By State Controller Betty T. Yee.
Taxes touch on every issue we face in California, from funding education to addressing our growing transportation needs.
Developed more than eight decades ago during a manufacturing-based economy, our tax system fails to generate dependable revenues or to keep pace with changes in the state’s economy. Our system leaves the state budget prey to boom-and-bust cycles, in turn disrupting funding of essential public services. As the state’s chief fiscal officer, I am responsible for managing cash flow in a time of continued revenue volatility. I know counties experience these dramatic revenue effects as well.
In June, along with my Council of Economic Advisors on Tax Reform, I published a first-of-its-kind report (“Comprehensive Tax Reform in California: A Contextual Framework”) that I hope will lead to wide-ranging public engagement in reforming California’s outdated and unreliable tax system. County governments are vital voices in the reform conversation.
Our Council framework cites two key objectives for comprehensive reform: sound fiscal management and encouraging economic growth. Policymakers in the past revised the tax system to reflect changes in the underlying economy. Despite large-scale shifts in recent decades, such as the ascendance of services over goods, the tax structure has remained largely static, with changes meant to plug budget holes rather than spread the burden fairly or assure dependable revenues.
California’s tax structure relies on highly unpredictable personal income tax revenues, especially collections from capital gains. While this system is highly progressive compared to other states, it results in seesawing revenues that make it hard to meet ongoing commitments. Meanwhile, in the nearly four decades since the passage of Proposition 13, revenues from the property tax—as well as the sales tax and corporation tax—have diminished.
Economic shifts, governance and fiscal changes, and short-sighted policy decisions have concentrated tax resources at the state level. However, local governments face the same dilemmas as the state in terms of volatility and need for revenue that matches growing demands. Even though they are saddled with many front-line responsibilities as the primary providers of essential public services, local governments are largely hamstrung in their ability to control their own revenues under our current tax laws.
Local governments need flexibility to raise revenues locally—especially in higher-cost communities that aspire to greater service levels. Some local officials have called for the authority to levy local sales taxes on services. Perhaps there should be greater flexibility in sharing revenues—especially discretionary revenues—across jurisdictional boundaries. Voluntary revenue-sharing agreements could help overcome limited local revenue capacity. For example, a revenue-sharing agreement to create a cross-jurisdictional fire agency might be more efficient than a fire-service contract between two local governments.
Now is the time to tackle tax reform, after six years of recovery and before the next economic downturn hits. No more kicking the can down the road. Counties, as providers of last resort with respect to our health and human services safety net, know all too well the limitations of California’s current tax structure. As administrative arms of State-mandated programs, providers of countywide services, and providers of municipal services in unincorporated areas, counties are a critical and unique stakeholder interest in comprehensive tax reform.
At its heart, a tax system is a social compact detailing how to pay for the common good—how people live, work, learn, and travel within our communities. Definitions of priorities may vary. However, people across the political spectrum agree that California’s current tax structure does not reflect the times. Regardless of our differences, we all must work together now to fix it.