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Why California Republican Lawmakers Are Wrong On Taxes

By David Kersten

With a $25 billion budget deficit looming next year and a $22 billion structural budget deficit as far as the eye can see, it is essential that the California Legislature do everything it can to get the state’s fiscal house in order.

The failure of State Republican lawmakers to debate the state’s tax system in an open and honest manner, coupled with the 2/3 vote requirement for tax increases, has created a situation in which it is impossible to raise revenues even by closing the most egregious of tax loopholes.

Republican lawmakers’ blind insistence that all tax increases are bad public policy defies all rational logic and fundamental principles of responsible policy-making.

The Republican mantra goes something like this: “All tax increases are bad, will lead to job losses and devastate the California economy.”

Assembly GOP leader Mike Villines and Senate Republican leader Dave Cogdill recently stated that “Raising taxes is the worst thing we could do right now…It will devastate an economy that is hanging on by a thread, threaten jobs and hurt working families.”

The truth is that an excessive tax burden is bad for the economy. But the Legislature’s failure to address tax loopholes and a tax system that is outdated and inequitable is even worse for the economy and job creation.

The ability to raise revenues in an equitable and efficient manner is essential to California’s long term economic prosperity. The state needs to invest in an education system that can produce the highly-skilled workforce that can fill the jobs of tomorrow’s economy.

We need a health care system that can care for those workers, adequate resources for public safety, and enough money to pay for the infrastructure that will maintain and promote future economic growth.

Here is a quick review of four proposals that Republican lawmakers should consider:

--Commercial Property Tax Reform: Current law requires the reassessment of commercial property when 51% of a property’s ownership shares change hands. This system makes sense for residential property but not for commercial property because of the complex manner in which investment property is held and sold. Current law has created a situation in which investment properties routinely change ownership without reassessment.

For example, in one transaction in Napa County in 2001, 12 shareholders of E & J Gallo Winery acquired the shares owned by approximately 20 shareholders of the Martini Winery, with the name changing and the deed changing, but since no single shareholder acquired more than 50%, no reassessment took place. E & J Gallo’s ownership structure and the ownership structures of many other California companies allow them to buy property after property without reassessment.

The California Tax Reform Association estimates that the state could raise $1 billion annually by tightening change of ownership statutes, and $3-4 billion annually by assessing non-residential property at market value each year, which is the assessment system used by most other states.

--Withholding on Independent Contractors: Billions of dollars in income paid to independent contractors goes unreported for tax purposes every year. The state should require withholding on independent contractors and increase penalties for failure to file 1099 forms for payments to independent contractors. The Franchise Tax Board estimates that these law changes would raise $100 million in 2008-09, increasing to $400 million in 2010-11.

--Inverted Corporations: Corporations are currently allowed to attribute income to tax haven countries even though they conduct no business in those countries. For example, more than a dozen corporations that are headquartered in California have set up a PO BOX in Bermuda or the Cayman Islands and claim that PO BOX as their corporate headquarters to reduce their tax liability. The solution is to treat income that is attributed to tax haven countries such as Bermuda and the Cayman Islands as though it were in the “water’s edge” for tax purposes. This solution would raise an estimated $60 million a year.

--“Nowhere Income”: Current law allows multi-state corporations who are based in California to claim “nowhere income” that escapes taxation in any state when they sell out-of-state subsidiaries or assets to out-of-state corporations. The state should require companies to make the same Section 338 election (IRS Code Section) for state tax purposes as they do for federal purposes. This is estimated to raise $50 million in 2008-09, increasing to $85 million in 2010-2011.

Republican lawmakers’ insistence that the state’s long term budget problem is a spending problem as rather than a revenue problem is misleading. It is time for the California GOP to finally face up to the fact that there are many loopholes and inequities in the state’s tax system that need to be honestly debated.

David Kersten is an independent consultant who specializes in public policy research and analysis.

Posted on November 25, 2008

Comments

OK, we do everything you say:
50 million,60 million, 100 million, 1 billion.
Raising tases will not get it done. Your blame game will fix 5% of the problem.
CA needs to stop the waste! Cut spending.

Posted by: Jeff at November 25, 2008 08:16 AM

it is the spending !!!! we all did this to the taxs payer im sick of the blame game you all play

Posted by: demc at November 25, 2008 09:29 AM

I got to this site by googling "Republican Party headquarters." Interestingly, I wanted to see what they were doing to address runaway government spending.
I will echo the comments I see below your commentary which say, "stop the spending!" We are tired of giveaways and wealth re-distribution.
All-in-all, the state budgeting process gets down to a bureaucratic shell game. And the corollary is 'if their lips are moving you can bet they're hiding something from you.'

Posted by: Peter Brady at May 5, 2009 03:00 PM

I got to this site by googling "Republican Party headquarters." Interestingly, I wanted to see what they were doing to address runaway government spending.
I will echo the comments I see below your commentary which say, "stop the spending!" We are tired of giveaways and wealth re-distribution.
All-in-all, the state budgeting process gets down to a bureaucratic shell game. And the corollary is 'if their lips are moving you can bet they're hiding something from you.'

Posted by: Peter Brady at May 5, 2009 03:01 PM

I got to this site by googling "Republican Party headquarters." Interestingly, I wanted to see what they were doing to address runaway government spending.
I will echo the comments I see below your commentary which say, "stop the spending!" We are tired of giveaways and wealth re-distribution.
All-in-all, the state budgeting process gets down to a bureaucratic shell game. And the corollary is 'if their lips are moving you can bet they're hiding something from you.'

Posted by: Peter Brady at May 5, 2009 03:02 PM

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Why California Republican Lawmakers Are Wrong On Taxes

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