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December 14-20, 2005

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Arnold Schwarzenegger

Photograph by Dan Pulcrano
Things Are Looking Up: Just a month after he took a savage political beating in the special election, Gov. Arnold Schwarzenegger wonders, 'Where are the answers to the state's troubles? Are they up there on the ceiling?'

Saving California

A maverick economist floats a plan to salvage the state's economic fortunes

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 a quartet of ballet initiatives that were 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.

Desperate to tweak his partisan image, the Republican governor appointed a 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. Just in case you aren't keeping track of the state debt load, $50 billion is nearly double the current amount owed. And the interest payments on that alone drain $4 billion a year out of the general fund. Of course, Schwarzenegger's campaign-contributing pals on Wall Street love tax-exempt state bonds backed by the sweat of working people; and the governor personally holds substantial investments in financial firms such as Goldman Sachs and Dimensional Fund Advisors that have vested interests in the largest bond offering in California history.

"He said he wanted to cut spending, so 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 the spotlight, he has been asking—and answering—the tough financial questions for 20 years. A graduate in economics from UC-Berkeley, he consults for consumer advocacy groups such as the Utility Reform Network and CALPirg. His group, the CTRA, has been funded since 1985 by public employee unions, including teachers and health-care workers. Goldberg's 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.

Goldberg's group issued a report last January 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, yet it has been conspicuously ignored by both the governor and most legislators. If Goldberg was in charge of California's public finances, we would have a balanced budget and a surplus, instead of a $15 billion structural deficit, an collapsed educational system, an increasingly ineffective social welfare net and a rapidly decaying infrastructure. Corporations and wealthy individuals would be paying 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.

The Prop. 13 Hot Button

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 World War I. Prop. 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 Prop. 13, but we're only talking about expanding the tax on commercial property.)

In effect, says Goldberg, 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. Plus, 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 the poor. Instituting Goldberg's reform would require a constitutional amendment, and generate $3 billion to $4 billion per year.

Goldberg says the state could raise another $3 billion annually by collecting sales tax on telecommunications, i.e., telephone, wireless, cable and satellite services. Goldberg points out that the state, wisely, does not put a sales tax on necessities such as food, energy utilities and prescription drugs. And 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.

Guess Who Picks Up The Slack?

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 only 18 percent 40 years ago. Goldberg points out that 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, offshore tax evasion, via the Cayman Islands and Bermuda, 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 designation created to protect small businesses, not multinationals. Goldberg would close these loopholes.

"Corporations report very different earnings for their shareholders and for the government," Goldberg says.

Not surprisingly, companies tend to overreport income to boost stock prices, and underreport it to shelter income from taxes. Often the "reportable federal income tax base is less than 80 percent of reported corporate-book income." Goldberg would disallow income reporting tricks, thereby collecting another billion or so for the children, elderly and disabled who are being squeezed by the Schwarzenegger-Bush war on entitlements.

This is my favorite: The taxpayer association 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 Redefining Progress, an environmental group, 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 that does not tax oil production at the wellhead. 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 a long history 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.

In a telephone interview last week, Goldberg told me that his ideas sometimes influence the content of legislative bills. He is optimistic that a 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.

Dream on, Lenny. Recall Schwarzenegger. Goldberg for governor!

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