, its modest proposals could foster such a conversation as well. Its own unanimity shows it's possible.

PETER SCHRAG's column appears in The Bee on Wednesdays. He can be reached by fax at 321-1996; by letter at Box 15779, Sacramento, CA, 95852-0779; or by e-mail

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