Contributors
Bill Leonard - Contributor

Bill Leonard is a Member of the State Board of Equalization

A Week Under the Dome
This week: Teachers attack Prop 13, Tax matters, Laffer's ideas are timely...
[Bill Leonard] 11/15/03

Teachers Attack Prop. 13

Last week the California Teachers Association announced that it is
sponsoring a November 2004 ballot measure to change Proposition 13 and
increase property taxes on commercial property. The teachers say the
additional money will be used for teacher salaries, smaller class sixes
and more preschools.

The CTA may find their cry of poverty falls on deaf ears. In the 2003-04
budget, base K-12 education spending increased 6.7%. Total K-12 spending
increased $1.3 billion over the previous year, and total per-pupil
spending is now more than $9,300. The problems with public schools are
not because there is not enough money spent in education; the problems
arise from spending money in the wrong places.

Consider the Sacramento Bee's series investigating categorical spending
earlier this year. The Bee found that more than $12 billion is spent on
more than 100 specific programs, but that, "The distribution of
categorical money from district to district is uneven, with politics often
determining who gets the most cash. A lot of the money is doled out based
on outdated programs and formulas with little connection to modern-day
needs in schools. And much of the money flows year after year with little
or no state monitoring of whether the programs are working, or even
happening. And some are not."

Rather than advocate for eliminating these ineffective programs and
putting the money directly into classrooms now, the CTA is spending its
time and its members' dues to try to raise your taxes. Not only is a
great amount of commercial property owned by small businesspeople in
California, but all businessowners will have to increase their costs to
you, the consumer, to cover their increased tax bills.

Level Playing Field

Taxpayers are not only annoyed when government misspends their tax money;
they are also annoyed by people who do not obey the same tax laws that
apply to everyone. To that end, I co-hosted a conference last week to
discuss the Underground Economy. This topic grows more important as we
face severe budget crunches because it is generally agreed that we could
balance our budget if the proper taxes were collected from those who cheat
on California's tax laws. The public needs to better understand the
harmful consequences of paying cash under the table to workers, using
unlicensed contractors, and engaging in retail sales without collecting
sales taxes. The workers, the licensed contractors, and retailers who
comply with these laws are all harmed when others do not follow the laws.
It is the duty of government to enforce these laws for the benefit of all.

This enforcement needs to be tempered with justice. Those who commit
fraud by knowingly and willingly violating these laws should be punished
fully. But others seem to violate these laws out of pure ignorance, and
the priority here should be to collect the taxes and pay the benefits to
make things whole for the victim. The toughest situation to enforce is
when both parties agree to ignore the law. It is hard to have sympathy
for the worker as a victim when the worker has agreed or even offered to
be paid under the table. Penalizing the employer alone is not justice in
these instances.

California labor law, contractor license and tax compliance investigators
are overburdened with the sheer numbers of laws and nuances that they must
enforce. The Legislature and the Governor should review these laws and
set priorities for law enforcement. Laws that are unenforceable only
engender disrespect for all laws and take away from the ability to help
the victims of illegal business practices.

To report a business that you believe is not complying with payroll tax
laws, call EDD's Underground Economy hotline at 1-800-528-1783. To report
sales tax evasion, call the BoE hotline at 1-888-334-3300. For concerns
about unlicensed contractors, call the Contractors State License Board at
1-800-321-CSLB.

The Controller and the MIC

The Manufacturers Investment Credit (MIC) was signed into law in 1993 to
encourage growth in manufacturing and employment. The MIC provides a six
percent tax credit on costs of manufacturing equipment. The law states
that the credit ends when it is determined that the number of
manufacturing jobs is 100,000 less than the number of jobs in 1994. To me
this is backwards. If the number of jobs is less than in 1994, then such
incentives are needed more than ever. Nonetheless, last February, the
Employment Development Department of Governor Davis concluded that
California had in fact reached the sorry state of having 100,000 + fewer
manufacturing jobs than in 1994, and therefore the MIC will expire on
January 1, 2004.

Several bills were introduced last session to extend the credit but none
even made it out of committee in their house of origin. Imagine my
surprise when State Controller Steve Westly seemed to announce to a
manufacturing group that not only was the MIC not expiring, but he also
took credit for getting the Legislature to extend it. I hope that Westly
is successful in convincing enough Democrats in the Legislature of the
benefits of an investment credit for manufacturing. It is an important
concept that should receive bipartisan support.

The Time Has Come for Laffer's Bold Ideas

God bless Arthur Laffer. There was a wonderful profile of the 63 year-old
economist in Thursday's LA Times and it could not have come at a better
time. He is most famous for arguing during the Reagan administration that
when taxes are raised too high, tax receipts come down. In other words,
there is such a thing as a level of optimal taxation where services can be
funded and economic behavior is allowed to flourish. What seems obvious
now was widely disputed at that time, but Reagan's own income tax
reductions and the corresponding increase in revenues provided solid proof
of the theory.

Laffer argues that our progressive taxation system -- where people who
earn more pay a higher rate -- is largely responsible for our current
fiscal calamity because such progressive taxes guarantee huge volatility
in revenues. It is virtually impossible in a political culture such as
ours to make our spending mimic these swings; thus we repeat the cycle of
fiscal crisis again and again because the massive increases in spending
from the good years cannot be sustained in bad economic times. The
obvious solution is a flat tax, with all Californians paying the same rate
with few, if any, deductions. The rich would still pay more because they
make more. The benefits would be that we could make long-term spending
plans with much greater confidence, and our economy would almost certainly
boom.

It is an undeniable fact that progressive taxation provokes high-earners
to make choices that are in their own interest, rather than in the
interest of the communities that are charging them comparatively higher
tax rates. Those who do not understand this, I invite to take a Sunday
drive through Incline Village, Nevada and check out the popular tax haven
for scores of wealthy former Californians.

Laffer's proposal in full would essentially abolish every state and local
tax in California, replacing them with a rate of about 6% on income for
all Californians. The state would divvy up the amount based on
population, the number of school age children, and other factors. The
state's economy is picking up, as are revenues. That is why we must start
this discussion immediately, or we will have to do so after the next
budget meltdown that will surely come.

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