How to Tax California’s One Percent

By Lenny Goldberg, California Tax Reform Association, and Roy Ulrich, Goldman School of Public Policy at U.C. Berkeley

(This article first appeared in the California Progress Report.)

Jerry Brown’s most recent budget proposal takes a meat ax to vital programs, including Medi-Cal and in home support services (IHHS). Why do we refer to them as “vital?” IHHS, for example, helps the disabled and seniors live safely in their own homes, thus obviating the need to place them in more costly outside facilities.

The governor’s plan represents the latest and worst in a spending cuts-only approach which California seems to specialize in. Reaping the benefits of this approach are the rich and powerful. The losers are those without high-priced lobbyists: the poor and the weak.

There are several potential revenue sources the rich and powerful have been able to avoid while other states, including a few very red ones, have seen fit to tap them.

First and foremost is an oil severance tax, which would raise $2 billion yearly if taxed a ten percent rate. California is the only state with oil reserves that doesn’t tax its removal from the ground by private companies. Even Texas, the home of George Bush and Rick Perry, has reaped billions of dollars for its university system from taxing this natural resource. The petroleum industry argues that prices at the pump will jump if we decide to tax it. That is nonsense. California oil is part of a huge global market, and it it’s priced too high, it won’t be able to compete in the market.

Second, you don’t have to change a word of Proposition 13 to declare by statute that a 51% turnover in publicly-held stock constitutes a change of ownership. For example, tech giant Intel owns prime Silicon Valley land which is taxed at 2-5 cents/square foot in an area where land goes for $1/square foot. Closing this loophole would bring in $2 billion annually which would be divided between local government and public schools.

Third, eliminate loss-carry-backs. Before your eyes glaze over, loss carry backs are accountant-speak for allowing current losses to be credited against prior years’ profits. Amazingly, the state is providing refunds to corporations for taxes paid in previous years even as we are cutting the budget. Ending this special interest tax deduction will save the state $200 million annually.

Fourth, tax overseas profits generated by multinationals whenever and wherever earned. Don’t wait until the money comes home. This accounting change would generate approximately $300-$500 million to the California treasury yearly.

Fifth, eliminate tax free exchanges at the state level. This is a sham, pure and simple, that allows the avoidance of capital gains taxes when a commercial property is sold and replaced by another of the same or greater value. This practice is especially egregious when a person buys out-of-state property and the revenue becomes forever lost to California. Elimination of this loophole garnered by the state’s real estate interests would generate $350 million to the state annually.

Sixth, vote for the Steyer initiative in November. Venture capitalist Tom Steyer has proposed a ballot measure that would force out-of-state companies to calculate their tax liability based on the percentage of sales here. A few years ago, in what was generally perceived to be an error, the legislature permitted multistate businesses the option to choose their own tax liability formula, depending on whether they had losses or gains. Elimination of this election will bring in $1 billion annually to the state.

Added together there are over $6 billion in untapped revenue that the public generally supports but Republicans as a united voting bloc won’t even consider. And their consideration is required because Democrats lack the 2/3 majority in both houses of the state legislature necessary to raise taxes. Obviously, Republicans can’t be expected to support all of these tax hikes. But the enactment of either an oil severance tax or redefining what “change of ownership” means under Proposition 13 would mean restoring previous funding levels for the poor, our schools, or for our colleges and universities. That’s something they should consider.

Lenny Goldberg is executive director of the California Tax Reform Association. Roy Ulrich is a lecturer at the Goldman School of Public Policy at U.C. Berkeley.