This is a slide from a 10/27/11 presentation by the Legislative Analyst's Office on California's Budget Woes. I encourage you to look at the entire slide deck to get a better understanding of some of California's significant budget problems that include current revenue shortfalls and large future liabilities such as over $150 billion of unfunded pension and retiree health benefits.
Some people are not concerned with the volatility of the personal income tax (PIT) saying that just means the tax is tracking the economy. That is, incomes go up, so does the tax base. But as the LAO indicates on the slide above, the PIT is more volatile than the economy. That harms the ability of this tax to fund government expenditures, which is the key purpose of a tax. Worse yet for California is that the PIT provides over half of state revenues. This is far greater than the role it played in 1969-1970 as shown in the following LAO slide.
For my list of California tax system weaknesses - check out this page.
The last slide (#36) notes that tax reform is a possible solution, but that it is "an incredibly difficult task with no clear consensus on what to do." That's sure true. Unfortunate but true. And, after Prop 26 (Nov 2010), any tax reform will need a 2/3 vote of the legislature. Any tax bill that needs a 2/3 vote will be labeled as a tax increase which will lead many Republicans who have signed the no new tax pledge to not vote for the measure even though it would help the state tremendously.
Here are a few tax and budget reforms that California needs:
- Expand the sales tax base to include digital goods and personal services. Transition in the changes, provide vendors with a refundable credit to help cover their new compliance costs, and don't apply the tax to purchases by businesses. Use some of the new revenue to cover our deficit and the rest to lower the sales tax rate.
- Work with Congress to get legislation passed that allows the state to collect sales and use tax from remote vendors.
- Phase out the mortgage interest deduction for debt on a second home, for home equity debt and for acquisition debt greater than $500,000.
- Change the senior exemption to be based on income rather than age.
- Eliminate the choice of apportionment to move to a single sales factor with all sales sourced based on market.
- Increase the gasoline excise and tobacco excise taxes.
- Enact an oil severance tax with the revenues to go into the General Fund with no earmark.
- Create a rainy day fund to start in 2 years. Funding of it should include 10% of taxes paid on capital gains.
