ELIGIO NAVA: State tax code needs to be fixed

Published online on Saturday, Oct. 17, 2009

It's no secret in Fresno County that California's water system is broken -- the same can be said of the state's tax system.

Just as Gov. Arnold Schwarzenegger has said for more than three years that we need a comprehensive water plan, the Golden State needs a comprehensive tax plan that will overhaul the antiquated system that plagues the state with feast-or-famine budget cycles.

It's exciting to see progress with the proposals made by the Commission on the 21st Century Economy. Convened late last year by the governor and legislative leaders, the Commission has provided direction to fix one broken system.

The Commission's proposals would benefit California by reducing the state's dependence on income tax revenue and its boom-and-bust volatility that caused this year's budget deficits and the subsequent deep cuts in health and welfare programs that largely serve the poor. The Commission took into account that any changes to the tax structure should reflect not only the need to maintain necessary government programs but the need to foster our state's economic growth in the 21st century.

Over time the revenue produced by the Commission's proposed Business Net Receipts Tax would allow California to eliminate its corporate income tax, get rid of the state sales tax and reduce personal income taxes. The BNRT would achieve the goal of producing new, steadier revenues in order to allow a shift away from the more volatile income tax by reducing revenue volatility and overall tax rates, expanding the tax base, and reflecting the 21st century economy.

Some in the business community criticize the BNRT. They must not understand that stabilization in state revenues would allow for California businesses to better plan for a future without the risk of facing tax hikes -- consequences of our out-of-date revenue laws that contribute to the state's feast-or-famine budget cycles. As a business owner and employer in Fresno, it's hard to imagine how I would handle my business operations with boom-and-bust revenue swings as drastic as the state's.

The state's increasing dependence on income taxes, which grew from 11% of state revenue in 1950 to more than 53% in 2008, has led to the wealthiest 1% of the state's population funding all state services.

It may seem intuitive that those with more income pay more taxes, but how much more? According to the Franchise Tax Board, in 2006, Californians making more than $500,000 a year filed just 1% of all state income tax returns and paid 47.2% of the taxes while earning just 24.8% of the adjusted gross income. When the economy tanks, so do these revenues.

These wealthy individuals are also our state's most mobile residents. They can and do set up business just about anywhere. For those who propose increasing the burden on the state's wealthiest, I'd urge that they keep this fact in mind.

Under the Commission's plan, the state's current half-dozen income tax rates would be replaced by two -- 2.75% of income for those making up to $56,000 a year and 6.5% of income for those earning more. Sales and corporate taxes would be replaced by the BNRT that would broaden the tax base by including service professions.

While legislators squabble over how to establish a comprehensive, reliable water system, this bipartisan commission was able to overcome major ideologies and provide some progressive and positive tax reform recommendations. Let's hope the politicians don't let partisan bickering get in the way of a reliable funding mechanism for our state services.

The Commission has laid the framework for California to reinvigorate state government with an overhaul of its out-of-date tax system. When Gov. Schwarzenegger calls a special session of the Legislature to debate the Commission's proposals, it will be in California's best interest if they can adopt and enact their recommendations that will bring state government in line with the economy of the 21st Century.