File California tax system revision effort under flawed

The panel handed the giant task has neglected Prop. 13 implications and faces an upcoming deadline. The governor's focus on revenue 'volatility' is just an excuse for giving the rich a new tax break.

In these budget-crisis days, when California citizens showing true public spirit are thin on the ground, I propose a tip of the hat to Gerald L. Parsky.

Parsky, 66, a prominent Los Angeles lawyer and investment executive, has shouldered the thankless task of chairing a 14-member state commission appointed by Gov. Schwarzenegger and the Legislature to rework California's tax system. He's determined to produce a sheaf of unanimous recommendations for lawmakers by summer's end.

So Mr. Parsky deserves our admiration, even though he's clearly headed for failure.

Revising the state's tax structure is a huge undertaking riddled with political land mines. Parsky's panel, majestically dubbed the Commission on the 21st Century Economy, is bipartisan to a fault: It ranges ideologically from a couple of Hoover Institution fellows on the right to former Assembly leader Fred Keeley and Christopher Edley, dean of UC Berkeley’s law school, on the left.

Would such a group be able to agree on anything? Judging from its meeting Thursday, a four-hour ordeal I attended so you wouldn't have to, it seemed as though the panel has been struggling so much to avoid partisan gridlock that it has left perhaps the most important element of the state's tax structure off the table -- the property tax, which is at the hub of the state's revenue dysfunction.

That began to change Thursday when Parsky decreed that 1978's Proposition 13 should be on the agenda at future meetings -- at least to the extent that the body consider special rules for commercial and industrial properties, the so-called split roll concept. That mollified Keeley, who had objected to the narrowness of the commission's deliberations thus far. But it also agitated former GOP Assembly Speaker Curt Pringle, a split roll opponent who seemed on the verge of bolting from the room in protest of not getting his way.

The commission's neglect of the implications of Proposition 13 is only one of the lead weights it has been carrying in its saddle for the last six months.

Its most obvious difficulty is its time frame. Schwarzenegger established the commission by executive order on Oct. 30 and set a reporting deadline of April 15. Some states spend years revising their antiquated tax systems; for some reason Schwarzenegger thought that moving California's from the Stone Age into modern times needed only 5 1/2 months.

The first 12 commissioners (six by the governor and six by the Democratic-controlled Legislature) weren't named until Dec. 11. They didn't hold their first meeting until Jan. 22.

The deadline was later extended to July 31. Parsky acknowledged Thursday that they won't meet that goal either, for which he wins the No Kidding award. He's proposing another extension to Sept. 15, the date the Legislature hopes to go home for the year.

A more fundamental problem is that the governor gave the body a curiously narrow charge. His executive order seems preoccupied with the "volatility" of tax revenue, as if the biggest problem facing the state is that some years it takes in a large amount of money, and some years it takes in a really large amount of money. (But never, courtesy of Proposition 13 and other tax restrictions, enough money.)

The truth is that this concern about volatility is merely an excuse for delivering a new tax break to the rich.

That's because the main source of tax volatility is the capital gains reported by wealthy taxpayers. In good years such as the late 1990s and the mid-2000s, these were lavish. When the markets then crashed, capital gains dried up and the state budget was left dependent on revenues that had evaporated.

What gives the game away is that the commission's working plan, concocted by the governor's team, involves flattening the personal income tax by cutting tax rates for the wealthy. The plan would also eliminate the sales tax and corporate income tax in favor of a ridiculously complicated newfangled device called a business net receipts tax.

At its heart this is a sales tax by another name, broadened to cover more services and goods, but every bit as regressive as the sales tax of today -- that is, it hits the middle and working classes especially hard, since they spend a bigger chunk of their income on core purchases than the wealthy do.

These changes certainly would reduce annual variations in tax receipts. But at what cost? As the commission staff acknowledges, in the baseline year of 2014 they would produce a tax increase totaling $7 billion for Californians earning $20,000 to $200,000 a year, but a cut of $4.4 billion for those earning $200,000 and up.

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?"

As Pomp observes, if volatility is really the curse Schwarzenegger seems to think it is, there are other ways to address it. One is to identify the most variable segment of income tax receipts and sequester it in a rainy-day fund, not to be touched except to cover shortfalls in lean

years.

This idea didn't play a prominent role on the committee's agenda until a few weeks ago, when Keeley proposed it in an attempt to derail the flat-tax locomotive. (He included it in a package of alternative proposals called the “blue” proposal.) Parsky, to his credit, has now placed it on the table, and it will be discussed at forthcoming meetings.

But the broader problems with the commission remain. It has devoted virtually no study to how changes in technology, including the rise of online commerce and the shift of business transactions from paper documents to digital transmission, will affect the state's ability to collect sales and business taxes. Isn't that what the 21st century is all about? Nor has it examined how an accretion of loopholes has made the state's corporate income tax a porous laughingstock.

Most important, it hasn't absorbed the lesson that haste is the enemy of good policymaking. With the Legislature planning to close up shop from mid-September through year's end, why the rush to produce recommendations by Sept. 15? Why not take at least until January, when lawmakers return?

This haste leads one to wonder whether the Parsky commission was never really meant to revise the state's overall tax system -- it was just a device cooked up by the governor, with the connivance of the legislative leaders,

to write rich people and

rich corporations more loopholes.

The commission has a clear choice: Hasten to meet an artificial deadline with a tax package preoccupied with the chimera of volatility and filled with flat taxes that no one will trust; or spend time to determine how the state's tax system can be made more productive, broad and fair.

Who knows -- if it takes the latter course, it could become one of the few state commissions ever to make a difference.

Michael Hiltzik's column appears Mondays and Thursdays. Reach him at michael.hiltzik@latimes.com, read previous columns at www.latimes.com/hiltzik, and follow @latimeshiltzik on Twitter.

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