[GRRN] Tax Shifting for California - New Report

Gary Liss (gary@garyliss.com)
Mon, 02 Aug 1999 17:44:07

If you are interested in helping to implement this concept, please email me
and I'll set up an email discussion group on this topic. Please forward
this to other listserves, trade journals and progressive business,
government and environment leaders and groups that you know, so that we can
build a coalition of interests around this.


Gary Liss
Fax: 916-652-0485


By M. Jeff Hamond
With Gary Wolff, Clifford Cobb, and Mark Frame

July 1999

A new report from Redefining Progress, Greening the Golden State: A Tax
Reform for California=92s Future, outlines an innovative approach to fiscal
and environmental policy in California. This new approach, called an
environmental tax shift (ETS), holds the potential to improve many of the
state=92s most pressing problems while attracting broad support from
lawmakers, business owners, and taxpayers alike.

Under an ETS, California would reduce current state taxes on "good" things
that it wants more of=97labor, profits, property improvements, and
investment=97and replace the revenue with new levies on "bad" things that it
wants less of, such as pollution, speculative land holding, resource
depletion, waste, and destruction of habitat.

The ETS examples provided in the report would replace a portion of state
revenues=97perhaps 5 to 7 percent, or about $5 billion=97with revenues from =
environmental taxes or fees. Total state revenue would be unchanged,
however, and major shifts in the tax burden up or down the income scale
could be avoided. Variations of this idea are being explored or have been
adopted in other states and countries.

Such a shift from taxing "goods" to "bads" offers a promising chance to
boost the state=92s economy by reducing taxes on productive economic activit=
(i.e., labor and investment) while establishing powerful tax-based
incentives to reduce pollution or improve land use. What=92s more, unlike
other tax reform proposals, an ETS could attract broad political support.
Many different constituencies=97environmentalists, middle-class families,
anti-regulatory activists, small business owners, high-tech workers and
investors, and so on=97will all find something to like about this policy=

Among other benefits, Greening the Golden State finds that a California tax
shift could:

=95 Create a prosperous business environment for the industries that are
leading California=92s current economic expansion and are likely to continue
to do so well into the next century. These include high technology,
tourism and entertainment, and professional services.
=95 Address a number of important and persistent environmental problems=97su=
as sprawl, air and water pollution, and inefficient water use=97at lower cos=
than new government regulations.
=95 Spur new development and job creation in low-income areas of the state
that need it the most. One reason for this is that energy- and
materials-efficient economies tend to employ more people than less
efficient economies of the same size.
=95 Provide much-needed tax reform that will empower average families to
reduce their taxes and result in a tax system that is more in line with
other states, thereby improving California=92s competitiveness. And this ta=
reform can be achieved without shifting the burden of taxation onto the=

The Rationales for Change

Like most tax systems, California=92s current state tax code sends the wrong
signals to virtually everyone. It discourages work, enterprise, and
capital formation while it encourages urban sprawl, pollution, waste, and
inefficient resource use.

On the other hand, an ETS changes these incentives by taxing "bad" things
directly, as opposed to the current approach that seeks only to reduce
taxes on particular "good" things. For example, when we want to promote a
particular social goal=97say, increasing the number of people with health
insurance=97we frequently pass tax credits or deductions that we think will
help accomplish that objective. But these numerous special preferences
result in a convoluted system that no one understands, and they cost so
much in lost revenue that we have to raise rates on everything else.

An ETS asks: What if we could change behavior and accomplish social goals
both through what we tax as well as what we "untax"? What if we could
accomplish social, environmental, and economic objectives all at the same
time? An ETS can meet these objectives, simply by making small changes to
what we tax in order to raise the revenue for needed public services.

How would an ETS work? There are many options. California could pass a
higher tax on the assessed value of urban and suburban land, thereby
providing a market-based tool to limit urban sprawl, and use the revenues
to reduce the (larger) portion of the property tax that falls on structures
and improvements. It could increase the gasoline tax and use the revenues
to eliminate the vehicle license fee or reduce the state sales tax. It
could tax energy and materials use a little bit more, and labor a little
bit less. The central point is that a portion of state revenues would be
raised by taxing environmental "bads," and the revenues would be directed
to other tax cuts, rather than new spending.

California=92s Economic Future

California=92s economy has made a remarkable turn for the better since the
recession of the early 1990s. Since January 1996 alone, the state has
added almost 1 million new jobs, and more than 1.5 million since the
recession=92s low point=97a rate of job creation and economic growth that ha=
outpaced the nation as a whole. Income and spending are up; inflation,
unemployment, and interest rates are all relatively low.

Still, things could be better. California can do more to accelerate job
gains and income growth among its working poor and immigrant populations,
and in its inner cities. It can do more to create a business environment
that will sustain its key growth industries. It can develop public
policies that lead the state toward the economy of the future, rather than
maintaining the extractive, wasteful, resource-intensive industries of the

The trends in California=92s economy indicate that an environmental tax shif=

=95 Benefit the industries leading California=92s expansion, notably high
technology, tourism and entertainment, and professional services. The
state=92s economy has changed, and its tax code must reflect these changes b=
reducing taxes on things the state has a competitive advantage in=97such as
labor and brainpower=97while increasing them on things it needs less of, suc=
as pollution and waste.
=95 Create new opportunities for those who have been left behind by recent
job growth and income gains. An ETS can help accomplish this objective by
reducing taxes on labor, encouraging more compact development, and spawning
new enterprises based on recycling, reuse, renewable energy, and/or energy
=95 Provide incentives for businesses to look for profit-making ways to
reduce their emissions, as many businesses have already done. Greening the
Golden State reviews how 11 large companies in California have both
increased profits and improved their environmental performance.

California=92s Tax System

California=92s tax system embodies definite strengths and weaknesses. Its
personal income tax is the most progressive in the country, and its revenue
sources are reasonably varied, ranging from income and sales taxes to
property taxes on vehicles and a menu of excise taxes. On the other hand,
its property tax entails a number of inequities, its sales tax is
regressive, and the system seriously restricts local governments=92
alternatives for raising revenue. Greening the Golden State examines the
major taxes in California=92s tax code, pointing out the major pros and cons
of each tax.

One important problem facing California is the fact that while the state=92s
overall tax burden places it near the middle of the 50 states, its
distribution of revenue among the different taxes is troubling. For
example, California=92s personal and corporate income taxes rank near the to=
nationally, and are much higher than surrounding states, but many of its
other taxes rank much lower=97particularly the gasoline tax that ranks 43rd
in the country. This imbalance should be corrected if California is to
continue to compete.

If the state can shift this revenue balance closer to the national median,
it might not only improve its competitive position, but also protect itself
against future deficits during recessions by reducing its reliance upon
income taxes.

California=92s Precious Environment

Key environmental problems that can be addressed by an ETS include urban
sprawl and traffic congestion, which increasingly are becoming statewide
rather than purely local issues, and the continuing problem of air and
water pollution.

Current projections show that the state will add 2.8 million new jobs and
nearly 5 million residents by the year 2005, but such growth brings
problems for communities and the environment because it increases pressure
for new development. Such growth is an environmental problem because the
state=92s incentives=97low land taxes, low fuel and energy taxes, and the
failure to value environmental assets in land-use decisions=97all lead down =
path of growing outwards, not upwards. An ETS can help in this regard by
changing economic incentives in the state without stripping local
governments of their land-use decisionmaking authority. It would use the
power of markets rather than regulation to encourage compact development
and improve the quality of life in many communities=97and it can do so
without abandoning the tax limitations of Proposition 13.

Finally, there is the continuing problem of pollution, which has
significant health impacts and important, wide-ranging effects on the
state=92s economy. California=92s air and water have improved in many ways =
recent years, but problems are still significant and will worsen with
continued population growth. Where air pollution is concerned, California
is in a uniquely good position to improve because there are no factories or
power plants to the west (the direction from which the jet stream
transports pollution).

An ETS can help reduce both air and water pollution in the state by driving
changes in behavior through the price system, rather than government edict.
Firms and individuals would be encouraged to find the cheapest way to
achieve the goal of conservation. And by returning the tax revenue to the
taxpayers via reductions in other taxes, an ETS provides the opportunity to
protect the environment for future generations with reduced concern about
economic costs or lost jobs.

Options for Tax Reductions and New Revenues

The tax reductions in Greening the Golden State fall into five categories:

1. Reductions in personal and corporate income taxes, both rate reductions
and new tax credits.
2. Tax reductions targeted to labor, such as state tax credits based on a
portion of federal payroll taxes paid.
3. Reductions in the state sales tax.
4. Property tax changes, including shifts between the buildings and land
portion of the tax (but no outright property tax increase).
5. Reductions in the motor vehicle "in lieu" fee, which currently taxes the
ownership rather than the use of motor vehicles=97even though the latter
activity causes the environmental harm.

The possible revenue increases fall into six categories, listed in the
order they appear in the report:

1. Energy and electricity, including a tax on the carbon content of fossil
fuels or the repeal of the state sales tax exemption on utilities.
2. Transportation and parking, including higher taxes on motor fuels.
3. Air pollution, water pollution, and toxic waste.
4. Land use, most prominently the buildings-to-land property tax shift
(a.k.a., "split-rate property taxes"), but also including new "impact fees."
5. Solid waste.
6. Water, which could include either a tax on the value of water rights, or
a tax on water consumption.

Three Tax Shift Scenarios and Their Impacts

Finally, the report presents three different revenue-neutral ETS scenarios
and discusses whether the scenarios might be viewed as equitable or fair.
Each of the scenarios is designed to replace approximately $5 billion in
state revenues, or about 7.5 percent of revenues in 1998. Redefining
Progress does not advocate any scenario, or any particular tax change, over
any other. The report is designed to spark discussion, and we hope the
report and the scenarios will do just that.

The scenarios are summarized below. Please see the report text for more
complete information, and for discussions of their likely impact on tax
equity and fairness.

Scenario 1: Energy and Transportation Tax Shift

New Taxes Revenue ($ bil)
Gasoline tax increase of 17=A2 a gallon 2.74
Eliminating the sales tax exemption on utilities 2.06
New sales tax revenue as a result of the gas tax increase 0.13
Total new taxes 4.93
Tax Reductions (Revenue Loss) ($ bil)
Exemption of the first $2,000 of wages from the federal payroll
tax, in the form of a refundable state income tax credit (3.61)
An additional one-third reduction in the motor vehicle
"in lieu" fee (0.94)
New state EITC equal to 10 percent of federal credit (0.38)
Total tax reductions (4.93)

Scenario 2: Resources and Pollution Tax Shift

New Taxes Revenue ($ bil)
State carbon tax of $20 per ton 1.94
State land surtax (on assessed value) of 0.2 percent 1.49
Tax on water consumption of $20 per acre-foot 0.80
State tax on solid waste of $14 per ton 0.44
A 10 percent tax on fertilizer, lime, and pesticides 0.16
New state sales tax revenue as a result of the carbon tax 0.07
Repeal of several tax breaks for the oil industry 0.05
Total new taxes 4.95
Tax Reductions (Revenue Loss) ($ Bil)
A 10 percent reduction in the state general fund sales tax (1.75)
Reduction in state personal income taxes by $1.0 billion (1.00)
An additional one-third reduction in the motor vehicle=20
"in lieu" fee (0.94)
Reduction in state corporate income taxes by $500 million (0.50)
New state EITC equal to 20 percent of federal credit (0.76)
Total tax reductions (4.95)

Scenario 3: Property Tax Shift

New Taxes Revenue ($ bil)
Allow local governments to use split-rate property taxes=20
(i.e., increasing land portion of property tax) 3.00
Additional gasoline tax of 8.5=A2 per gallon 1.37
Tax on water consumption of $20 per acre-foot 0.80
New sales tax revenue as a result of the gas tax increase 0.06
Total new taxes 5.23
Tax Reductions (Revenue Loss) ($ bil)
Allow local governments to use split-rate property taxes (i.e.,=20
reducing property taxes on buildings and improvements) (3.00)
A one-half cent reduction in the state sales tax (1.75)
New state EITC equal to 10 percent of federal credit (0.38)
Removing tangible business property from the tax base (0.13)
Total tax reductions (5.26)

To order a copy of Greening the Golden State, or for more information,
please contact:

Redefining Progress, (415) 781-1191, info@rprogress.org
CLCV Education Fund, (310) 441-4162, Taxshifting@ecovote.org