Real tax reform

THERE'S NOT A whole lot that's positive about the state's massive budget crisis. But the $35 billion shortfall may finally do something that common sense and hard financial facts never could: force the governor and the legislature to consider some real, lasting changes in the state's tax system. The same thing could happen in San Francisco: when the impacts of the state's fiscal mess trickle down – and that's going to happen very early in the year – the city will also have to figure out how to raise a lot of revenue very quickly, or make some devastating cuts in local services.

This is a real opportunity: both the state and the local tax systems are unfair and regressive, hitting low-income individuals and small businesses hardest.

We've proposed dozens of ways to cut costs and bring in more revenue at both state and local levels in the past few years, and we listed some key moves for the San Francisco Board of Supervisors two weeks ago. Here are some of the most significant ideas that ought to be on the top of the state legislature's agenda today.

• Raise income taxes on the rich. The state's highest tax bracket used to be 11 percent; it was cut to 9.3 percent back in 1996. State Sen. John Burton (D-S.F.) has repeatedly called for restoring that top tier, which would bring the state $2.3 billion a year. But so far, he's had little success with the legislature, and Gov. Gray Davis has openly opposed the idea.

However, Burton's plan is not only a good way to raise badly needed money, it's eminently fair: only the wealthiest 5 percent of taxpayers (those with incomes of more than $260,000) would actually pay the tax, and everyone in that income range has received major tax benefits from the federal government over the past few years. In fact, almost everyone who would pay the higher income tax could and would deduct it from their federal income taxes – meaning Washington would actually pick up about a third of the cost.

• Create a split-role property tax system. Under Proposition 13, the 1978 tax-cutting initiative that devastated California schools and local governments, property taxes can only be reassessed when a house or building is sold. Since commercial property turns over far more slowly than residential property, homeowners have shouldered an increasing share of the property tax burden over the past 24 years. To make matters worse, commercial property owners often try to weasel out of reassessments by disguising the sale of a company or the price of a property through stock transfers and other financial instruments.

Steve Peace, who is now Davis's budget director, carried a bill last year, when he was in the state senate, that would have triggered a reassessment of commercial property anytime 50 percent of the stock of the company that owned the property changed hands. According to the California Tax Reform Association, that would bring in $4 billion a year.

That bill should be reintroduced (Mark Leno, the new San Francisco assemblymember, would be a fine sponsor). But the legislature should go further and place on the ballot a constitutional amendment that would alter Prop. 13 to allow local government to reassess commercial property on a more regular basis, perhaps allowing an increase of as much as 10 percent a year when property values are rising.

• Eliminate the manufacturing tax credit and all other "job creation" tax-credit programs. Big manufacturers get a tax credit that costs the state $400 million a year anytime they buy new equipment, and a wide range of industries benefit from so-called "new jobs" credits. But very few credible economists believe these credits actually encourage companies to expand equipment purchases or hiring; they're just corporate welfare.

• Make the vehicle-license fee progressive. Davis has suggested restoring the license fee to its 1999 level, which is still low; that alone would bring the state $1.1 billion a year. But why not charge the owners of luxury cars a special surtax and hit the owners of vehicles (like most SUVs) that don't meet certain emissions standards with a special "pollution fee"? That would not only shift the tax burden a bit more onto the wealthy, it would also discourage people from buying SUVs, which foul the air and make the streets and highways more dangerous. (That's another great issue for Assemblymember Leno.)

• Let some prisoners go. This sounds radical, but it's actually pretty simple: according to Burton, the state pays more than $13 million a year to house 503 prisoners who are older than 70. Few of them can really pose much threat to society. There are thousands and thousands more, costing millions and millions, who are in for nonviolent crimes, mostly drug-related. The prison-industrial complex is one of the greatest money drains in the state, and it can be pared down dramatically with no real threat to public safety.

• Don't try gimmicks like then-governor Pete Wilson did in the early 1990s, when he put special sales taxes on newspapers and candy. Any type of sales tax is regressive, hurts the poor, and further damages the economy.

California gave birth to the tax-revolt movement almost a quarter century ago. Now the state has a chance to lead the nation in a revolt against tax structures that benefit the rich and starve the public sector of crucial services. If that's the lasting legacy of the budget mess of 2003, it will be remembered as an opportunity, not a crisis.