Lets start with what is wrong. First, California has high personal income taxes, and derives much of its income from those income taxes. Because income is relatively volatile, especially at higher income levels, the level of tax revenue is extraordinarily hard to predict. When you cannot predict your income, it is almost impossible to come up with an accurate budget (especially given legislators' tendency towards extreme optimism that they will be able pay for every program that anyone wants). Warren Buffett warned Schwarzenegger about this, to no avail. In addition, the incentive created by high income taxes - reduce your income - is rather backwards.
Second, California has high sales taxes. In some counties they approach 10%. In a consumer-driven economy, this again creates a reverse incentive from what we want for economic growth, by discouraging purchasing of items in California. It also puts a huge burden on lower-income Californians, as a larger proportion of their money gets swallowed up by taxes on essential items.
Because local governments rely heavily upon sales tax revenue, they also have a perverse incentive to favor development of auto malls and big box retail, which are ugly and bad for small local businesses and the environment, but generate the most sales tax revenue. Housing, parks, schools, libraries, and mixed uses are discouraged.
Third, California has low or no extraction taxes. We have no oil severance tax, so the big oil companies can pull a lot of oil out of the ground under California (and reap huge profits) without paying for it. Alaska and Louisiana don't seem to have a problem with oil severance taxes - the oil companies are still pulling out oil and still making a very nice profit, but the states get something out of it. California is still the fourth-largest oil producing state, but it gets nothing for its oil. California could easily add an oil severance tax with no adverse consequences.
Let's move on to what is mixed. Under Proposition 13, long-time homeowners get much-needed protection against property taxes escalating to astronomic levels, which is good. But land speculators, real estate developers, and commercial landlords - all of whom profit from increased property values - essentially get a free ride. They get to reap the benefits of rising property values without bearing a corresponding tax burden, so their business is basically being subsidized by everyone else.
Let's look at solutions. The first few are obvious, based on the problems identified above. We should significantly reduce personal income taxes and sales taxes, and add an oil severance tax. For property taxes, we should keep the Proposition 13 cap on taxes on a primary residence, while allowing taxes on commercial properties (and second and third homes) to float with property values.
To make up for the lost revenue, while simultaneously creating better incentives, we can add taxes that create positive incentives, and that people can reduce - or even avoid - by making choices that benefit everyone.
Given the increasing scarcity of water in California, a water extraction tax would create an incentive to save water by increasing its cost. The proceeds could be used to fund water projects instead of relying on state-issued bonds. Under this approach, the biggest water users would pay the most for water infrastructure, which is fairer than using bonds that are paid for by all taxpayers regardless of their water use. If you don't want to pay the tax, you can use less water.
Similarly, an increased car tax, with the proceeds used to pay for highway projects, would be helpful. Those who own more cars and more expensive cars would pay more for highways, which again is fairer than having all taxpayers pay through other taxes. Car use has been heavily subsidized, and this is a way to make cars bear some of the costs they impose on everyone else. Some of the proceeds could also go toward defraying the health care costs caused by cars and their emissions.
A carbon tax, or a proxy for a carbon tax, would create appropriate incentives for Californians to reduce their carbon footprint. The proceeds could be used to begin adapting California's infrastructure for the impacts of global warming.
A tax on toxic chemicals and pesticides would create incentives to reduce their use, and the proceeds could be used to defray the health care costs (particularly cancer) that they cause.
Finally, the legalization and taxation of marijuana would provide a substantial new income stream to California.
These tax changes would reduce the tax burden on most Californians - your income taxes and sales taxes would go down a lot, and the property taxes on your home would stay the same. You would pay more for water, gas, your car, and things made with toxic chemicals - but you would gain the ability to reduce most of those taxes by using less.
These changes would also refill the state coffers, allowing us to again fund the quality programs we should be providing to our residents. We are a rich state, and we should be embarrassed that we are pleading poverty and claiming to be unable to pay for schools, infrastructure and social services. With a little common sense, we can feel - and be - truly rich again.
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