The Mayor’s Tax Plan

Los Angeles Mayor Antonio Villaraigosa’s speech last Tuesday to the Sacramento Press Club has garnered significant attention, most of it focusing on his call for California to revisit how the state taxes commercial property. The Mayor’s proposal to limit Proposition 13’s preferences to homeowners, increase support for California’s schools, and reduce homeowners’ tax bills is an interesting one and deserves serious consideration. His call to “modernize and rationalize” California’s tax system is also a worthy and urgent one. Where we part company with the Mayor is over the remainder of his tax proposal, which has, to date, received far less attention.

In addition to his property tax proposal, Villaraigosa would eliminate the corporate income tax, extend the sales tax to services, and reduce income taxes by 11 percent. Here’s our back-of-the-envelope scorecard of what this proposal would mean.

• Tax business property at market value. The obvious “losers” are businesses that would pay higher property taxes, although they would also benefit from a larger investment in California’s public schools. Homeowners, who would pay lower property taxes, would win, although it is unclear whether the Mayor would mitigate or leave in place the disparities between long-time and recent homeowners. California’s public schools would benefit from a much needed infusion of funds.

• Eliminate the corporate income tax. Repealing the corporate income tax would benefit businesses structured as corporations, particularly the 0.2 percent of California corporations with annual incomes in excess of $10 million that pay 72.5 percent of the corporate income tax. This proposal would provide no benefit to businesses that are not corporations – mostly small businesses – though they would pay higher property taxes. The roughly $9 billion tax cut from the elimination of the corporate income tax would likely exceed the higher taxes paid on business property, making corporations, as a whole, significant winners.

• Extend the sales tax to services. The CBP has a longstanding history of calling for broadening the sales tax base by extending it to services, although we typically call for using most, if not all, of the revenues to lower the sales tax rate. The Mayor’s proposal would use the revenues to replace those lost from the elimination of the corporate income tax and the reduction of personal income taxes. The result? A shift in who pays the cost of public services from corporations to households and from high-income to low- and middle-income Californians. Contrary to urban legend, extending the sales tax to services would still hit low- to middle-income taxpayers more than their higher-income counterparts, albeit slightly less so than our current goods-based tax.

• Reduce personal income taxes by 11 percent. While specific details are not available, the Mayor’s proposal would reduce personal income taxes by 11 percent, spread across all of the tax brackets. The proposed 11 percent reduction would provide a larger tax cut – in both dollars and, more importantly, as a share of a household’s income – to the wealthiest Californians. It would provide no benefit to the poorest Californians, who would pay sales tax on their car repair bills, but would give substantial sums to those at the top of the income distribution, whose incomes have skyrocketed at a time when those of middle-income families have fallen behind.

The bottom line? Taken as a package, the Mayor’s proposal would likely reduce the taxes paid by large businesses, raise those paid by small business, and increase taxes paid by middle- and low-income families while reducing those paid by the very wealthy. We’d congratulate the Mayor for his breadth of vision, but send him back to the drawing board with respect to his plan’s impact on California’s families.

— Jean Ross