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California's fiscal good times have opened a window of opportunity to realign financial
relationships among governments in California, confront Proposition 13 and address a
dysfunctional tax structure, according to Senator Peace. He also said a "split roll" should and will
be part of the discussion of long-term infrastructure financing.
The San Diego County legislator-businessman also has been the Senate Democrats' point man in
efforts to improve the fiscal relationship between the state and local governments.
" from a pragmatic perspective, when you're realigning relationships, whether it's amongst local
government entities, or agencies, or between the state and the locals, or even the relative effect of
a shift in tax policies on different business groups, you can't do that in times where revenues are
on a downswing or in a tight environment. You ultimately have to develop these kinds of work
products in a compromise fashion in which everybody feels they're winning. It's difficult for
everybody to win when everybody is losing.
"So we have a window of opportunity. Nobody knows how wide that window is and we're going
to go through the next few months exploring some of those options. It's been about a two-year
process for the budget committee, specifically, moving around the state and taking testimony and
speaking with representatives of all communities, but in particular attempting to establish a better
line of communications between state-elected officials and local-elected officials and attempt to
break the rhetorical barriers.
"You know it's a lot easier for a city manager to blame the difficulties of the city council on the
evil empire in Sacramento than it is to say, 'Well, gosh, the reality is we just don't have enough
money and we're going to have to make some tough decisions.' And similarly the state can talk
about the slovenly administrative policies of the counties that are the consequences of wasting
the largess that the state regularly showers upon local government.
"And I've often said that being a state legislator in California is kind of like permanently having
your kids in college. Every month you get another telephone call saying, 'Send more money. Oh,
and incidentally, I want to decide how I'm going to spend it.'
"And that's nobody's fault. It's the consequence of legislative reaction to Proposition 13. the
longer it takes us to confront that reality, speak honestly with each other, and say the dirty word
of California politics - Proposition 13 - that which every politician has been for decades afraid to
utter, the Legislature will never get to having a real conversation about what is dysfunctional
about our tax structure. What it is that actually means is every Californian, no matter who they
are, what kind of tax obligation they have, is overtaxed. That's because, by definition, the manner
in which we structure our system is first inefficient in the exchange of dollars back and forth. We
have a lot of transaction costs that are unnecessary. And all of that is the consequence of a series
of complex formulas; all designed to replicate the world as it was prior to Proposition 13.
"Second, we never reacted in any way after 1986 when the federal government fundamentally
changed federal tax law, in many ways, but in one of the most significant ways, they eliminated
the deductibility of the sales tax and we were already well on our way to becoming a sales tax-dependent state when that occurred. Nobody stopped and said, 'Time out! Gosh, now that sales
taxes are no longer deductible, this means that when we rely upon a sales tax dollar, we have to
pay an extraordinary high price for it. I'm going to have to grab $1.30 from every taxpayer in
order to get a dollar, when I chose a non-federally deductible revenue stream rather than a
deductible revenue stream.' We've just not had the conversation. It isn't to suggest that any of us
know what the answer at the end of that conversation will be. But it seems remarkable, in and of
itself, that nobody's bothered to sit down and say, 'What does this mean? What are the options
and the alternatives? And how is it that we could draft a tax structure that provides the maximum
yield for the benefit of taxpayers in the form of actual services that they can see and touch and
feel, and in turn improve upon their capacity to be effective in the economy, while minimizing
the tax impact?' "
Senator Peace advocates reducing government dependence on the sales tax and increasing
revenue from commercial property taxes. He previously suggested that commercial property be
subject to a one-time reappraisal (See February's Cal-Tax Digest), but not a higher rate of
taxation.
He initially said "no" to the question of whether a "split roll" - raising taxes on business property,
not residential property - is possible. However, he later said a split roll will be part of the
discussion of the ongoing obligation to finance infrastructure improvements. " the discussion
about what the differential is in commercial property tax assessment versus current value versus
homeowners and residential property assessment and current value is going to be in the
discussion," he said.
Senator Peace explained that, unlike other provisions of Proposition 13, the assessment rules
about commercial property or collectively held property, corporate-held property, partnerships,
etc., which assumes that you only have a change in ownership at 51 percent, is not written in
Proposition 13. It was a majority-vote Quentin Kopp bill. "So the issue of assessment of
commercial property, I suspect, is going to be very much a part of a debate."
"And, what I believe we ought to be doing, as a commercial property owner, is to get the debate
and discussion so that we look globally at the sales tax rate, which needs to be driven down. It's
in our economic interest to significantly reduce our sales tax. We are in grave danger if we
continue to be a high sales tax state. In some communities, with all these special sales taxes in
place, we're pushing the envelope on being a double-digit sales tax environment.
"Second, we ought to recognize that the principal beneficiary of infrastructure stability is
business. It's my business. I want those roads and those sewer systems. I want to be able to get
out there and get my goods moving and make it happen. I want the telecommunications systems
in place. I don't want to have to worry about that stuff."
Infrastructure and the Sales Tax
Senator Peace noted that he was the author of a California Business Roundtable-sponsored bill to
finance infrastructure with more sales tax revenue. " they understood going in I disagreed with
the sales tax component and would seek to change it. you want to capture an increment of
revenue that has a logical nexus to infrastructure. I own commercial property. That's where the
nexus is. I benefit in the context of my property holding when that infrastructure is preserved,
when the sewer system works and the water is delivered. I don't see any nexus between the sales
tax activity that I may generate as a consequence of my business enterprises that's associated with
that infrastructure."
Change Priorities for Incentives
"If California fails to change its governmental priorities in terms of the incentives that we give
local government for accommodating space for manufacturing and space for homes and housing,
as the economy shifts (from the research-and-development era to the manufacturing phase) of
this new economy, what will happen is we won't get a reasonable share of the actual widget-making business. Why? First, we won't have the space for it. You will not have made the land-use decisions that allow companies, for example in the biotech industry, to locate the actual
manufacturing operations that will ultimately be the byproduct of what is now their R&D phase.
"Second, even if you quickly come up with some magic tax incentive program or whatever to
solve that problem, it won't matter. Because we won't have built enough housing so that the price
of housing will be accessible enough for that class of employee for that business enterprise to
make a reasonable decision about being willing to pay the political stability tax and the climate
tax, so to speak, to be willing to locate in California, despite the increment of higher costs. You
know, reasonable people make reasonable business decisions about wanting to be located in
California, despite some increment of higher costs, as long as we maintain a high standard of
quality of life. That also means we have to keep our eye on the ball with respect to things like air
pollution and water pollution. It means we've got to solve traffic problems. It means that we've
got to invest in mass transit .
"It means that we've also got to have employers be able to compete on an international basis with
respect to what the net cost of their employment base is, what their payroll cost is. And that
payroll cost is driven ultimately by disposable income.
"So the problem in California isn't so much wage-based. The problem in California is cost of
living and what it's going to take to get a nexus between cost of living and quality of life. We're a
very, very long way from being able to meet that goal. We're no closer right now, today, than we
were in the middle of the recession.
"I think 50 years from now people are going to look back at Pete Wilson's time as governor and
his legacy is going to be an extraordinary one. This governor guided this state through a period in
which the economic impact on this state was significantly more serious than it was during the
depression in 1929. This state was hit much harder during the Wilson administration than it was
hit in 1929, and yet we kept the lights on. Now we did the same thing, if you talk about operating
a government like a business, we did exactly what a business does. We begged, we borrowed, we
stole and we cheated. And that's exactly what any responsible businessman does when times are
tough and the revenues aren't there. You figure a way to survive until things turn around, right?
"We begged from our stockholders, the taxpayers. We borrowed from anybody who would lend
it. And we stole from pension funds. And the courts have confirmed that we stole it. And we've
managed now to pay it all back, that which we borrowed legally, that which we stole illegally.
We've paid our fines and done all those things and this state is in very good economic condition,
as are frankly all but the most incompetently operated cities and local governments . There are
just a few that aren't. And let me tell you, any government entity that has any kind of financial
problems today ought to be abolished just on principle. Because, if you are not financially solvent
in this environment, you've got to be the most incompetently operated. I mean, you'd almost have
to be corrupt, you almost couldn't be in trouble through mere incompetence.
"But it disguises the reality that we're still in the same dysfunctional relationship and
environment. It's just disguised by the fact that we're awash in money. And, as any businessman
will tell you, that's the time when businesses really get in trouble. You know, things are going
good, you're a little lax and kind of going along, the sales force loses its edge a little bit So it is
this period of time in which we have the danger."
Seeds of the Next Recession
"The failure to act, both in the context of reorganizing how we deal with the revenue strengths
and also the failure to aggressively invest in our infrastructure needs, will be the seeds that sow
the next recession. We're going to have a downturn economically. It's inevitable. But, it doesn't
have to be a recession. You know, leveling off of economic growth and even temporary
adjustments don't have to produce the kind of crisis that we had before.
"Left as we are today, we will have another crisis, because our problems are systemic. We are
inordinately sales tax dependent, number one. That inherently makes our revenue streams
extraordinary volatile and inelastic. That's an inherently unhealthy environment to be in because
you can't sustain yourself.
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To underscore how well the economy is doing, Senator Brulte noted that the state's general fund
is about $60 billion, and legislative analysts believe it will exceed $80 billion over the next four
years. It was roughly $40 billion in fiscal 1993-94.
Not counting any new revenue that shows up since the legislative analyst estimate in February,
California has, on an ongoing basis, $12 billion more in revenue since Pete Wilson left office in
January 1999.
"By the way, the analyst (Elizabeth Hill) has been wrong the last four years. She has consistently
underestimated revenue. And that was February. We are hearing out of her office now, quietly,
it's not official yet, that the actual year-over-year surplus may be over $10 billion. So there's
plenty of money for state government to do what needs to be done."
Senate GOP Tax Proposals
Senator Brulte described the Senate Republicans' tax-relief agenda, which was released late last
year and, he said, will be updated based on fresh budget numbers due in May (the annual May
Revise of the governor's proposed budget.)
He said Republicans want to accelerate the next car tax cut from 2002 into the 2000-01 budget
year. "It makes prudent fiscal sense, since you have to account for it in the budget anyway by
putting it in the reserve. Why put it in the reserve? Why not pull the trigger early and let
California taxpayers and businesses keep that revenue?
"We tend to favor across-the-board tax cuts . Whenever we say across-the-board tax cuts, which
we believe are good public policy, the other side tends to say we are helping the rich. And so,
rather than an across-the-board tax cut, we've proposed increasing the exemption for dependents.
It's currently $234. We would take it up to about $314. That's about $300 million on an ongoing
basis.
"We also know that, in order to have a well-educated work force, we've got to increase access to
the University of California and California State University, so we would cut fees at UC and
CSU by 50 percent, which helps middle-class families. If you're truly wealthy in California, it
doesn't matter how many kids you send to college, you can afford it. And if you're truly poor, the
state pays for your kids to go to school. But, if you're part of the great middle class, the fees may
only be $4,200, but the total nut is about $13,600, so we would cut fees at UC and CSU by $412
million and we'd backfill that money from the surplus, so programs aren't cut.
"We made some business tax-cut proposals early on. We've continued the diesel incentive
program We would extend the manufacturers investment tax credit (MIC) to 2005. We would
expand the MIC to telecommunications. We think that's an important component. We would
enhance the R&D tax credit. We would conform the net operating loss treatment to federal law,
and we would actually help our friends in the Silicone Valley by providing transit pass credits.
Those were proposals we made last December, based on additional revenue of about $5 billion,
that pencils out to a little over $1.4 billion in one-time and ongoing relief. We think that's
relatively close to being the floor now in the face of what could be a $10 billion surplus.
"We think we have to actually beef up our tax cut proposals. We may have been a little cautious
on the front end. And, if we do what we've done in the past, Senator Peace and I will work very
hard together so we can get a budget for the people of California on time that continues to not
only meet our statutory commitment to Proposition 98 (the constitutional school funding
guarantee), but over-appropriates 98. I believe the Senate Republicans and the Senate Democrats
have proposed over-appropriating it by roughly $1 billion. We both agree that we need to put
more money into scholarships for California students. We both agree that we have to put
significant money into long-term infrastructure, or building for California's future.
"The historic way that government builds roads is we borrow and build. We go to the ballot with
a bond and we ask the voters of California to help us borrow money and we do that. We think
that, while that's a rational way to do it in the time of tight budgets, the fact that we may have a
$10 billion surplus, and even if we don't have $10 billion, even it's only $7 billion, we ought to
be able to take a minimum of a billion out to increase the infrastructure.
"And for those of you who are not number crunchers, let me just give you a couple of them. If
you borrow $8 billion through a transportation bond and pay it off over 30 years, it costs you
$15.4 billion in interest and principal to get less than $8 billion of roads. If, on the other hand,
you take $1 billion out of a $7 billion or $10 billion surplus and put it into road construction,
over 30 years you get $30 billion worth of road construction for $30 billion. So, while borrow
and build is a legitimate way to do infrastructure, we think in this time it's not."
Time to Cut Tax Rates is Now
Senate Republicans, said Senator Brulte, who also is chair of the Senate GOP Caucus, "think the
time to adjust the tax rates and make California more business friendly is not when we're in the
depths of a recession. We think it's better to pre-empt that. "If you assume that half of the 1990s
recession was related to defense cutbacks and military base closings, then you have to assume
that the other half was specific to California. Business didn't get into trouble in the 1990s in
California because of decisions that were made in the 90s. Business got into trouble because of
decisions that were made in the 70s and 80s when times were relatively good. The Legislature
didn't take into account the laws of the market place."
Senator Brulte noted that it is politically difficult to argue that business is hurting and needs
increased tax credits and action on some of the tax issues that stifle growth. "It's politically
difficult to do that, when we're the number one job creator in America," he added. "Now is the
time that we have to continue to improve the business climate and be very, very cognizant of it.
Because, by the time we're on our way into a recession, it's too late. And it has a real impact. If
you presume that half the job loss wasn't relational to defense cutbacks and base closings, then
we have to assume that about 400,000 Californians lost their jobs because of decisions we made.
"In my lifetime, California was always the last into recession and the first out. In this decade we
were the first in and the last out. Good tax policy is a component part of a healthy business
climate. The difference between being the last in and the first out and being the first in and the
last out can be 200,000 to 400,000 Californians who are out of work."
Income Tax Rates
Individual taxpayers get to the top 9.3 percent income tax bracket way too soon, observed a Cal-Tax member in the audience. Both senators concurred, and Senator Brulte noted that he once
carried a bill to adjust personal income tax (PIT) rates but, in the end, "my Democratic colleagues
agreed to reduce the bank and corporation tax rate alone. And so let me just tell you, I don't
disagree with you, but with a Republican governor (Pete Wilson) and 37 Republican Assembly
members and 17 Republican senators, we couldn't get across-the-board cuts in PIT rates. So I'm
here to tell you, with a Democratic governor (Gray Davis), with 32 Assembly Republicans and
15 Republican senators, I don't think we can get that. Now that's not being a pessimist. I'm an
optimist. It's being real."
A Cal-Tax member asked why the state can't be as "nimble" in time of plenty - and cut taxes - as
it is in time of need. During the recession, 10 and 11 percent brackets were temporarily added to
the PIT structure.
Senator Brulte said the "liberal components of Mr. Peace's party wanted to continue the 11
percent tax rate. There is a philosophical difference between liberals and conservatives on the
rate of taxation. We have a minimum of a $7 billion surplus. It will probably be 10, maybe even
higher. And within the last 40 days, the Democratic speaker of the Assembly (at that time
Antonio Villaraigosa) has proposed increasing the sales tax, and (Assembly Appropriations
Committee chair) Carole Migden has proposed taxing the Internet. Steve Peace is not a liberal.
But the liberal appetite for taking your money and spending it is insatiable."
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This
article is from Cal-Tax Digest, published
