Paul L. Caron

Saturday, November 26, 2011

Think Long Committee for California Releases Tax Reform Report

BlueprintHuffington Post, Tax Change Could Bring In Billions Of Extra Dollars For California Schools:

A group of billionaires, old-line political movers and shakers, and influential advocates released their recommendations Monday for changing the state's tax structure to increase state revenues by $10 billion a year, with half of that going to K-12 schools and community colleges and another $2.5 billion for the University of California and California State University.

The Think Long Committee for California, chaired by Nicolas Berggruen, founder and president of Berggruen Holdings, intends to place two initiatives on the 2012 ballot to overhaul the state's tax and finance structures, and to amend the school funding law, Proposition 98.

The proposals, explained in the committee's 24-page report, A Blueprint to Renew California, seek to get the state out of debt by reducing personal income taxes at every level, cutting corporate taxes, and reducing sales taxes for consumer goods while extending them at a higher rate for services like haircuts, accounting, and car repairs.

Here are the proposed tax changes:

A Modern, Broad-Based Tax System, Updating California’s tax system to mirror the real composition of our modern service and information economy and provide a stable, broad-based tax system that is sustainable over the long term.

While maintaining California’s progressive income tax structure, we would reduce rates for every bracket and reduce the sales tax on goods from 5% to 4.5% while broadening the sales tax at a 5% rate to apply to services, which are more discretionary. Education and medical care would be exempted.

Those with low incomes would receive a sales tax rebate. Those earning $45,000 and under would pay zero income taxes. The working middle class with incomes up to $95,000 would pay only 2%. The homeowners’ exemption and renters’ credit would be doubled. Those making above that amount would pay 7.5%. Because of the 1% surcharge for mental health on millionaires, they would pay a top rate of 8.5%.

A family with income of $90,000, which would have paid $1,449 in personal income taxes under the current system, would now pay $832 – a more than 40% reduction in their state personal income tax. Overall, the reform will maintain California’s progressive tax system. Households with Adjusted Gross Income of less than $20,000 per year would pay an average of $71 more in direct and indirect state taxes, while those earning more than $1 million would pay an average of $11,478.

This combination of cutting the personal income tax and broadening the tax base will help stabilize the boom and bust cycle of the budget while generating $10 billion in new revenues annually to start paying down the state’s “wall of debt,” and provide funding for K-14 schools, for CalState and the University of California and for local public safety and other local needs.

Small and medium-sized business proprietorships, “S” corporations and LLC’s are the backbone of the California economy. Unlike the large “C” corporations, profits and losses are “passed through” and taxed at the personal income tax rate. Therefore, a PIT cut will boost job-creating business prospects. For example, a business with a taxable income of $480,000 that would have paid $39,452 in income taxes under the current system will pay $33,114 under the proposed system.

Further, the mandatory single sales factor would be imposed on corporations while, at the same time, California’s corporate tax, one of the highest in the nation, would be reduced to make it competitive with other states and foster an improved business climate.

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(Hat Tip: Francine Lipman.)

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California is what happens when you turn the taxing power over to the GOP which is effectively what they did with the 2/3 vote requirement for tax increases that came with Prop 13.

When the Federal government sought to make up the state revenue shortfall through the stimulus, the acceptance of the federal money should have acted as an abrogation of all super-majority requirements of the states that accepted the money. Otherwise the rest of us not living in super-majority states get to help make up for states like California.

Posted by: jim harper | Nov 27, 2011 6:24:12 PM

Yeah Jim, California's fiscal crisis is a revenue problem caused by inadequate taxes caused by a party that has not being in effective control of that state since for at least a decade. (Actually, to the extent that the revenue side of the equation needs fixing is its reliance on the volatile income of the top millionares.)

Posted by: MG | Nov 28, 2011 4:24:00 AM