Progressive Taxes Can Solve California’s Fiscal Uncertainty

Then there are corporate loopholes. Businesses fight hard to maintain their tax advantages, usually with the argument about driving jobs out of California. But the legislative analyst has taken a straightforward approach to this issue, similar to an approach the California Tax Reform Association put forward along with Sen. Martha Escutia several years ago: limit the amount of corporate income which can be sheltered through the use of these credits.

The legislative analyst has identified approximately $700 million in revenue from limiting the amount that research and development credits, and loss-carry forwards, can shelter income. She also argues, and the CTRA agrees, that the state’s enterprise zone program is wasteful and ineffective, for another $100 million.

CTRA would add to that, limiting the use of the Subchapter S form of organization to small companies, which is what it was intended for, not so large companies can avoid corporation taxes, for another $300 million.

And, while the state has cracked down on abusive tax shelters for personal income taxpayers, better information disclosure could add another $100 million—at least — from corporate tax evaders. So, we should add another $1.2 billion in corporate-loophole limitations, which have far more to do with tax sheltering than with real business decisions.

The largest business loophole in the state’s tax system, by far, is the failure to reassess commercial property, which is protected by Proposition 13. The failure to tax non-residential property on the basis of market value is loophole-ridden, economically counterproductive, harms land use decisions, and fails to generate revenue from economic growth.

Reassessing commercial property would generate $4 to $5 billion for cities, counties and schools — at least. Some of this loophole can be closed by the legislature, but the solution requires a constitutional amendment, and must be part of any long-term revenue solution to the state’s fiscal problems.

Smaller ticket items

There are many, many additional sources of revenue. The sales tax base could be broadened, to include such things as admissions to sporting events and amusement parks, cable TV, and digital downloads, for well over $1 billion, and perhaps much more.
Pollution charges and other “green” taxes can raise billions.

There are smaller but egregious loopholes, like the ability to avoid sales tax on yachts ($26 million), and the incentive for commercial property owners to buy out-of-state property and avoid capital gains ($50 million).

The truth is, there are many billions of dollars from progressive revenues that should form the basis of a solution to our state’s daunting but closeable budget deficit.

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