Loophole to loophole

In the latest in the California budget crisis, Democrats have suggested closing tax loopholes to help generate more revenue for the state and help dig it out of the debt that still weighs it down. These include the lack of sales tax on yachts and the allowance of business to move offshore to avoid paying taxes. The Republican response is about what I would expect:

Administration officials make no apologies. They say businesses and the wealthy are already paying too much, quoting from studies showing that Californians pay more in taxes than residents of most other states.

We aren't talking about hiking the tax rates on anyone here, we're talking about adding a sales tax to yachts. If you don't want to pay a little extra, then don't buy it. It's not a forced tax on the wealthy at all. But no one is out there scrimping and saving pennies to buy and yacht and then going to be turned off by an extra 7.5%.

Not taxing enough is not the problem, according to Finance Director Tom Campbell. The problem, he says, is that when the state was flush with cash, California became overly generous in providing services — with no plan to cover the bill in a down economy.

As Kevin Drum points out, this isn't entirely true, either:

Just as George Bush seems to hope that tax cuts will create an artificial crisis atmosphere that allows him pursue pet projects like Social Security privatization, Schwarzenegger campaigned on a pledge to cut the auto license fee. This slashed $3-4 billion in revenue, an amount that would go a very long way toward eliminating California's problem. Like Bush, Schwarzenegger seems to actively like the idea of cutting taxes in order to create an ongoing crisis that provides him with a pretext to pursue his real agenda.

For non-Californians who aren't up on all this, the details make it even worse. The license fee in California was reduced by Democratic governor Gray Davis in 1998, but with the proviso that it would return to its original rate if the state faced a funding shortfall. In 2003 Davis raised the fee back to its original level and was demonized in the recall election with ads in which a young woman with a Valley Girl twang whined memorably that "it's ridiculous, nobody can afford that." Of course, the fact that everyone had paid "that" a mere five years earlier meant nothing. Davis went down to a crushing defeat.

There was a plan in place to help offset spending, but Arnold decided that a politically popular act was much more important than balancing the budget.

One of the only tax breaks the governor is considering scaling back is a renters' credit for low-income seniors. Under Schwarzenegger's plan, the credit would be eliminated for elderly Californians earning more than $13,000 per year.

That proposal would save the state $100 million annually.

But the governor's plan would leave intact the mortgage deduction that the wealthy enjoy on million-dollar vacation homes. The nonpartisan Legislative Analyst's Office has suggested that removing the deduction could save the state several times the amount gained by the renters' credit cut.

Another of the governor's proposals would cut payments to caretakers for the disabled and frail elderly from more than $10 an hour to minimum wage, $6.75. The move would save the state $195 million.

Yet high-end hotels in downtown San Francisco could continue to claim tax credits from an "enterprise zone" that was intended for economically depressed neighborhoods but has now grown to include wealthy urban areas. Studies suggest the state is losing at least $50 million per year on the credits.

Schwarzenegger's plan to end set pension payments for government workers and replace them with a 401(k)-style system would net Wall Street investment firms hundreds of millions of dollars in commissions.

But there is no plan to collect the tens of millions of dollars in state taxes being lost each year from companies that shelter their income in the Caribbean. Montana has passed a law that will allow that state to begin collecting such money.

There are some loopholes where the stakes are significantly higher.

One allows numerous businesses to avoid paying the tax hike everyone else in California faces when they buy a property. In California, voter-approved Prop. 13 keeps residential and commercial property taxes from increasing more than 2% a year. When ownership changes hands, a property is supposed to be reassessed at market value, which could drive up its taxes by thousands of dollars.

The requirements for what constitutes a change in ownership are vague, however, and partnerships have found they can avoid reporting it when no single investor owns a controlling interest in the new property.

Senate Appropriations Committee Chairwoman Carole Migden (D-San Francisco) says the state loses as much as $1 billion a year as a result.

"Even if there isn't a fiscal crisis, you should at least be looking at these things," said Daniel J.B. Mitchell, a professor of management and public policy at UCLA. "The notion that the current tax code is perfect the way it is now and it never has to be revisited again, that is politics, not economics."