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April 1, 2015

Tax Reform in California? Brace for Impact.

Get ready to hear a lot about tax reform in California, but be warned:  What most taxpayers would think of as reform may not be what we see from the California Legislature and the many interest groups that want to increase state spending.  They will use the word “reform” all day long, which in a technical sense may be correct.  Taking the system as it is, and changing it to something fundamentally different, is to re-form it.  Reform can refer to a process, but it’s more important to focus on reform as a policy outcome.

All of this started with Proposition 30, the 2012 ballot initiative supported by Gov. Brown that enacted temporary increases of the state sales tax (expiring after four years) and the personal income tax on those with taxable incomes exceeding $250,000 (expiring at the end of 2018).

The state’s fiscal analysts say the tax increases raise revenues by $6 to $7 billion per year.  That’s quite an attractive sum to public employee unions, health and welfare advocates, and other interests seeking higher levels of state spending on public programs.  They won’t show much tolerance for Brown’s stated desire to let the taxes expire.  “I said when I campaigned for Prop. 30 that it was a temporary tax,” Brown told the San Francisco Chronicle’s political reporter last October.  “That’s my belief, and I’m doing what we can to live within our means.”

This begs a question:  Could public employee unions and others convince voters to make these taxes permanent over the popular Governor’s opposition?  We may find out, but the pathway will be anything but simple.

Already, a state Senator (and former Assembly Speaker) has introduced legislation to reform the tax laws.  State Senator Bob Hertzberg (D-Van Nuys) has introduced SB 8 as a discussion starter, but there is some meat on these bones.  The bill calls for extending the sales tax to most services, an idea that others have proposed as a way of reducing the state’s over-reliance on volatile income tax revenues from those with higher incomes.  Beyond extending the sales tax, SB 8 calls for an examination of personal income tax rates but, in this first draft, does not reduce them.  This version of reform would generate an additional $10 billion in revenue to the state, without easing (and in fact increasing) the burden on taxpayers.

This or any other legislation that increases taxes faces long odds in the Legislature, where the two-thirds vote requirement for tax increases gives Republicans the power to block.  Advocates of higher taxes know this well, which means they will likely look to the 2016 ballot.  At least four ballot initiatives are being prepared for possible campaigns in 2016:

•   Extension of the Prop. 30 sales and personal income tax increases, to make them permanent.

•   Split roll property tax, which would occur with an amendment to Prop. 13 that preserves the limitations on residential property tax increases but removes those limits for commercial properties.

•   Oil severance tax, which would impose a per-barrel tax on oil extracted from California lands.

•   Tobacco tax increase, increasing the state tax to $2.87 per pack from 87 cents currently.

Other tax-related ballot initiatives may be brewing as well.

All of this can send chills down the spines of taxpayers, which might be exactly what unions and other groups interested in higher state spending want.  By scaring the state’s taxpayers and business owners with nightmarish visions of voter-approved tax hikes in 2016, these advocates perhaps hope to create an atmosphere inside the Legislature this year where enough Republicans look at something like Hertzberg’s SB 8 and, hearing from worried taxpaying constituents, look to make a deal that avoids a tax increase frenzy at the ballot box.  This seems unlikely to succeed.  Republican legislators start with the assumption that there is nothing more dangerous than voting for a tax increase.  Even some Democratic legislators from rural areas would likely balk.

The ballot initiative strategy might be too cute by half as well.  Historically, California voters have been reticent to vote for tax increases via ballot measure, and a ballot crowded with competing tax increases could easily motivate frustrated voters to vote against everything.  Even if tax increase advocates narrow it down to one ballot initiative, voters will likely be influenced by what Jerry Brown says as much as anything the unions say in their campaign.  The Governor has established credibility with voters on tax issues; it is widely acknowledged that without his promise to the voters that the Prop. 30 taxes would be temporary, the measure would have been rejected.

As he looks out over the next four years—his last as Governor of California—Jerry Brown must see himself once again at the center of a stormy tax debate, just as he was in 1978 when he opposed the tax-cutting Proposition 13, announcing later (Brown was reelected on the same ballot) that he was a “born-again tax cutter.”

We may be in for another wild tax ride.