February 29, 2008

Commentary:

Tax ‘expenditures’ should be part of the budget debate

By Sen. Jenny Oropeza

Leadership means solving problems. Business executives must keep business growing for the benefit of their shareholders, government leaders must make difficult public service funding decisions with a fixed amount of revenue, and single parents must balance food, clothing, and housing needs within the limits of their paychecks. Leaders of all kinds cannot afford to ignore reality; instead, they must make hard decisions with the information at hand.

This year, California’s budget crisis requires leadership. A weakening economy once supported by increasing real estate prices and burgeoning corporate profits has resulted in a shortfall now pegged at $16 billion. Simultaneously, increased costs, automatic funding formulas and voter-approved initiatives drive state spending higher. Any way you look at the problem, we are in for a year of hard choices.

For all crises, leadership is about striking balances, not taking the easy way out. Gov. Schwarzenegger chose to make 10-percent, across-the-board cuts for almost all public services provided by the state, including health care, prisons, and public education.

The governor’s plan treats every public investment the same, instead of prioritizing spending based on the effectiveness of the investment of California taxpayers’ dollars. Beyond a few small fee increases, the governor has not proposed new or higher taxes to help balance revenues – echoing the party line issued by legislative Republicans. Since 1967, Governors Reagan, Deukmejian and Wilson have raised taxes when California faced a significant fiscal problem.

Even Liz Hill, California’s respected, non-partisan Legislative Analyst, came out against blanket cuts, urging lawmakers to reject them on the grounds it was short sighted. She also urged leaders to modify or eliminate some tax expenditures.

The Legislature has already cut services to balance the budget this year. The budget spending debate ignores a crucial issue: tax expenditures. These are various tax measures meant to serve as personal or business incentives. These add up to about $50 billion per year, according to the state Department of Finance. None of this revenue is included in a line item in the budget. Many critics call tax expenditures loopholes, while others argue that tax expenditures are important investments that help the public at large, not only one industry. Should not these tax expenditures also be given extra scrutiny in a time of hard budget choices?

The state provides tax credits to businesses constructing child care centers or providing child care instead of directing cash payments for the same reason. Is this the most efficient way to accomplish our mission?

Tax expenditures are paid for when a taxpayer receives a tax benefit for taking a specific action. In turn, the marginal loss shifts the burden of paying for public services to all other taxpayers. The question is whether the tax expenditure is the best or appropriate tool for accomplishing the goal. The question arises: Are there other policies that would better accomplish these goals?

It can be argued that one persons’ loophole is another’s good investment. Arguably, expenditures such as the California’s Research and Development tax credit that helps spur investment and innovation is a good investment. Others, such as the sales tax exemption for poultry litter and the enhanced oil recovery credit, are merely incentives for a bygone era of California’s economy.

Remarkably, beyond a few out-of-date reports, the state has not measured the effectiveness of tax expenditures.

That’s why the Senate Revenue and Taxation Committee, which I chair, will be reviewing these tax expenditures at our hearing. My bipartisan committee is bringing together economists, academics, business leaders and labor representatives to review these tax expenditures and consider alternatives. Which tax expenditures help grow the economy and create jobs? Which ones are sweetheart tax breaks? Can any be changed to get more for our money? How does the state measure the effectiveness of tax expenditures? How should tax expenditures be evaluated? Is there a better way to reach policy goals than through tax expenditures?

Through this hearing we hope to identify tax expenditures that may be outdated, inefficient or just plain bad ideas. Yes, we hope to suggest improvements where merited. This diligent review will help us resolve the difficult choices required to bridge the budget gap. Leadership demands no less.

Elected to the Assembly in 2000 and the Senate in 2006, Jenny Oropeza is one of the highest-ranking Latinos in the Legislature and chairs the Senate Revenue and Taxation Committee. For more information visit www.senate.ca.gov/oropeza

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