The last thing overtaxed Californians need is another tax. Yet the state Legislature continues to churn out new taxes that, once enacted, rarely go away.
Our economy has been transitioning to a greater reliance on services. As a result, some tax reform groups have argued for expanding the sales tax to include services. On its own, a sales tax on service — like Senate Bill 8 by Sen. Bob Hertzberg — is a terrible idea. It would impose a massive, complicated tax increase on both businesses and consumers. Arecent study found that fully taxing all services would cost California taxpayers as much as $123 billion more each year.
What if shifting to a greater reliance on “consumption” taxes, like the sales tax, allowed us to eliminate taxes that destroy jobs, like the income tax? What if we didn’t raise taxes, but instead shifted them, replacing income tax with an expanded sales tax—and abolished the Franchise Tax Board?
It might be difficult to imagine a California without an income tax, since most of us weren’t alive during the Great Depression, when California first started collecting it. However, seven U.S. states seem to be doing just fine without an income tax. By several key measures, they’re doing far better than California.
According to financial publisher Bankrate, six of the seven states with no income tax — Florida, Nevada, South Dakota, Texas, Washington and Wyomin — all are considered better retirement destinations than California. (The exception being Alaska, for obvious, climate-related reasons.)
Retirees who have invested their lives in our state shouldn’t be forced to move away from their kids and grandkids for financial reasons. Yet the Manhattan Institute cites retirement-related moves as a key ingredient in the “The Great California Exodus” of more than 3.4 million residents since 1990.
Another vital measure is poverty. California’s so-called “progressive” income tax has done little to improve the plight of the poor. In fact, based on data from the Census Bureau, California has the nation’s highest poverty rate when other cost-of-living factors, such as taxes, are considered.
The reason is simple. California’s punitive income tax rates drive away the very jobs and investment that help low-income workers move up the economic ladder. According to the Tax Foundation, some small employers in our state face combined top marginal tax rates exceeding 50 percent.
The dramatic ups and downs of California’s income tax create conditions ripe for new and higher taxes. Good tax policy is rarely formed in moments of crisis. Steep declines in income tax revenue led to Prop. 30, which increased both sales and income tax. Those drops also gave us the lumber tax and a controversial fire prevention fee. Tax increases, even when sold as temporary, rarely go away after the state’s rollercoaster revenues rebound.
If California joined the growing number of states considering elimination of their state income tax, it might increase pressure to get rid of the federal income tax. A movement in favor of what is known as the “FairTax” seeks to repeal the 16th Amendment and replace federal income tax with a national sales tax. Sure, it’s a long-shot, but who wouldn’t be glad to get rid of the Internal Revenue Service?
A common objection to replacing the income tax with a consumption tax is that, unlike income tax, sales taxes are regressive, hitting lower income people the hardest. This objection can be answered in several ways. For instance, some economists have suggested making the sales tax “progressive” by excluding more basic necessities or providing a rebate for seniors and others with lower incomes.
If we eliminate the income tax, most workers would immediately experience an overnight increase in take-home pay. True, service-oriented businesses would have to collect and pay sales tax, but they’d also no longer be paying state income tax.
What’s needed now is a serious study of the options before us. Which revenue neutral tax changes would improve California’s economic competitiveness? Which changes would raise incomes, grow jobs and keep more retirees in our state? Which changes would produce the most stable revenue and spur the most growth?
Since taxes affect behavior, dynamic economic modeling would provide answers to these key questions. But first, California’s leaders need to muster the courage to ask the questions.
Mr. Runner, Vice Chair of the state Board of Equalization, may be contacted at boe.ca.gov/Runner.
The so-called tax reform people are probably not the ones burdened by the extreme waste of resources (money) in this State. Many people that I know will be out of California in the future. This over-taking of people’s hard earned retirement may have become the last straw. Consider that your social security is taxed AGAIN if you’ve WORKED HARD AND SAVED for your retirement. By the way, saving for almost everyone is a sacrifice of immediate desire delayed in order to plan for future retirement!
How can you know what you need financially to retire, when the union owned legislators lie awake at night seeking another way to part us from our money from one year to the next?
Please seek ways to reduce all of these burdens on California citizens. I think reduce and cut are words law makers are afraid of. Oh, let me see, where is the proposal to reduce and cut their benefits and pensions!! Most of them don’t represent us, they represent the highest campaign contributors.