In 2008-09, personal income grew at an anemic 3 percent, and, as a result, general fund revenues plummeted by 19 percent. In 1970, the report points out, personal income taxes accounted for 27 percent of revenue while sales and use taxes accounted for 40 percent. By 2011, reliance on the personal income tax was 57 percent and sales and use taxes only 22 percent.
In those same years, the California economy has been transformed from a mainly manufacturing and agricultural economy to one increasingly dominated by services and information – a metamorphosis mirrored elsewhere in the country. Nearly one half of California’s $2 trillion economy is composed of services – none of it taxed.
If you eat a donut in a coffee shop, the sales tax on goods applies. If you use a legal or financial service, it is not taxed. In other words, the coffee shop donut subsidizes lawyers, accountants, and other services.
While maintaining California’s progressive income tax structure, we would reduce rates across the board for every bracket and reduce the sales tax on goods from 5 percent to 4.5 percent while broadening the sales tax at a 5 percent rate to apply to services, which are more discretionary. Education and medical care would be exempted. Those with low income would receive a sales tax rebate. Those earning $45,000 and under would pay no income taxes.
This combination of cutting the personal income tax and broadening the tax base will help stabilize the boom-and-bust cycle of the budget in a fair way while generating $10 billion in new revenues annually. That can start paying down the state’s “wall of debt” – for K-12 schools, higher education, for local public safety, and other locally determined needs.