The legislature took a break after congratulating each other on passing the budget; the finance people immediately announced that next year’s deficit is already somewhere between $8 billion and $20 billion (That is before we know the outcome of the various lawsuits about the shenanigans they included in this "balanced" budget.); and the Governor called a special session for the fall to take up the findings of the Commission on the 21st Century Economy, which is capitol-speak for "tax code change commission." The Commission has been tasked with identifying revisions to the tax code that would stimulate the state’s economy while remaining revenue neutral, and the Governor now, without knowing what recommendations will be made, is asking the legislature to consider the proposed changes.
Coverage of the Commission’s debates has focused on the "volatility" of state tax revenue, which is just silly. Taxes may indeed be volatile, depending on what is going on in the world’s economy at any one time. Ask any businessperson in the state about the volatility of their revenue; it is simply a fact of doing business. What the politicians are really complaining about when they say "volatility" is that we are too heavily dependent on a handful of rich people making a boatload of money and paying a concomitant level of taxes. The true problem is that the politicians spend the money before it has been collected, and that happens because the state is incapable of doing accurate, dynamic forecasting. One way the government could deal with this is by saving a healthy reserve to be used once in a 20-year dire emergency. Instead, we guesstimate revenue for the year and base our budget on that guess, finding ourselves holding the bag when the guess was wrong. I anticipate that the Commission’s "solution" to this non-problem will be to increase taxes on more people to make up for the fact that they have overspent in years when the rich people did not do so well. It makes more sense to stop spending every dollar we take in every year, accrue some savings in good years and use it to pay down debt or build up a reserve. Apparently, far too old-fashioned a concept to fly in these times.
Or perhaps instead the Commission is going to suggest some version of a flat tax? How is that supposed to work when we already exempt every family with income below $40,000 from any state tax? Even if you only charged a minimum $25 tax, it would be a tax hike on those least able to pay.
Maybe the Commission is leaning toward some sort of business receipts tax to replace the sales tax since the spenders are angry that they cannot find a way to tax every single sale that happens in the state because of numerous exemptions, the facts of life in the internet age, and the reluctance of consumers to voluntarily part with even more money. I have written many times about such business receipts taxes being too complex, awkward and probably unworkable. Since we already know how bad the state is at revenue predictions, do we really believe they can come up with a proposal that will be revenue neutral?
Take a look at some recent opinion pieces about the Commission’s work and get ready to start telling your legislators about how untenable the proposals will be:
"This is treacherous ground. As virtuous as it may be to smooth out dips and surges of taxes flowing into Sacramento it must not be a pretense to increase tax burdens. That temptation will be great."
http://www.ocregister.com/articles/tax-government-increase-2513654-taxes-revenue
"It took Richard Pomp, a University of Connecticut tax expert who is the only non-Californian on the commission, to denounce the absurdity of this result.
"’How are you going to defend a $7-billion tax increase on the middle class?’ he asked at Thursday’s meeting. ‘Tell them it’s going to reduce volatility?’"
http://www.latimes.com/business/la-fi-hiltzik20-2009jul20,0,5271569.column
Well said, Professor.