Don’t Tax Me! Tax The Guy Behind The Tree!

Democrats in the Senate and the Assembly have prepared budget plans that rely on as much as $11.5 billion and $6.4 billion in new revenue, respectively. 

Except they aren’t saying where that new money is coming from. Like in a baseball trade, it’s a tax increase to be named later. In this fiscal year or the next one?

So as a public service aimed at speeding resolution of the budget – which was due to the governor on June 15 – here’s a look at what can fill those big ol’ nasty holes. 

First off, Governor Schwarzenegger and Assembly Speaker Karen Bass are right in calling for an overhaul of California’s rickety Swiss Cheese-O-Rama tax system. 

Not sure it really requires creation of some panel of chrome-domes, do-gooders and doctors of Thinkology to figure out what’s messed up about it, however. 

The three legs of California’s tax stool were created during the Depression. The Great Depression. Like, you know, the one before World War II and stuff. 

The Bank & Corporations tax was created in 1929, the sales tax four years later and the income tax – with a top rate of 15% — got slapped on Golden Staters in 1935. 

(Not sure why California’s highest tax rate is now 9.3 percent and has to stay there when folks were able to hack 15 percent during the Great Depression. Maybe the rates could be higher then since no one had any money.) 

Seventy-five years ago, the state’s chief industries – and the economy – were about goods. Things have changed a skosh since. Now the economy is driven by services and software. 

Turning to the budget shortfalls at hand, lawmakers need to select the best tax increases. Or, as former director of Finance Tom Hayes refers to them, the “cream of the crap.” 

Elizabeth G. Hill, the legislative analyst, more politely refers to them as  “tax expenditure programs.” 

Depending on whose ox is getting gored, these tax expenditure programs are loopholes that need to be closed or important economic incentives. 

Starting with the simple stuff: A 1-cent increase in the sales tax raises $5.2 billion. That would take a big slice out of the Assembly budget’s hole. But 2 cents would be needed to wipe out most of the Senate’s hole.

The base sales tax rate, of which many cities and counties have piled on more to pay for highway projects or services, is 7.25 percent. 

Looking at California’s current tax system – sales, income tax and bank and corporations — there are several hundred “tax expenditure programs” which benefit certain taxpayers or incentivize certain types of behavior such as not burning rice straw. 

The Legislative Analyst said in an April 2008 report these tax expenditure programs cost the state nearly $50 billion. Close them all and California is in high cotton. 

Looking at the current sales tax, the most expensive exemption is food, costing the state $3.8 billion in lost revenue. Doubtful there’s any Profiles in Courage lawmaker itching to carry that repeal. 

However, no self-respecting Democrat should hesitate to restore the sales tax on candy and snack food. 

California repealed the sales tax exemption on candy and snack foods in 1991. Voters reinstated the exemption at the ballot in 1992. 

But today Californians are healthier. Democrats have repeatedly used the power of government to help save Californians from themselves. Banning junk food and soda pop from school cafeterias and vending machines is just one example. 

Why give a tax break to the purveyors of foods that cork arteries, widen waists and rot teeth? Carrots, rice cakes and anti-oxidant rich blueberries ought to be promoted instead. 

Good social policy and $338 million for state coffers. A no-brainer. 

Californians pay no sales tax on utilities — gas, electricity, water and steam. That costs the state $2.3 billion. 

Again, here is another way to use the tax system to promote social good. What better way to encourage energy conservation than add $17 to a $200 electricity bill? What objection could Republicans have to using the free marketplace to foster greater conservation? 

Just by ending those two measly exemptions more than half of the Assembly budget’s hole is erased. 

And, hey, here’s another no brainer: Add the sales tax to prescription drugs. About half the states tax them already. The exemption costs nearly $1.8 billion per annum.

Ending this exemption is a secret goldmine. The Baby Boomers are getting old. Within 20 years, one in three Californians is going to be 50 years of age or older. 

Prescription medicine use is going to shoot straight through the roof, and so will the sales tax revenue from it. 

With that kind of future cash flow, there’d still be plenty of dough if lawmakers wanted to exempt poorer Californians from paying tax on their meds. Exempting low-income folk might reduce the savings to, say, $1.2 billion. 

Candy, snacks, utilities, prescription drugs totals $3.8 billion — more than half way to closing the Assembly budget revenue gap.  The way things often get counted in the White Sepulcher, the total would be trumpeted as two-thirds of the way home. 

Jet fuel sold to airlines is also exempted at a cost of $104 million. If they’re going to start shaking down passengers who have the temerity to carry luggage at $15 a throw, the bastards can start paying the damn sales tax. 

And just so the Perrier crowd feels like they’ve contributed to a budget solution, end the exemption for bottled water and snag another $64 million. 

When the bottlers start displaying on their label how much sodium and magnesium their product contains they can petition the state to restore the exemption. Until then, they can cork it. There’s a budget to balance, nes pa? 

Here’s another one. If someone is affluent enough to take their laundry to a dry cleaner they don’t pay sales tax but frugal folk who buy a home washer and detergent do.  Hello? 

Turning to income tax, the biggest single exemption is mortgage deductions at $5.7 billion. Doubtful that would be taken away or reduced. 

Limiting the deduction to primary homes has been bandied about in the past. The rationale is that if someone is rich enough to afford a mortgage on a second home, the deduction isn’t necessary. Seems sound. 

Employer contributions to health and pension plans represent $8.6 billion in exemptions. The capital gain exemption on the sale of a personal residence is $3.7 billion. Axing those is the political equivalent of licking the third rail. 

The Legislative Analyst has suggested reducing the dependant tax credit, which costs the state $1.7 billion per year. Lawmakers seem reluctant to “hurt kids.” 

First of all, it doesn’t hurt kids, it increases the tax liability of their parents. And even if it “hurt kids,” kids don’t vote.

There’s a two-fer under the bank and corporations tax the method of calculating taxes owed in California by multi-national corporations. The so-called Water’s-Edge Election — costs $640 million and has appeared on several “loophole closure” lists by Democrats.

Some of the biggest companies in the world employing some of the most gifted lobbyists will oppose this vehemently thereby not only saving the state money but stimulating the economy as well.  

During budget crises in 19901 and 2002 the state suspended for two years the ability of businesses to carry over net operating losses. Doing so would save nearly $800 million. 

 Current law allows the deductions to offset all of the taxpayer’s income. Unused deductions can be carried forward up to 10 years. 

The Legislative Analyst has recommended capping the deductions at 50 percent of the taxpayer’s net income each year generates $330 million in revenue the first year and $410 million in the following year.  Liz rocks! 

The Legislative Analyst also suggests making the state’s research and development tax credit, which costs the state $1 billion annually, less generous.

Now a business can offset all tax liabilities except the minimum tax and the alternative minimum tax using research and development credits. Unused credits can be carried forward indefinitely. Sweet. 

Her proposal would cap the amount of credit applied in a tax year to two-thirds of a taxpayer’s liability for a savings of $335 million and just under $300 million the following year. Seems reasonable. 

Maybe California ought to enter the 21st Century and broaden the sales tax to include some services. 

In April the chairwoman of the state Board of Equalization, which administers the sales tax, urged legislative leaders to expand the sales tax to potentially netting the state $2.7 billion in new revenue. The Senate Democratic leader has suggested applying the sales tax to consultants, dry cleaners and lawyers, among others. 

Talk about a double-whammy. Billed $450 an hour for something that shouldn’t even be litigated and paying sales tax on it as well. But, hey, these are dark fiscal times. 

How’s this for a tax system:  An Internet music, movie or book download is not subject to the state sales tax but a CD, book or movie purchased at a store is.

There might be smidge of opposition to equalizing store and Internet purchases.

Bankers, broadcasters, cable TV, retailers, manufacturers and the motion picture industry — to name a few — opposed a bill that would have asked the state Board of Equalization to start to commence to begin to propose a regulation to lay the sales tax on those electronic transactions. Very seriously dead bill. 

Any number of services could be taxed besides those the Senate leader embraces. Barbering, cosmetology, accounting, gardening, pool cleaning, limousine rentals, car washes, self-storage, golf, cable TV.

Any or all. Mix and match. 

Not that California cares what other states do but 37 of them tax professional sporting events, 22 tax auto repair and 21 tax health club dues. 

  Frankly, health insures should be picking up the tab fro gym memberships because of future cost-savings but that’s a different rant. 

Politically, any expansion of the sales tax base would need to be accompanied by a reduction in the rate. 

That way it would be a tax cut that rakes in more dough in the future. Politicians from both teams win. 

So start filling those budget holes, already. 

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