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Taxing enterprise


This week you will read in our cover story how funding for public services in this county --in the state -- was turned upside down 25 years ago by the passage of Proposition 13. It was a revolution that eventually spread across the country. I voted for it. My reasons were personal. We bought our house in 1974. Property values in the mid-1970s were in a real growth spurt, and each year it was not a pleasant surprise to open the tax bill.

Having your house dramatically reassessed in any given year played havoc with many a family's budget. We struggled, but we were not as bad off as the older retired couple down the street. They had lived in their home for more than 40 years -- raised their kids there -- and yet they had to put their house on the market because they just could no longer afford the taxes. The Legislature refused to fix the system, Californians took the matter into their own hands with the initiative and public services -- with schools sadly leading the way -- began a 25-year slide.

A friend of mine in real estate did not vote for Proposition 13. He had an inkling of what would some day come to pass: the gross inequity that now exists between the pre- and the post-Proposition 13 homeowners. (He owns a home up Fickle Hill in Arcata and pays one-third the taxes of his newer neighbor for very similar property.)

A second, and in my opinion fatal, flaw with the current system is that it taxes enterprise. Fix your house up, pay more. Let your house deteriorate -- well, you get the idea.

If you read last week's cover story, you will know that I spent a day in Sacramento shadowing Assemblymember Patty Berg. The topic on everyone's mind, of course, was the $38 billion deficit or, more specifically, the spending cuts and/or tax increases it is going to take to close the gap. So I read with interest a column by Joel Fox in Sunday's San Francisco Chronicle. According to a recent poll from the Public Policy Institute of California, voters don't want cuts in services or new taxes.

So how do we fund public services?

In his column, Fox reminds us of a plan put forth many years ago by economist Arthur Laffer: to wipe out all taxes except two -- the "sin" taxes on cigarettes and alcohol, and a flat tax. (I would add a tax on casino revenues, but that's a subject for another column.)

Laffer's flat tax would be placed on income in addition to a flat value-added tax levied on business. It works like this: Each product on the way to consumers has some value added from raw material to finished product. Each business along the way would be taxed on the product's increased value. Creating a simple tax with few deductions streamlines bookkeeping and allows business to be more productive. Greater production means more money for the government treasury. And a flat tax on income would mean lower rates for most people. (Laffer estimates 6 percent on income and business would bring in the same revenue now produced by all California taxes.)

It should have been obvious from my article last week, but the Republicans are in the driver's seat right now, even though they are in the minority in Sacramento. The Democrats need some cooperation (two Republicans in Senate and six in the Assembly) to get a budget passed. The Republicans will likely get what they want: no new taxes, which means all our services are going to be dramatically reduced and some will disappear entirely. (See last week's story on the California Arts Council.)

There has to be a better way. Maybe it's Laffer's way.




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