On November 1 California began withholding 10 percent more from workers’ paychecks than the government already takes. This money grab, bad enough on its own terms, is a sign that the state has missed an opportunity to modernize the tax system and provide more stable revenue.
Those were the tasks of the California Commission on the 21st Century Economy (COTCE). The bipartisan Commission’s main recommendations are to eliminate the state sales tax and corporate income tax and replace them with a new “net receipts tax” on business. The number of personal income tax rates would be reduced from six to two.
The personal income tax rates would be 2.75 percent for couples with taxable income (AGI) up to $56,000 and 6.5 percent for those with taxable earnings above $56,000. The standard deduction for couples filing jointly would be $45,000. These reforms would shift the tax base from income to consumption and could serve as a first step toward more stable revenues.
The Commission released its report in late September but the legislature did not, as previously announced, put the recommendations to a vote. Instead the Sacramento establishment turned its guns on the COTCE reforms. Assemblyman Wes Chesbro even called the package “regressive.”
Some charged that lowering the rates of income tax for everybody would shift the burden from the rich to the middle class and poor. Those earning $56,000 can hardly be described as rich, and they would pay a higher rate, and more tax money overall, than those earning less than $56,000. The recommendations preserve “progressivity,” which means a higher rate for some than others.
A higher rate for some taxpayers is really a punitive and regressive tax, because it punishes effort and entrepreneurship, which California desperately needs. The only way to have a completely “fair” tax is for all Californians to pay the same rate. If they did, those workers earning higher incomes would pay more money overall, and still bear more of the tax burden. High-income earners, we should note, are not all film stars, personal-injury lawyers, University of California administrators, or high-tech entrepreneurs. One nurse in Napa, a state employee, brought in $700,000 in overtime over five years, according to a report by the Bureau of State Audits.
Now the state has rejected a vote on the COTCE report and turned back the clock to the days of unrestrained budget gimmickry. The money grab, which the state claims is not a tax increase, targets the paycheck of every worker in California and continues through 2010. The state did not bother to consult the workers or put the move on the ballot. Worse, this increase in withholding does not mean new services for taxpayers or improvement of current services. Rather, legislators are pillaging workers’ paychecks in an attempt to fix their own budgetary mistakes, imprudence, waste, and overspending.
As the Wall Street Journal noted, California’s current deficit, now estimated at $7 billion, could bloat to $20 billion next year. The withholding ruse will reduce Californians’ take-home pay by about $1.7 billion and is not likely to boost the economy. It is a clear example of government greed, a term that should be part of the debate. So should “denial.”
Legislators can deny that withholding 10 percent more from workers paychecks is a tax increase. That does not change the reality that it is, and that California is a high-tax, high-regulation state. That needs to change if the Golden State is to recover and prosper. Legislators should discard gimmicks, reconsider the COTCE report, and put the recommendations to a vote.