Sunday, November 20, 2011

Think Long Should Think Harder

Tomorrow, a group of wealthy California philanthropists is set to remind us how much better we'd have it if we only put our lives in their hands. Calling themselves the Think Long Committee, politicians like Gray Davis and Arnold Schwarzenegger and business luminaries like Eli Broad and Google's Eric Schmidt will announce a plan for saving the Golden State from collapse. Unfortunately, the plan offers exactly the kind of out-of-the-box thinking you'd expect from a committee featuring Gray Davis.

The centerpiece of Think Long's plan is a dramatic reform of the state's tax code: in contrast to Jerry Brown's hopelessly unpopular income and sales tax hikes, they would make California's taxes broader and more regressive. On the plus side, income taxes would drop sharply. Incomes below $45,000 wouldn't be taxed; a 2% rate would apply to incomes between $45,000 and $95,000; and incomes above $95,000 would be taxed at 7.5%. On the minus side, it would eliminate most deductions on personal income. The state's minimum sales tax rate would also fall, from 7.75% to 7.25%, but it would apply to services (basically, everything except health care and education) as well as goods. In a nod to the Governor's failed jobs plan, Thing Long would drop the corporate tax rate from 8.84% to 7%, but would raise taxes on out-of-state employers by applying the so-called "single sales factor." The group estimates that this plan would raise an additional $10 billion in tax revenues for Sacramento, mostly due to the tax on services. According to their plan, the money would be used to retire debt in the first year, and would go to schools and local governments thereafter. Think Long plans to put its members' money behind two ballot measures that would implement their proposal.

Mark us down as unimpressed by all of this. First of all, the plan has political problems. Insofar as it would repeal the requirement to compensate schools in the event of budget cuts, the powerful teachers' unions will labor furiously to stop it. And insofar as the service tax would doubtless translate into higher prices for consumers, it's not clear whether the public will get behind it. But Think Long also needs to Think Carefully about the underlying economics. Given how much the private sector in California is struggling with the state's regulatory environment, a hefty new tax on business is not the way to address an unemployment rate that's still over 11%.

More generally, it appears that Think Long focused on figuring out a politically palatable way of paying for the status quo in Sacramento: a better idea would've been to ask some serious questions about that status quo. Clearly, billions in new taxes will be needed if our government is to have any hope of paying for the programs and benefits it's promised so far; yet the reason California finds itself in that predicament is our government's long-running predilection for creating spending programs that can't be paid for. So why should anyone believe that an extra $10 billion every year would be spent retiring debt and funding existing programs, as opposed to expanding these programs or adding new ones? In other words, given everything we know about Sacramento, it's hard to believe we wouldn't see another Think Long Committee sometime down the road, with a new plan to fix a new financial mess. If these folks really want to chart out a better future for California, they should start asking more difficult questions about what spending the state can realistically afford, and what spending should be cut in the interest of economic recovery.

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