A dispiriting gridlock continues to grip Washington and Sacramento, undermining the public's faith that democracy can solve our problems. As we write, the so-called "super committee" of Congress, convened to figure a way out of the nation's fiscal crisis, remains hopelessly paralyzed along the familiar partisan lines. Everyone knows the sad story in Sacramento.
However, an independent group of dedicated California citizens -- ranging, among others, from retired California Supreme Court Chief Justice Ron George to former U.S. Secretary of State George Shultz to Clinton-era chair of the Council of Economic Advisors Laura Tyson to Antonia Hernandez, former president of the Mexican-American Legal Defense and Education Fund, to Google chairman Eric Schmidt and former Governor Gray Davis -- has succeeded in breaking out of the untenable status quo. Along with other members of the Think Long Committee for California*, they have put politics aside, bridged philosophical divides and agreed to a bipartisan plan to reboot California's dysfunctional democracy.
Unlike many other piecemeal reform efforts over recent years, the Think Long Committee plan seeks to modernize California's system of governance by installing a new civic software more suited to the realities of the decades ahead.
Our integrated set of recommendations range from common-sense practices such as a Rainy Day reserve fund to multi-year budgeting; two-year legislative sessions with one year dedicated to oversight; transparency on initiative funding; K-12 school reform; aligning the skills and educational outcomes of California's master plan institutions with the needs of our cutting-edge industry; and speeding up regulatory approval to foster job creation.
But the core of our proposal has three parts:
The ideologically rigid will have a hard time putting the Think Long proposal in any box. It is essentially a pragmatic response to the non-partisan Legislative Analyst's October 2011 report on California's budget woes. That report points out that the boom and bust "volatility" that continuously wreaks havoc with state finances has increased in recent years due to the narrow reliance on personal income taxes. In 2008-2009, personal income only grew at an anemic 3 percent, and, as a result, general fund revenues plummeted by 19 percent.
In 1970, the LAO report points out, personal income taxes accounted for 27 percent of revenue while sales and use taxes accounted for 40 percent. By 2011, reliance on the personal income tax was 57 percent and sales and use taxes only 22 percent.
In those same years, the California economy has been transformed from a mainly manufacturing and agricultural economy to one increasingly dominated by services and information. Nearly one half of California's $2-trillion economy is composed of services -- none of it taxed.
If you eat a donut in a coffee shop, the sales tax on goods applies. If you use a legal or financial service, it is not taxed. In other words, the coffee shop donut subsidizes lawyers, accountants and other services.
The Think Long Committee's plan thus proposes to rebalance and update California's tax code.
While maintaining California's progressive income tax structure, we would reduce rates across the board for every bracket and reduce the sales tax on goods from 5 percent to 4.5 percent while broadening the sales tax at a 5 pecent rate to apply to services, which are more discretionary. Education and medical care would be exempted.
Those with low income would receive a sales tax rebate. Those earning $45,000 and under would pay no income taxes. The working middle class with incomes up to $95,000 would pay only 2 percent. The homeowners and renters credit would be doubled. Those making above $95,000 would pay 7.5 percent. Because of the 1 percent surcharge on mental health on millionaires, they would pay a top rate of 8.5 percent.
A family with income of $90,000 which would have paid $1,449 in personal income taxes under the current system would now pay $832.
This combination of cutting the personal income tax and broadening the tax base will help stabilize the boom and bust cycle of the budget in a fair way while generating $10 billion in new revenues annually to start paying down the state's "wall of debt," for K-12 schools, higher education and for local public safety and other locally determined needs.
Our tax incidence analysis shows that any overall increased tax burden would be 0.6 percent or less for any income category. The top 5 percent of earners would still pay 62 percent of the personal income tax.
Small and medium-size business proprietorships, "S" corporations and LLC's are the backbone of the California economy. Unlike the large "C" corporations, profits and losses are "passed through" and taxed at the personal income tax rate. Therefore, a PIT cut will boost job-creating business prospects. For example, a business with a taxable income of $500,000 that would have paid $36,510 in income taxes under the current system will pay $30,262 under the proposed system.
Further, the mandatory single sales factor would be imposed on corporations while, at the same time, California's corporate tax, one of the highest in the nation, would be reduced to make it competitive with other states and foster an improved business climate.
Bipartisanship is very hard work. The Committee did not come to its conclusions lightly.
In our deliberations, we have been tirelessly served by the unprecedented collaboration of some of the best minds in California with decades of experience in state government. These advisors include former Republican and Democratic directors of finance Mike Genest and Tim Gage -- often at partisan loggerheads in past years -- as well as Brad Williams, who was chief forecaster for the Legislative Analyst's Office for 15 years.
The Committee also heard from dozens of other expert witnesses from labor, business and social services. Over the course of our year-long deliberations, we met with both Governor Arnold Schwarzenegger and Governor Jerry Brown to hear them out.
We weighed the other alternative plans out there -- further raising the income tax on the rich or further slashing the budget and insisting on no new tax revenues. Many of us were sympathetic with one or the other of these approaches.
But, as necessary as these alternatives may be as short-term fixes, and as personally sympathetic as some of us were to these ideas, they simply do not face up to the real issues and solve the long-term problems of the state.
The Think Long Committee was not appointed by any official or sponsored by any special interest lobby. We came together only as an independent group of concerned citizens who believe in California's promise and who want to get the state back on the right track.
We will seek to qualify our plan in two initiatives and place them before the public on the November 2012 ballot. We have made our best effort in good faith and hope the public agrees. It will be up to the voters of California to decide.
*Full list of members: Condoleezza Rice, Ron George, Antonia Hernandez, George Shultz, Gray Davis, Bob Hertzberg, Willie Brown, Laura Tyson, Eric Schmidt, David Bonderman, Eli Broad, Gerry Parsky, Terry Semel and Maria Elena Durazo (abstained). Matt Fong, a former state treasurer, passed away during the course of the year.
This article originally appeared in the Sacramento Bee.
Nicolas Berggruen is chair of the Think Long Committee for California. Nathan Gardels is a senior advisor to the group.
A question about one phrase in the article, viz "...reduce the sales tax on goods from 5 percent to 4.5 percent...." The current rate is 7.25 percent, is it not? Misprint or something I don't understand?
What about a progressive tax on consumption and public private partnerships to add to the mix? The days of counting on government spending seems limited to move large transit and housing projects forward. A back stopped public-private security might be an attractive alternative to treasury yields.
California is one of the most left-leaning states in the nation. The Democrats have controlled this stated for a couple of decades at least, and we see what their ideas and policies produce - economic disaster.
The only thing that will fix California is to elect conservatives - grown ups, regardless of party affiliation. Otherwise, we will continue to scare away business of all types - and if you think a tax on services will not scare off more business, you probably also believe in the Easter Bunny, and in Hope and Change.
All of those in California remember what life was like in the days prior to the Three Strikes law that locked up violent criminal and residential burglars for a long time. Yes, it filled up the prisons. But before the law went into effect, a Californian never knew when he or she came home from work, or vacation, whether he or she would find the home burglarized. Or worse, bump into a burglary in process. Those who broke into homes would rack up large tallies of crimes and still be allowed to run loose quickly. Three Strikes stopped that escalating problem. Empty the prisons, put the felons back on the streets among the citizens, indulge in the fiction that local government can deal with them, and Californians can prepare for the kind of suspense that they used to fear on returning home. If they don't get mugged or carjacked before they get home.
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
So instead of having Google pay their fair share, he's rather an immigrant pay a 5% tax on services from an immigration attorney? He'd rather a landscaper and a housecleaner pay more in taxes so Google can continue to pay a 2.4% corporate tax rate?
This is what happens when the 1% like the people who support this plan are allowed to write the tax code, the 99% pay more.