Democrats For a Flat Tax in California?

Democrats For a Flat Tax? By JOE MATHEWS
Some California legislators realize revenue from the rich is too volatile.
WSJ, Jul 11, 2009

Los Angeles

Karen Bass is an unlikely tax cutter. She's the Democratic speaker of the California State Assembly, a fierce defender of the labor movement, and an advocate for repealing a constitutional provision that requires that tax increases pass the state legislature with a two-thirds majority.

But as California faces a budget crisis that defies efforts to resolve it, there is a woman-bites-dog story developing with Ms. Bass at its center. By the end of the month, a commission she pushed to create is expected to recommend that the state adopt a flat (or at least flatter) personal income tax and cut or repeal corporate and sales taxes.

Normally, such proposals would be dead on arrival in Sacramento. But now many Democrats, including the speaker, are realizing that what they need is a tax base that will provide steady funding for their programs. In other words, they need a tax base that doesn't count on a large slice of revenue from taxes on a relatively small number of wealthy residents who can flee the state or who are themselves vulnerable to losing a substantial portion of income in a recession.

No one understands the political dynamics of volatile state revenues better than Ms. Bass. She's a progressive who has made finding more money for foster care and children's services a top priority. And after negotiating three rounds of budget cuts in the past year she has grown weary of deficit politics. So, determined to modernize the tax system, Ms. Bass is pledging to put whatever recommendations the commission comes back with to an up or down vote.

If that happens, California's tired budget debate -- which usually pits Democrats against Republicans -- will take on a new twist. This time the debate to watch will be among Democrats as they hash out whether taxes are too progressive to accomplish progressive political goals.

In a public meeting last month, a majority of the commission's 14 members -- seven of whom were appointed by Ms. Bass and her Democratic counterpart in the state Senate, the other seven by California's nominally Republican governor -- seemed to favor replacing the state's six income-tax brackets with a single 6% rate. The plan they mentioned would also eliminate corporate and sales taxes and replace them with a business net receipt tax.

"You have to admit," commissioner member Fred Keeley, a Democrat who is the treasurer of Santa Cruz County, said after the meeting, "that the package is a game changer."
In recent days, Mr. Keeley and other Bass appointees, have countered liberal objections with other proposals. But each adopts the logic of simpler taxation. One would create three income-tax brackets (0%, 4% and 7%). Another would cut corporate taxes and the income-tax rate for top earners while imposing a new fuels tax.

It remains unclear how much Ms. Bass will fight for the commission's recommendations. Underscoring the political sensitivity of tax reform, she has been cautious in recent public comments, emphasizing that she is "open-minded" about supporting the recommendations herself. She told me she didn't like the idea of a "flat tax" if it meant raising the tax burden on poorer and middle-class Californians. But she also said she worried about the state's heavy reliance on about 144,000 wealthy people to pay half of all income taxes for a state with a population of 38 million. "It's a crazy statistic," she said.

Late last year, Ms. Bass convinced Gov. Arnold Schwarzenegger and the state senate's Democratic leader, Darrell Steinberg, to create the Commission on the 21st Century Economy with a mandate for tax reforms that would reduce volatility in state revenue. The Democratic appointees include state tax expert Richard Pomp and Berkeley law school dean Christopher Edley Jr. The governor's appointees include economists Michael Boskin and John Cogan, as well as businessman Gerald Parsky.

"One of the reasons why Californians go through the annual budget ritual in a way that is most years very, very frustrating is that our sources of revenue are far too volatile," Mr. Steinberg said at a December press event.

Other Democrats have made similar points. U.S. Sen. Dianne Feinstein recently explained her state's problems to the New York Times by saying that 55% of state tax revenues come from income tax and 45% of that comes from the top brackets.

Susan Kennedy, a Democrat who serves as Mr. Schwarzenegger's chief of staff and who is the most important unelected official in the Capitol, was recently asked at a business event what the state tax system needed. "Flatness," she replied. "Our revenue stream is way too progressive."
But as the commission gets close to making recommendations, opposition is forming on the left. Liberal-leaning groups that study the budget argue that all taxes are volatile and that the state should raise taxes, particularly on property, to balance its budget. Public employee unions are demanding in blunt terms that Democrats make the tax code more progressive. The American Federation of State, County and Municipal Employees recently asked legislators to sign statements supporting some $44 billion in new taxes, much of them on the wealthy and industry.

Robert Cruickshank, a contributing editor at the progressive blog Calitics, says of the commission's expected recommendations: "Most progressives are not going to support these kind of regressive solutions. You would see a fight if the Democratic legislature made a move to do this."

The commission poses a political quandary for Republicans. Joel Fox, a former president of the Howard Jarvis Taxpayers Association, predicts that libertarians could embrace the flatter taxation while conservative populists might oppose the commission out of fear its reforms would increase government revenues.

But supporters of the commission's proposals are likely to get a fair hearing. Frustration with the California status quo crosses all ideological lines. Even those who disagree with the commission's thrust are glad to have something new to discuss. "I'm really glad they're trying something," said Rick Jacobs, chairman of the Courage Campaign, a progressive Internet network with more than 700,000 members. He argues that the existing state tax system is too regressive. "It's important to push the discussion out."

Privately, some Democrats hope that the commission sparks a debate that will lead to a tax hike. These Democrats want to end the two-thirds vote requirement on tax hikes and lift limits on commercial property taxes put in place by Proposition 13 in 1978. But regardless of the aims of some heading into this debate, the result is that by starting a discussion on tax reform Democrats could create a flatter, simpler tax code for California. These are strange times in the Golden State.

Mr. Mathews, a senior fellow at the New America Foundation, is the author of "The People's Machine: Arnold Schwarzenegger and the Rise of Blockbuster Democracy" (Public Affairs, 2006).