A flat tax for Californians

[AlphaCentauri]

Facing a shortfall that Gov. Arnold Schwarzenegger has estimated at $20billion, Democratic lawmakers in the Capitol are looking for a way to raise tax revenue. They might want to adopt and modify an idea advocated by a conservative think tank - and increase tax revenue while lowering tax rates.

California's tax rates currently top out at 10.3 percent for individuals and 8.84 percent on corporate profits. But a report by the Pacific Research Institute says a flat, 3 percent rate would collect the same amount if the state also eliminated all of the deductions that now riddle the income tax code.

The institute is officially nonpartisan, but it leans toward conservative principles. The author of the study, Robert Murphy, says his plan would help moderate the state's notorious revenue roller coaster, provide incentives for economic growth and draw more high-earning individuals and companies to the state. He's not in favor of raising taxes.

But if the 3 percent rate he describes would be revenue neutral - bringing in the same amount the state collects now - a slightly higher rate would bring in enough money to wipe out much of the deficit. Just as an example, a 3.5 percent rate applied to all income would probably mean an extra $10 billion to the treasury. Would all the economic advantages Murphy cites from moving to a flat, simple tax disappear if the rate were just one-half of 1 percent higher than he recommends?

Murphy seemed taken aback when I asked him about that possibility during a panel discussion on his idea in Sacramento this week. Yet in California's current political climate, his plan is going nowhere anyway. One way to salvage its best elements would be to combine it with the Democrats' desire for more revenue to avoid deep cuts in education, health and social programs.

Various players in the Capitol are already considering more limited moves in the same direction. The state's nonpartisan legislative analyst has recommended repealing or limiting several credits and deductions to raise about $2 billion more per year. Schwarzenegger says he is open to closing what he calls "tax loopholes." The newly elected Assembly Speaker, Karen Bass of Los Angeles, meanwhile, says she plans to appoint a bipartisan commission to explore fundamental tax reform for California.

Murphy's proposal has two main elements. One is to simplify the tax code by essentially wiping out all deductions. The other is to apply a single flat rate to all income, rather than the progressive, graduated system California uses now.

Although the two ideas - a flat rate and a simple tax code - needn't go together, Murphy's proposal weds them to form a system he says would allow people to do their taxes in five minutes. All you would need to know is your annual income, which you would multiply by the tax rate, and that's how much you would owe. Someone making $100,000 in a year, for example, would multiply that by 3 percent and pay $3,000.

Politically, the idea is a double-edged sword. Most voters would probably love the concept of eliminating all the tax breaks that the wealthy and the well connected use to reduce what they owe the state. But the tax code also includes some biggies that help the middle class, such as the deduction for home mortgage interest and the tax credit families get for each child in a household.

Murphy's plan would tax all income at the same rate, from the first dollar on up. Today, a couple with two children generally pays no income tax in California until the family's earnings top $50,000. Under Murphy's system, the same family would pay 3 percent, or $1,500 in taxes.

A serious proposal along these lines would likely exempt the first $20,000 or $30,000 a year, And it would probably leave intact some of the most popular tax deductions.

Democrats already are looking at broadening the sales tax base by applying the tax to services rather than only to goods.

Murphy's proposal for the income tax follows the same path. Democrats shouldn't dismiss it - even if they might want to bend it to serve their different goals for the size and scope of state government.

http://www.dailybreeze.com/ci_9202203

[tularetom]

1. I'd go for that in a heartbeat

I have no deductions except for charitable contributions and property taxes.

I'd save a bundle.

I'd like to see a rate that would raise enough funds to repair California's crappy infrastructure.

The Dems are wrong on the sales tax issue. A value added tax is the most regressive possible format.

[AlphaCentauri]

2. I think the value added flat tax would work only if it is apply to every transaction

A flat tax system would be beneficial in eliminating a lot of the current loop holes, bureaucracy and would eliminate the criminalization of the taxpayer, also a flat tax can be progressive too if it cover for health care, education and other services.

[haele]

3. Noooo - $1500 for a family of 4 at $50,000 is as much as they pay in Fed income tax -

"Fair"? $50K income in California is like $25K - $30K in Texas or South Carolina. The housing, commuting, and education costs eat up at a minimum around $20K a year for the average family, not considering how many kids they have. Even rents for 1 bedroom places in crappy neighborhoods run close to a thousand a month in most towns here.

That average family who "generally pays no income tax" at $50K a year in reality lends anywhere from $600 - $1200 a year to the state, then gets most of it back sans the interest that money would have made in a money market or savings account for a year. The state gets the interest on the taxes they pay the previous year.

But besides that, let's look at "reality" a flat tax does on a somewhat average family. I make close enough to $50K with 4 exemptions (me, my non-working disabled husband, kid, and pets). We live paycheck to paycheck, and between a teen who apparently has been growing an inch every six months, the rent and utilities constently going up, the single family vehicle that is falling apart, and rapidly rising inflation, we have lost any savings cushion we have. I still pay on a bi-weekly basis around $5 - $8 (depending on my pay) for State Taxes and $150 for feds and I end up breaking even with the feds (because of husband's SSDI) and because of my renter status and the fact they don't count my husband's SSDI, I get the whole, whoppin' $310 or so back from the state. Woohoo!

This plan sounds as if it's just a budgetary shell game to take more money during the year that they'll have to pay back (sans interest) to most of us who make $50K or under a year. They collect the interest off of $1500 instead of $310 during the year, and that makes up for the budget shortfall on the backs of those who have to come up with an extra $100 a month that is getting harder and harder to come by?

I don't believe the 5% to 10% of "Californians" who make the upper six figures will be paying much of the flat tax as it is - there's always loopholes they can wrangle - especially if they shift the majority of their "income" into investments before they get to use it. Unless they want to VAT tax everything, which places the worst burden on the poor who can't afford it when they have to pay it, the wealthy will manage to pay less than those who can't afford accountants and investment brokers. The majority of the tax will be paid for by the middle 50%, as usual.

The middle class is getting severely pinched, and I hate to think what those just over the poverty line are putting up with. I don't think the average family has an extra $1000 - $1200 a year to spare on a flat tax - that's one month's rent in most places. Even if they exempted the first $20 - $30K, it could beggar anyone struggling with medical bills or investing in education expenses to help themselves or their kids to become "better taxpayers" and not leech off the system.

If they're determined to follow through with this, they'd be better off to exempt the first $50K, or failing that, add in addition to a child tax credit and student costs deduction, a medical tax credit, say $100 for every $1K, on yearly out of pocket dental, medical and prescription co-pays and deductibles - that is if we aren't going to go to single payer. It's easy enough to record these costs through insurance billing and receipts. That way, you don't hurt the truly struggling families dealing with disabilities.

Haele

[Lindsey]

4. Yea, it's really expensive to live here. Sometimes I wish I didn't love it so

much- but to me, leaving is not an option because of my awe when I'm in Big Sur, San Francisco, and yes, even L.A.(where I live). If I end up having to live in a house full of roommates, it's worth it to me. Hell, in the 60's they called 'em communes and it was cool. B-)

[AlphaCentauri]

6. Services are needed, the flat tax option is a good way to eliminate the loopholes

The exemptions in the actual tax code may be an illusion counting on how much people pay as sale tax.

[truedelphi]

16. I imagine those that are supporting this see supporting it as a way to keep

A discussion of the end of Proposition 13 off the table.

I was for Prop 13 when it was enacted - who wanted Granma to have to live in a cardboard box under a freeway just because housing prices were escalating.

But the thing is - the house that was protected should have had a value cap on it - so if Granma ends up in a 1.3 million dollar home, she can decide whether to sell it and avoid paying taxes on it, or else live in it and pay taxes at its enhanced value above a certain threshold (Like give Granma the ability to have the first 400,000 of its value protected by Proposition 13.)

Also we need to end the ability of a corporation to have Prop 13 propping up its holdings - that is really nonsense.

[truedelphi]

17. You also say that you don't think the real upper income folks would pay much

And that's true. Many of the upper elite in California have second homes and aren't even in California to do therir purchasing. FOr instance, when they buy a car it will be from the dealership around the corner from their Medford Oregon second home - with Oregon not having any sales tax.

[kristopher]

18. There is no reason to couple simplification with the flat tax

You could get the same benefit by eliminating the deductions and keeping a progressive structure reflecting disposable income.

[haele]

19. the point is that they will be collecting more money during the year on working people

Who will then, depending on whatever "progressive structure" is proposed, get their money back in the middle of the next year anyway. Families making under $60K pretty much get everything back with the current tax structure anyway, even if their only deduction is the standard + the "renter's" deduction. Heck, without the renter's deduction, they still will get at least half the taxes they paid in back.

My complaint with the idea of a "3%" flat tax is that in California, making under $50K a year, I don't have an additional $100 a month to spare that the flat tax will require my employers to take out of my paycheck. I don't know many families that make around $50K a year that can afford that on a monthly basis.

My understanding of a flat tax is that there are no exemptions when you pay as well as limited deductions when you file. Most working people pay through their employer - and their employer has to follow the rules laid out by the Franchise Tax Board in terms of how much goes to the state per pay period.
It's the exemptions that are "allowing" the lower income levels to not pay very much in taxes over the year - again, most California families with incomes under $60K are basically loaning the state money interest free every paycheck.

Haele

[Name removed]

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[Daveparts]

5. The Flat Tax

is the wooden nickel of the 21st century. A scam, always an exemption for the wealthy and closing tax loop holes applies only for the working class.

Look whose pushing this flim flam, Republicans and the wealthy.
John Linder author of The Fair Tax listed his assets of 33 million dollars, Would he really push a plan that would hurt himself?

Don't take any wooden nickels

[AlphaCentauri]

7. Republican are pushing their version but democrats can come out with theirs

a progressive flat tax, something to think about it for XXI century.

[alarimer]

11. Flat taxes are by definition not progressive.

They are regressive by their very nature. 3% might not seem like a lot but it affects lower income people disproportionately.

[yurbud]

8. here's a thought: everything conservatives have touched has turned to ash

it's time to assign them the place at the table we give our schizophrenic cousin who refuses to take his medicine.

He can sit and eat, but everyone knows not to listen.

[yurbud]

9. it's pathetic. Here in California, Democrats are permanent majority but let GOP set agenda

on taxes and spending.

[struggle4progress]

10. Why shouldn't those who have more pay substantially more? They benefit

substantially more from the system

[depakid]

13. More importantly, the per unit "value" of each dollar is worth "less"as income rises

$10 for a single mother waitress has more utility than $10 does to a middle manager- and more than 100 or even 1,000 or 10,000 dollars has to a CEO or an NBA star.

Progressive taxation simply recognizes one of the most basic principle underlying modern economics: declining marginal utility.

And there no logical reason that brackets can't be set accordingly- while at the same time closing loopholes to increase revenues.

[AlphaCentauri]

15. The collecting revenue per unit value increase as income rise

when a flat tax is set with out loopholes.

The waitress contribution would be $0.30 cents out of her 10 dollars while the CEO would pay $300 out of his 10 000, that's a deal, don't it?

[Joe Bacon]

12. Wow, that Flat Tax really works in Pennsylvania!

Pennsylvania has a flat income tax since 1971 and it's been economically dead for years!

[AlphaCentauri]

14. I don't think you can blame Pennsylvania economics on the income tax system

most if not all of the 10 poorest US states use the so called "progressive tax system" which is full of loopholes for the corporations and wealthier.

Montana
Tennessee
Kentucky
Louisiana
Alabama
Oklahoma
Arkansas
West Virginia
Mississippi