Tuesday, October 06, 2009

Failed State

It was a beautiful day in Southern California yesterday: cool, clear, a nice breeze blowing. I've always believed that Autumn was the best time of year in this part of the country. My sense of appreciation for my surroundings was edged, however, with a certain poignancy. This state is in big trouble financially and may in fact deserve the title of the world's next "failed state."

There had been some hope that The Commission on the 21st Century Economy, the blue ribbon panel on tax reform for California which issued its report last week, was going to come up with some solid plans to cure at least part of our economic ills. Unfortunately, the commission acted pretty much the same way our state legislature has for decades. None of the real problems were addressed and the "answers" turned out to be a conservative's wet dream. The panel blew it.

Michael Hiltzig, business columnist for the Los Angeles Times, came to the same conclusion in his column in yesterday's edition.

The 14-member Commission on the 21st Century Economy, appointed by Republican Gov. Arnold Schwarzenegger and the Democratic Legislature, could have confronted all the hard issues our elected politicians have dodged for years.

They could have subjected the manifold inequities of the post-Proposition 13 property tax to close examination. They could have assessed how much of our budget crisis derives from the legislative supermajority requirement to enact a tax increase.

They could have insulated the consideration of tax policy from such popular misconceptions as the one about Californians being the most heavily taxed humans beings in America. (Buried in the final report, indeed, is an acknowledgment that as a percentage of personal income our state and local tax load is only a smidgen above the national average.)

They did none of this. Instead they produced a plan that -- surprise! -- would shift the burden of state taxes away from the wealthy and toward the middle class and the poor.
[Emphasis added]

The conservative members of the panel would vigorously dispute this charge. They would point to the lowered income tax rates for all the citizens, but Mr. Hiltzig did the math:

...under the proposal, which collapses today's six brackets into two and drops the top marginal rate to 7.5% from 10.55%, those making more than $1 million would get an average tax cut of 31.5%, or $109,291.

Those making $20,000 to $50,000 would get a tax break of about 1.5%, worth an average of $3. (All others fall in between.)

Yet, in the judgment of many tax experts, by rendering so many currently exempt goods and services taxable, the new business tax would load back onto poor and middle-income Californians all they might gain from the income tax cut, and then some.

The "bold" new plan proposed by the panel to offset the loss in income taxes is designed to look like a harmless new source of revenue, but, as Mr. Hiltzig discovered by digging through the rhetoric, it is one that will fall disproportionately on the poor and middle class:

The commission's proposal combines a cut in the top income tax rates with the creation of a novel and unbelievably complex "business net receipts tax."

This would replace the corporate income tax and some sales taxes. In practical terms it resembles a sales tax expanded to cover food, medicine and services like child care and medical treatment -- which are tax-exempt today and represent a relatively larger share of expenditures by lower-income households than the wealthy.

So, there you have it.

The salvation of California is going to be dependent on more of the same practices that got us into this fix. What a wasted opportunity indeed.



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