Opinion

Wednesday, Sep. 30, 2009

Dan Walters: Much-needed California tax overhaul likely doomed

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A blue-ribbon commission appointed by Gov. Arnold Schwarzenegger and legislative leaders to overhaul California's counterproductive tax system delivered its oft-delayed report Tuesday and, if adopted, it would improve predictability, fairness and simplicity.

That said, the report from the sharply divided commission is probably dead on arrival in a Capitol that can't agree on the time of day, much less anything as intellectually and politically challenging as long-term tax reform.

Even as Schwarzenegger and commission Chairman Gerald Parsky were unveiling the report, California Labor Federation chief Art Pulaski was declaring that it "would entomb California in perpetual recession," and California Chamber of Commerce President Alan Zaremberg was declaring it "fatally flawed."

The Republican Schwarzenegger declared, "I would sign it immediately," but the Democrats who appointed half of the 14 members on the commission – Assembly Speaker Karen Bass and Senate President Pro Tem Darrell Steinberg – issued only tepid, noncommittal statements. And while Parsky and all but one of the governor's other appointees signed it, five members – mostly liberals appointed by the Legislature – demurred, a bad omen for its legislative fate.

Schwarzenegger et al. created the commission in response to a growing realization that the tax system, heavily weighted toward income taxes on a handful of affluent taxpayers, had become a revenue roller coaster. When the economy expands, billions of extra dollars flow into the state's treasury, triggering automatic spending increases and encouraging politicians to spend the bounty. But when the economy cools, revenue plummets, leaving huge deficits.

Schwarzenegger has failed to persuade voters to counter this trend with spending limits and "rainy day funds" – a proposal revived in the commission's recommendations. The alternative would be to reduce reliance on personal income taxes. The commission would do that by flattening the tax to just two brackets, eliminating state sales and corporate income taxes, and substituting a new "net business receipts tax" similar to European-style value-added taxes that would tax services as well as hard goods.

But business and anti-tax groups fear the reach of such a tax, and liberals dislike the sharp reductions in taxes on the wealthy, which is reflected in the commission's split. The one Schwarzenegger appointee who rejected the report is Bill Hauck, head of the California Business Roundtable.

California desperately needs a tax overhaul. But as we've learned the hard way, our political system cannot swallow anything big that doesn't have stakeholder unanimity, which is impossible to achieve in such a complex state.

Tax reform, like so many other issues, will remain unfinished until we summon the fortitude for a broader systemic overhaul of California's dysfunctional governance.