California Tax Reform Association

Finally, a real debate on the economics of taxation?

Since a discussion of tax politics begins and ends quickly in the Capitol, let’s try talking economics instead.

The Governor’s tax commission did the state the favor of opening the discussion of the economics of taxation, and Schwarzenegger called for “major, radical reform” in his State-of-the-State address. So perhaps an economics discussion will attract some real debate, instead of the “just say no” discussion which applies to all taxes, however rational they may be.

The Commission on the 21st Century Economy (COTCE) also did an inadvertent favor to the discussion through their proposal to tax the net receipts of all businesses, which the Governor called “great, great reform.”
One key point made by many analysts of this tax is that many businesses would be taxed heavily even if they incur significant losses, because major expenses — labor, interest on debt — would not be deductible from the tax. The result of the backlash to this proposal was, helpfully, to reinforce the concept that taxing profits through the corporation tax and the income tax makes economic sense, contrary to the misguided COTCE goal of eliminating the corporation tax and flattening the income tax for the wealthy.

The Governor provided another inadvertent favor in the tax discussion by proposing to delay the new secret corporate loopholes as part of his budget trigger mechanism. With this delay, he effectively acknowledges that these loopholes, part of the last year’s budget hostage-taking, have nothing to do with economic recovery, a.k.a “jobs jobs jobs.”

Allowing corporations to get refund checks for taxes they previously paid when they take a loss (“loss carry-back”) destabilizes the budget in a down year and, because the refunds are two years after the fact, provide zero incentive effects for job creation.

Allowing corporations to share unused tax credits with affiliates (“credit-sharing”) benefits only a handful of very large companies, and also gives out tax dollars for activity already engaged in — not any new activity. And allowing corporations to choose how they want their taxes to be apportioned to California (“elective single-sales factor”) provides huge tax cuts without requiring a dime of new investment or a single job to be created.

The result, if these take effect: Programs will be cut by hundreds of millions of dollars, with thousands of real jobs lost. So, thank you, Governor, for de-linking these loopholes from any notion of economic recovery.

But that may be as much appreciation as we can muster.

The Governor’s proposals for housing tax credits and job tax credits are, alas, giveaways that he apparently believes in.

Last year’s developer credit, which only applied to new houses not yet lived in, gave preference to developers with excess inventory over homeowners trying to sell in a collapsing market. The new $200 million credit takes taxpayer dollars and temporarily pumps up a housing market which eventually has to seek a real level. Doesn’t anyone believe in market forces anymore? And, this $200 million does not have to create a single new job, nor is it likely to, by artificially delaying the settling (in economists’ terms, equilibrium) in the housing market.

And, there’s a $3,000 job training credit for employers. Low-wage jobs may cost employers well over $20,000 per year; good jobs will cost, in total, $50,000 to $60,000 a year when other employment costs are figured in. In the real economy, employers hire when the new employee contributes to the bottom line, not just temporarily but permanently.

Dan Walters got it right in the Bee: if you want to enact a useless tax break, get rid of some other useless tax breaks, such as the $500 million enterprise zone program, which, through rigorous economic analysis, has been shown to create no new jobs. Better yet, use the revenue from eliminating useless tax breaks to stop real cuts in programs and jobs. Real economics, anyone?

Beyond that, of course, there are the weakest links in our tax system.
Economists recommend taxing “economic rents” — that is, windfalls earned as a result of the actions of others —because they do not affect new investment. A tax on oil production, proposed once by the Governor, is the most obvious of those. Heavy, expensive California oil costs about $20 per barrel to produce, yet the world market prices reflected in California are in the range of $70. A tax of about $7 per barrel, as opposed to our current 60 cents, would have no effect on gas prices or production, according to a Rand Corporation study. In terms of economic impact, this is a free $1 billion, most of it from four multinational oil companies.

The oil industry mobilized a large astroturf campaign against a bill by Assemblyman Alberto Torrico for an oil production tax to be used for higher education, but the only economic argument they could muster was that 10-barrel/day stripper wells would be shut in early—except, of course, these have been exempt from tax in every oil tax proposal in the last 50 years! So, big oil can mount a major lobbying effort but cannot muster a single economic argument.

What is better for the economy, useless tax breaks or slashing public programs? Withholding revenues from independent contractors (which are supposed to be paid anyway), as Sen. Darrell Steinberg has proposed, or eliminating school support employees? Allowing multi-nationals to use tax havens, or making it easier to students to go to college, as addressed in a bill by Assemblyman Marty Block?

We have presented a $20 billion list of low-hanging fruit in the tax system (www.caltaxreform.org ), and the economics of some of those could, admittedly, be debatable. So let’s debate them, and maybe only agree on $10 to $15 billion. But let’s take up the Governor’s challenge: a real economic debate over the impact of sensible taxation versus massive budget cuts.

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