With the release of recommendations by the Governor’s Commission on the 21st Century Economy, Californians can expect heated debate over our state’s tax structure. The most controversial of these proposals is undoubtedly the Business Net Receipts Tax (BNRT), which will tax businesses on their receipts minus purchases from other businesses. Combined with a decrease in the progressivity of state income tax, the gradual phase-out of the sales tax, and the elimination of the corporate tax, the recommendations seek to broaden the tax base to avoid boom-or-bust tax revenues.
Although abolishing the “regressive” sales tax will offset some of the BNRT, critics denounce the new tax as placing undue burdens on the poor and middle class. Proponents argue increased burdens will be slight, and counterbalanced by stability in revenue and so spending programs targeted at the most vulnerable in society.
But debates over the best way to tax citizens in order to ensure a stable revenue source for spending obscure more fundamental questions concerning the relationship of the tax system to good governance. To encourage responsible taxing and spending all adults who benefit from taxes must be subject in some degree to those very taxes. Taxation ought to be simple, open, and proportional—all should pay the same relative portion of their income. That way, informed taxpayers can clearly comprehend their stake in the proper running of the state and hold government responsible for its governing.
The BNRT might very well accomplish a number of laudable goals. Unfortunately, it will continue to keep hidden the absolute amount of property taken by the government from the taxpayer each year. An alternative to the BNRT left out of the report, and one that would increase transparency, would be to eliminate all withholding tax provisions and replace all current state taxes with a single flat-tax. A flat-tax paid in full once a year would focus voter attention on the act of relinquishing—and amount of relinquished—property to the government. In this sense, the flat-tax could be a useful step toward restoring limited, responsible government.
Voters should know the exact amount they pay into the government coffers each year, know what government costs, and how they, the taxpayers, are shouldering these costs. A flat-tax on personal and corporate net income is relatively simple, requiring a less complex bureaucracy (so, lower government costs), and open, allowing for fewer hidden taxes or exemptions. It is also proportionally equitable on rich and poor, and is to that extent less punishing of individual initiative and industry.
Proponents argue that one result of a flat-tax system would be that taxpayers would quickly see any increases in government spending because increases in spending would require an increase in the tax rate across the board. Politicians would be forced to justify spending increases as tax increases, fostering greater competition between political parties. Parties would need to detail how much they proposed to spend on which programs, and compete by offering better services at greater levels of efficiency and lower cost. Voters would have a clearer choice come election time, and be able to assign blame or reward more rationally through the ballot-box.
Several states currently employ some form of the flat-tax, with mixed results. The American Legislative Exchange Council recently ranked flat-tax states Utah and Colorado first and second in future financial prospects, but Illinois forty-fourth—one worse than California—and Rhode Island a dismal forty-eighth. Though numerous factors contribute to these rankings, including the actual level of the flat-tax, it is notable that those states that ranked higher extend the flat-tax rate to the corporate tax.
To promote maximum competitiveness with pro-business Nevada and Washington, California would eliminate corporate taxes, too. If retained, they must also be subject to the flat-tax, with careful avoidance multiple-taxation so that taxes fall only on profits. A flat-tax of roughly 5% on personal and corporate income would achieve this while retaining revenue neutrality. Combined with the elimination of all other state taxes a proportional flat-tax will provide a steady revenue stream that strikes a balance between the progressive income tax and regressive sales tax.
Clarity in taxation makes government spending more accountable and the budget process more open. The connection between policy and taxes should be made as clear as possible so voters can determine whether they receive an adequate return on their taxes. The Commission on the 21st Century Economy has opened the debate. Californians must seize the opportunity to demand necessary changes to restore responsible government.
A version of this paper appeared in the October 21st 2009 issue of the Los Angeles Daily News.