Should California's Democrats, now in control of supermajorities in the state legislature, raise taxes more -- or stick to the voter-approved temporary increases in sales and income tax rates that were part of Prop 30?
That's a big question right now in California politics. But it's also the wrong question.
The Democrats -- and all Californians -- should be asking not whether to raise rates but, rather, how best to tax.
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And the trouble with Prop 30 -- and most existing tax proposals -- is that they build on the existing tax system. Prop 30 merely raised rates temporarily on sales taxes (a quarter cent for 4 years) and on income (limited to those making more than $250,000, and only for seven years).
There are two big problems with this approach. One is that the taxes are temporary -- so people who believe the state needs more revenues (a group that includes Democrats, many independents and more than a few Republicans) should realize Prop 30-style taxes aren't a solution.
The second is that these taxes -- particularly the tax on sales -- miss broad swaths of the California economy.
The sales tax in California is focused on goods. But the growth in California's economy has been in services. To get more revenues, the state should look to a tax on services. Instead, California state government and local governments keep adding to a sales tax on goods -- even though that tax is likely to bring in less money.
This is not a new observation. Over the past four years, two big efforts to look at taxation have recommended that the state try to boost revenues by aligning its taxing structure more with its existing service economy. Members of a state tax commission suggested a tax on business net receipts. The Think Long Committee recommended extending the sales tax to services -- while lowering the overall rate.
So far, these proposals have gone nowhere. But they are worth revisiting. Instead of getting bogged down in a debate over the Prop 30 taxes, Democrats should look for ways to improve the tax system, while drawing in more revenues. One big way to do that is to tax California's real economy.