A Tax Commission for California? How It Can Be Made to Work

Both Governor Schwarzenegger and Assembly Speaker Bass have stated that they would like to form a bipartisan commission to find ways to improve California’s tax system. They seek to modernize our tax system, make the state more economically competitive, and have a system that produces stable revenues.

These are great goals. California’s tax system was designed decades ago in a manufacturing era when borders were important and tangible goods ruled. Our tax system was not designed for the current information age with its mobile capital, worldwide-based workforce, and goods and services transferable over the Internet. Serious work is needed to bring our tax system into the 21st century.

A tax study commission is not a new idea. We’ve had several in the past and recommendations were made. California’s last tax review group was called the Commission on Tax Policy in the New Economy. Formed in 2000 by the legislators and governor, it held 17 public hearings and issued its report, with recommendations, in 2003. There is also a 2000 report by then Assembly Speaker Villaraigosa’s Commission on State and Local Government Finance. We also have a 1999 report from then State Controller Connell’s SMART task force.

Very few of the numerous recommendations of these commissions were seriously considered by the legislature or enacted. What would be different if yet one more commission studied our tax system?

Well, taxes are complicated and thoughtful consideration of the strengths and weaknesses of our current system is needed to bring it into the 21st century ways of living and doing business. However, elected officials and the public must have a strong willingness to accept change for a commission’s work to be worthwhile. Otherwise, we’ll end up with yet one more unused report.

Here are six suggestions that should increase the chances that the commission approach will help improve our tax system.

First – serious commitment. There must be serious buy-in from the legislature and Governor. The commission should be established by legislation with the Governor and legislature selecting the members. Legislative hearings on the final report should be required within two months of its issuance. The tax-writing committees and governor must also be required to propose tax law changes in response to the report and hold legislative hearings by a specified date. If they find the recommendations unacceptable, they should be required to issue a statement explaining why.

Second – able, willing and non-partisan commissioners. Commission members should have a strong technical and practical understanding of our tax system and the economic impacts of taxes. They should understand today’s global economy and how it affects business decisions and how a tax system can support economic growth. Commissioners should be willing to propose changes even if they would result in tax increases for themselves or their employers.

Also, while the Governor and Assembly Speaker have called for a bi-partisan commission, they should consider a non-partisan one as it may get more support from the public. Governor Pawlenty of Minnesota recently formed the 21st Century Tax Reform Commission and noted that he only knew the party affiliation of two of its 15 members.

Third – principles and goals. A set of principles should be adopted and followed that support good tax policy, such as equity, efficiency, transparency and simplicity. The National Conference of State Legislatures has a set of these principles, as does the AICPA. Also, several states have useful sets of guiding principles for reform, such as Washington and Arizona. In addition clear goals for reform should be established that harmonize with California’s goals for economic growth, social welfare and the environment.

Fourth – reality. Taxes must make sense for the system to be respected such that compliance is high. An approach that might make great economic sense but is too difficult to comply with won’t be a lasting change. Also, change can’t happen overnight so transition rules must be considered.

Our current system was not designed with any thought of how technology can help compliance; today it must be considered.

Labor and capital are more mobile today than decades ago. Demographics have also changed. Consideration must be given to what has changed and that the economy, society and technology will continue to change. Mobility and state competition to attract businesses also makes consideration of how other states tax relevant in the design of California’s tax system.

In addition, state taxes affect other levels of government. Commissioners must be mindful of local government tax concerns and how tax system design can benefit both California and local governments.

Fifth – time-saving background work. There are numerous reports from other states, think tanks, business and government organizations, and academics that can help the commission with its work. Also, lessons can be learned from other states that have recently studied and reformed their tax systems, such as Ohio and New Jersey.

Finally – public education. Concurrent work is needed by the legislature and tax agencies to help the public understand current tax problems and their direct and indirect effects on their lives and the state. This will help ensure that the commission’s recommendations get the careful consideration they’ll need in order for tax system modernization to become a reality.

Tax commissions typically spend hundreds of hours on their task. Staff and individuals who present testimony to these commissions also devote numerous hours to the cause. California’s tax system is in need of improvement and a commission can accomplish a lot in making thoughtful recommendations towards that goal. The six suggestions outlined above should help ensure that the commission’s time is well-spent so that California’s tax system can indeed get a strong opportunity to join the 21st century.