DESPITE THE BUDGET cutbacks and tax increases approved by the Legislature last February, the Legislative Analyst's Office warns that California faces a cash-flow crunch in the coming fiscal year, regardless of the outcome of the May 19 special election. But that is only the beginning of the state's fiscal woes.

While the recession has presented a short-term fiscal challenge to California, severe budget problems will remain even after an economic recovery unless some basic tax and spending reforms are made.

The state's budget is all but certain to have a structural deficit, which could be made worse if Proposition 1A fails. That measure is designed to address some of the state's long-term fiscal woes.

It would extend income and vehicle license tax increases for two years and the 1-cent sales tax hike for one year. Most important, the measure mandates that a rainy-day fund be set aside that could be used only in dire economic times such as what we are experiencing now.

Prop. 1A would require the state to place any revenues in excess of the trend line for the past 10 years into the reserve fund, which would be increased until it equaled 12.5 percent of annual general fund revenues.

While passage of 1A would make it easier to balance budgets in the future, it is not likely to be a sufficient remedy for correcting the structural problems with the budget. That is especially true once the tax increases are phased out.


Advertisement

Because of the dim long-term fiscal forecasts for California, some public policy organizations are calling for major tax reforms. Certainly, tax reform is needed if California is to be an engine of innovation and economic growth.

But before any proposals are made, it is important for Californians to understand where the state is positioned regarding individual taxes and the overall tax burden on its residents.

Huge budget deficits, less-than-average per-student spending on K-12 education and woefully poor investment in basic infrastructure belie the fact that California is a relatively high tax state.

We have the highest state income tax rates in the nation, one of the top sales tax rates (even before the 1-cent increase) and the highest corporate tax rates in the West.

Proposition 13, passed in 1978, has given California a low property tax rate. But because of high real estate prices, the property tax burden is near the national average. In addition, many school districts have adopted parcel taxes and bond measures.

Overall, California ranks sixth in the nation, measured by the percentage of income spent on state and local taxes, according to the Tax Foundation, a nonprofit think tank in Washington, D.C.

The problem with California's tax system is not necessarily the average amount of revenues raised over time. It is the volatility of some state taxes.

The lion's share of personal income taxes, which account for 33 percent of state revenues, are paid by only a small percentage of wealthy Californians. This revenue source fluctuates wildly between boom and bust economic years.

Prop. 1A seeks to level this volatility by placing excess revenues in a rainy-day fund and making it more difficult to raid it. That's why we're endorsing it.

Property tax rates have remained stable thanks to Prop. 13. However, an ever larger percentage of the burden is falling on homeowners, where properties change hands more often and thus are reassessed at higher levels more frequently than business properties. This inequity could be addressed by reassessing business properties on a regular basis rather than only when they are sold.

Corporate taxes could be moderated with exemptions or credits for research and job creation, which increase economic growth and long-term tax revenues.

These are the kind of reforms that should be considered before any rush to overhaul the state's tax system simply to increase the fiscal burden on average Californians and businesses.

Even more important, tax reformers must understand that revenues are only part of the state's fiscal problems and cannot be properly considered separately from spending reforms.