HAREBRAINED TAX SCHEMES ABOUND IN HARD TIMES

CALIFORNIA FOCUS
FOR RELEASE: TUESDAY, OCTOBER 20, 2009, OR THEREAFTER

BY THOMAS D. ELIAS
“HAREBRAINED TAX SCHEMES ABOUND IN HARD TIMES”

Every Californian knows these are hard times here in America’s largest state. With a recession still raging despite the optimistic pronouncements of a few government economists, state workers are furloughed regularly, motor vehicles offices are shuttered periodically and unemployment is at near-record levels, to name just a few of our ills and inconveniences.

In any such time, goofball ideas arise, purporting to be solutions, and this year is no different.

Because it's widely recognized that a shortage of state revenues is a major problem, all manner of ideas are now springing up as potential remedies. Most are harebrained, including the most hyped among them.

One proposal comes from Republican Insurance Commissioner Steve Poizner, running hard to the right in his quest for next year’s GOP nomination for governor. The Silicon Valley billionaire calls for “pro-growth tax cuts,” proving that the discredited “trickle down economics” theory pushed so hard during the Ronald Reagan era by economist Arthur Laffer is far from dead.

Laffer claimed reducing taxes for the richest Americans would somehow increase actual tax receipts, betting the wealthy would invest in job-creating industries. This proved wrong in the 1980s, when another recession coincided with tax cuts made early in the Reagan years.

Now Poizner wants to cut capital gains taxes by half and slash sales, income and corporate taxes by 10 percent. “Lower tax rates are essential to stimulate our economy,” he says. His Republican campaign rival and fellow ex-Silicon Valley mogul Meg Whitman also wants tax cuts, but she wants them mostly for businesses.

The theory here is much like Laffer’s – cut taxes for the rich and the corporations and there will be more jobs, with more tax money the eventual result. It didn’t work for Reagan and Laffer because many corporations invested their tax benefits abroad and individuals often pocketed theirs. What makes the people think things would be different now?

But the most hyped proposals come from the so-called Commission on the 21st Century, better known as the state tax revision commission. This group met for months and came up with a plan to eliminate corporate income taxes, slash taxes on the wealthy and impose a levy of about 4 percent on every business and service provider in the state, including doctors, lawyers, accountants, barbers, nail polishers and shoeshine stand operators.

This was hardly surprising, as the 14-member group, appointed equally by Republican Gov. Arnold Schwarzenegger and Democratic legislative leaders, included a chamber of commerce executive, the leader of the California Business Roundtable, members of corporate boards including the Walt Disney Co. and Bank of America, along with a sprinkling of academics and former legislators.

How harebrained is this plan? For one thing, it was supposed to be “revenue neutral,” designed to stabilize state tax intakes while assuring the amounts brought in at least match what today’s system brings. But an analysis by the nonpartisan California Budget Project found that in a typical year, it would bring in about $5 billion to $7 billion less than today’s system. That’s about what the state invests each year in the University of California and California State University systems combined.

Richard Pomp, a commission member and a University of Connecticut law professor, observed that in addition to this rather major shortcoming, business payrolls would be taxed under the commission plan, but payments to freelancers or outside contractors would not.

“That encourages outsourcing,” he said. “It exempts imports from taxation, but taxes exports. Which means it would encourage businesses to set up operations outside California.”

Despite its seeming benefits for big corporations, this plan has been greeted with skepticism by the state Chamber of Commerce and other business groups, along with labor unions.

Bill Leonard, a former Republican legislator and current member of the state Board of Equalization, calls the report’s ideas “the most volatile change in taxation since…1916.”

And Pomp observed that “If ever a commission report deserved a direct deposit in the round file, this is it.”

But that won’t happen. Schwarzenegger has already called a special legislative session to consider the plan, even though it has absolutely no chance of passage. Which means lawmakers could be called to Sacramento and paid their usual sumptuous per diem expenses, even though everyone knows no work product will result.

That makes Schwarzenegger and anyone else who participates in this charade as harebrained as the tax schemes themselves.

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Email Thomas Elias at tdelias@aol.com. For more Elias columns, visit www.californiafocus.net