Temporary tax hike can resolve state budget woes

BY MICHAEL ASIMOW AND KIRK STARK

"Tax, Budget Woes Grow." "Financial Illness Could Kill Local Government." "State Budget is a Fiscal Time Bomb."

Do these headlines sound familiar? If so, you were probably reading California newspapers in 1967, 1971 or 1991. In each of those years, the state faced a budget crisis eerily similar to the one now upon us.

What distinguishes those years from the current mess is that each time a Republican governor — Ronald Reagan in 1967 and 1971, then Pete Wilson in 1991 — joined with state lawmakers to raise taxes to bridge the budget gap. And in each case, taxes were reduced after the budget crisis had passed.

In the twisted world of California budget politics, a temporary tax increase has a compelling logic. The idea is that the Legislature would enact an increase in income taxes with bipartisan agreement that includes a sunset clause to ensure the tax hike's eventual demise.

A temporary tax increase would allow the state to avoid drastic spending cuts for vital public services, especially in education. (According to a recent poll from the Public Policy Institute of California, 86% of respondents expressed concern that state budget problems will cause significant spending cuts in K-12 education, with 56% saying they were "very concerned.")

One of the chief arguments against tax increases of any sort is the adverse effect on business climate and market incentives. Republicans rightly point out that California needs to attract business and not drive it away by excessive taxes.

But because of its preplanned expiration, a temporary levy changes the usual cost-benefit calculus associated with tax increases and signals that the state is serious about keeping its financial house in order without using the budget crisis as an excuse to ratchet up tax revenues over the long term.

In the past, lawmakers have relied upon an increase in the top personal income tax rate, ensuring that only the wealthiest Californians would be subject to higher taxes. An alternative approach would be a surcharge added to the state income tax. For example, assuming an income tax surcharge of 10%, a taxpayer with state income tax liability of $2,000 would owe an additional $200 in taxes, while someone with a $5,000 liability would owe $500 in taxes.

A temporary 10% surcharge would raise about $5.5 billion, with an additional $1 billion coming from a comparable levy on corporations. Significantly, however, much of the increased burden for taxpayers would be offset by a reduction in their federal tax liability. Taxpayers who itemize their deductions could recoup as much as 35% of the increased cost via itemized deductions on their federal income tax returns. Thus, the federal government would share in the overall cost of addressing California's budget crisis.

The idea of increasing taxes — even temporarily — won't please everyone. Liberal Democrats will complain that it's not enough and that the state's structural deficit needs a permanent increase in taxes. Conservative Republicans will fight the idea of any new taxes. But political leadership is not about satisfying everyone. As Reagan and Wilson showed us, sometimes compromise is required to get the state through a crisis without lasting damage.

Asimow is an emeritus professor of law, and Stark a professor of law. A longer version of this op-ed appeared in the Sacramento Bee.