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December 14-20, 2005

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The Byrne Report

Saving California


By Peter Byrne

ON NOV. 8, A MAJORITY of the California electorate told Gov. Arnold Schwarzenegger to get a life. The governor had staked his political future on the fate of a quartet of ballot initiatives designed to weaken the power of organized labor—especially nurses, teachers, firefighters and cops—while enhancing his ability to unilaterally slash education, social services and road repairs from the state budget. Echoing their disdain for Gray Davis, whom they recalled in 2003, the voters rejected Schwarzenegger's "pay-to-play" model of governance, in which campaign donors get legislative favors and government contracts, while nonplayers get nada.

Desperate to tweak his partisan image, the Republican governor recently appointed Democratic party hack Susan Kennedy as his chief of staff. And, eager to kiss and make up to pork-loving legislators, Schwarzenegger floated the notion of borrowing $50 billion to spend on public works that would be paid back through state bond measures.

Just in case you are not keeping track of the state debt load, $50 billion is nearly double the current amount due. The interest payments on that amount alone drain $4 billion a year out of the general fund. Schwarzenegger's campaign-contributing pals on Wall Street love tax-exempt state bonds backed by the sweat of working people. Furthermore, the governor personally holds substantial investments in such financial firms as Goldman Sachs and Dimensional Fund Advisors, which have vested interests in what would be the largest bond offering in California history.

But amid all of this crazy talk, there is one voice of sanity.

"He said he wanted to cut spending, [and] now he wants to spend $50 billion more. Who is going to pay for it?" asks Lenny Goldberg, executive director of the California Tax Reform Association (CTRA), a nonprofit based in Sacramento. You gotta love Goldberg, who is easily one of the best economists in California. Outside of the spotlight, he has been asking (and answering) the tough financial questions for 20 years. His sound advice is highly regarded by policy wonks in Sacramento, even as it is roundly disregarded by most politicians, presumably because it might end government corruption as we know it.

The CTRA, of which Goldberg is the heart and brain, issued a report earlier this year called Tax Policy for the 21st Century: Resolving California's Long-Term Structural Debt. This easy-to-digest presentation delivers a $17 billion solution to our budgetary woes. Naturally, it has been conspicuously ignored by both the governor and most legislators.

The CTRA has been funded since 1985 by public-employee unions, including teachers and healthcare workers. Goldberg consults for such consumer advocacy groups as the Utility Reform Network and CALPirg. If Goldberg were in charge of California's public finances, we would have a balanced budget and a surplus, instead of a $15 billion structural deficit, a collapsed educational system, an increasingly ineffective social-welfare net and rapidly decaying infrastructure. Corporations and wealthy individuals would pay their fair share of taxes. Polluters would be penalized for polluting. Budget-makers would focus on shaping the future. Special interests would stand in line like everybody else.

Clearly, he is not in charge.

According to Goldberg, the first step in converting state government to fiscal sanity is to reform the commercial property tax system. Currently, the annual tax on commercial real estate, as it balloons in market value, is based upon its price the last time it changed hands, even if that was before WW I. Proposition 13 does not allow county tax assessors to accurately assess increasingly precious commercial property according to its true income-generating value. (Residential assessments are also limited by Proposition 13, but in this model we are only talking about expanding the tax on commercial property.) In effect, said Goldberg in a telephone interview last week, longtime holders of commercial real estate are gaining "windfall" profits at the expense of new real estate investors, who pay property taxes based upon current market value.

This phenomenon stymies economic growth and promotes exurban sprawl as investors seek ever cheaper land to develop. Naturally, real estate lawyers have become adept at structuring complicated land swaps, which are really new sales, to avoid triggering market-based reassessment and higher taxation. One consequence of what Goldberg calls our "underperforming property tax" is that local governments are forced to make up the difference by increasing sales taxes, which are regressive and negatively impact poor people. Instituting Goldberg's reform would require a constitutional amendment, and would generate an estimated $3 to $4 billion per year.

Goldberg further suggests that we could raise another $3 billion annually by collecting sales tax on telecommunications, i.e., telephone, wireless, cable and satellite services. He points out that the state wisely does not assess a sales tax on such necessities as food, energy utilities and prescription drugs. Labor-intensive services, such as those performed by accountants, lawyers and auto mechanics, have long been exempt from sales tax. But what about short-term rentals, such as seats at the symphony and sporting events? How about putting a sales tax on the use of golf courses, gyms, bowling allies, parking lots, self-storage units and movie theaters? Additionally, the state loses untold millions by not policing companies that fail to collect legally required sales tax on Internet and mail-order deals.

And, speaking of scofflaw corporations, individuals are picking up the corporate tax slack. Personal income taxes in California account for 48 percent of general fund revenues—up from just 18 percent some 40 years ago. Goldberg points out the tax credits and misused tax-incentive programs—such as "enterprise zones" that serve rich districts, not poor neighborhoods—allow profitable businesses to pay zero taxes. Additionally, off-shore tax evasion robs Californians of taxes that indigenous companies should be paying for the use of our public infrastructure. And many large corporations are avoiding the higher corporate tax rates by spuriously declaring themselves to be S corporations, a protection created to shield small businesses, not multinationals. Goldberg would like to close these loopholes.

But this is my favorite bit: the CTRA proposes that corporate polluters be taxed for adding pollution to the environment, as opposed to paying for air and water pollution tax credits, which allow them to pollute. Any attempts to pass the pollution tax on to poor consumers would be offset by earned income tax credits and low-income electricity discounts. According to the environmental group Redefining Progress, the state could raise $1.4 billion a year by charging polluters by the pound for emitting nasty particulates or spewing toxins into our oceans, rivers and lakes.

Goldberg also recommends eliminating special tax breaks for oil companies. California, for instance, is the only oil-producing state in the nation that does not tax oil production at the well head. I must add that resurrecting the windfall-profits tax to curtail the energy industry's blatant profiteering in California is a no-brainer. Keep in mind, though, that Schwarzenegger's Council of Economic Advisors is run by neoconservative employees of the Hoover Institution, who have long histories of advocating for energy deregulation and lustily applauding the ugly result. In my opinion, price gouging, not gay marriage, should be disallowed by constitutional amendment.

Lastly, Goldberg suggests raising the top income tax bracket from 9.3 percent to 11 percent. He points out that President Bush's tax program rewards the top 1 percent of California taxpayers with an average cut of $77,500. Goldberg would reduce Bush's gift to the wealthy by an average of only $8,300—while generating more than $2 billion for the general fund.

Goldberg says that his ideas sometimes influence the content of legislative bills. He is optimistic that real reform will one day sneak past the corporate lobbyists who govern California. For instance, he'd like to see the governor spend some of the $50 billion on affordable housing.

Recall Schwarzenegger. Lenny Goldberg for governor!


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