REVIEW & OUTLOOK SEPTEMBER 30, 2009
A California Quake
A tax commission releases a ground-breaking plan.
No state’s economy, with the exception of Michigan, has careened into a deeper ditch than California in this recession. The state now has the fourth-highest unemployment rate (12.2%), the third-highest rate of mortgage foreclosures, and for two years has had the biggest budget deficit in the history of the 50 states. So it is very good news that yesterday Governor Arnold Schwarzenegger’s bipartisan tax commission recommended a road out of this mess.
The heart of the new plan is to broaden the tax base and slash tax rates on personal income, business and sales. California currently ranks at or near the top in all three categories. This has, paradoxically, contributed to the state’s inability to pay its bills by driving men and women from the state and leading to revenue boom and bust. We don’t agree with everything in this report, but there’s no question it would be a huge improvement over the current tax code in its economic incentives, simplicity, revenue stability and fairness.
The commission hasn’t recommended a pure flat tax, but something much closer to it. As shown in the nearby table, the income tax rate, which currently tops out at 10.55%, would be chopped to a more reasonable (but still high) 7.5%. (The plan doesn’t eliminate the one-percentage-point millionaire income tax surcharge, alas.) Because about 70% of small businesses pay the personal California income tax, the commission found that California’s high rate is driving enterprises to the likes of Nevada, Texas and Idaho. The number of tax rates is reduced to three from seven (we prefer one), and thanks to the elimination of credits and loopholes, the new California tax form would fit on a postcard.