Angelides Gets Tax and Economic Policy Right

Conventional political wisdom says that candidates always have to sidestep the T-word—taxes. Schwarzenegger, like Bush, seeks painless government—spending without taxes. Angelides has decided to tell the truth, to make clear that the future of California lies in building on the investments California made in the past, in its people, its land, its education system. California cannot sustain a high level of public investment—necessary for a high-productivity economy—at a low level of taxes. With polls continually showing that many people want higher levels of public investment and services without tax increases, Arnold’s position may be politic—but it’s unsustainable.

And Phil gets it right, both with his tax increases and his tax cuts. The increase in the top brackets, at 11% for returns over $500,000, follows in the tradition of Pete Wilson and Ronald Reagan. More important, it’s a tax on those who have already done very well in California, and all the evidence demonstrates that it has the least possible impact on the economy for the $3 billion it raises. In the context of the fact that many of these wealthy individuals are paying the federal marginal capital gains and dividends rates at only 15%, and California is losing $1 billion or more from the federal repeal of the estate tax, this increase only picks up a small amount of the federal tax cuts for the wealthy.

This proposal also picks up an anomaly in our tax structure which is not replicated at the federal level: the highest rate of 9.3% kicks in at about $80,000, and then is flat until it reaches $1 million, when the mental health tax adds 1%. So taxpayers earning between half a million and one million pay the same rate as the two-earner working family. Angelides proposal restores some progressivity, asking those who can afford it (and who benefit from California’s economic strength), to pay a little more.

His proposal to establish a commission to examine corporate loopholes and pick up $2 billion is modest. The largest loopholes in our tax system, worth as much as $4 billion, lie in our commercial property assessment system, by which corporate property in fact changes ownership but is rarely reassessed. There are some billions in various credits and other loopholes with little economic justification.

I would hope that the commission would convene the badly-needed effort to examine the entire tax system, and, with some tradeoffs and give-and-take, could easily raise $2 billion while improving the private economy at the same time. The California Tax Reform Association has identified $17 billion which could be raised by correcting numerous anomalies in the tax system. Some of these fall more broadly on the public than just on the corporate sector, but because tax discussions are so grossly distorted in the campaign process, Angelides is well-advised to keep the focus on corporate loopholes and the wealthy.

In any case, Phil is right to identify the undertaxed corporate sector, despite some corporation tax revenue gains (finally!) in recent years. According to a study done by the Council on State Taxation for the U.S. Chamber of Commerce, California business taxation ranks low in several key measures: 39th in business taxes as a percent of private sector economic activity, 42nd as a percentage of capital income, and 32nd in business taxes as a percentage of all state taxes. Since much of that lies with our ridiculous commercial property tax, a commission which examines these issues could easily be a win-win for the public sector and the economy.

The identified tax cuts also move in the right direction. Take the dependent credit increase by $200. Raising a child is not only one of the most important tasks in society, it is also one of the most expensive. In both 1987 and 1997, I was involved with efforts to raise the dependent credit to its relatively high current rate, and the result has been that California has the highest threshold of any state by far, about $40,000, by which working families start paying the income tax. Increasing the dependent credit will further remove hard-working families from the tax rolls, at a threshold of about $46,000 for a family of four.

However, despite this threshold, California doesn’t have the fairest system for non-income taxpaying families. Several states have refundable earned income tax credits, which would compensate lower-income taxpayers for the unfairness of relying as heavily on the sales tax as California does. Since the EITC, as proposed by Angelides, would piggy-back on the federal, it would help lower-income families with children who are already paying sales taxes, gas taxes and other fees and charges. It’s a major piece of tax fairness, and provides direct relief to those who need it most.

His small business tax relief targets the personal property tax up to $500,000 worth of property for small businesses, eliminating a tax nuisance worth up to $5000 yearly for over 1 million small businesses. I have advocated very similar relief as part of a broader commercial property tax reform—in short, tax the land, not the equipment—and see this proposal as a smart piece of a larger package. As such, it makes good tax sense.

Reluctantly, I take issue with one small part of the package—student fee relief. I say “reluctantly” because I was the beneficiary of an amazing part of the California dream: one year after moving to the state, I received a world-class graduate education at UC Berkeley, virtually for free! Still, as the upper-middle class parent of a UC student, UC and CSU education is still a major bargain by national standards, and, given priorities, fee relief for higher education may be less important than improving quality in the entire system, from community college to UC.

It is invigorating to see a campaign with such sharp choices on key economic issues: facing up realistically to our future, in a progressive way, or pretending for just long enough to get elected, that “no new taxes” is a viable way of dealing with the extensive budgetary needs of the public sector. Schwarzenegger has shown that he will keep his “no taxes” pledge, so, if he wins, we can surely expect deep cuts in programs and services, to the detriment of our future.

Lenny Goldberg is the Executive Director of the California Tax Reform Association.

The California Tax Reform Association (CTRA) is a small non-profit organization based in Sacramento, California. CTRA has advocated for many years for fair taxes in the context of a healthy public sector. CTRA is primarily supported by labor, public health, education, and law enforcement groups. CTRA has worked on a variety of tax policy issues - usually focused on equity and social fairness.