COMMUNITY COMMENTARY:

California’s tax structure simply does not work. Not only is it an unstable source of funding for state government, it is complex, convoluted and cumbersome for the taxpayer. The time has come to reform California’s toxic tax structure into a stable source of funding that does not penalize savings and investment.

California’s inefficient personal income, corporate and sales tax structures must be replaced with a tax system that can withstand volatile economic conditions. As we saw firsthand this year, our budget problems were exacerbated by California’s over-reliance on high-income earners to finance government.

For this reason I have co-authored a proposal to implement a flat tax in California. Sen. Bob Dutton (R- Rancho Cucamonga) and I have introduced Senate Bill 328, legislation that will eliminate the state’s elaborate personal, corporate and sales taxes and instead establish a flat-personal-income and business-value-added tax. Dutton and I believe this type of tax system will be fairer and more equitable for businesses and people.

Currently, the top 10% of income earners contribute 75% of the state’s total tax revenues. This makes our system heavily dependent on the revenues generated by personal income tax. As a result, the state’s income is heavily reliant on earnings from investments. Economic disasters, as we saw this past year when the stock market plunged, result in a precipitous drop in state revenues. This tax structure makes no sense and leaves the state vulnerable to the whims of the financial markets.

A flat tax is not a new or untested concept. European nations that have adopted a flat tax have seen their economies grow between 13% and 25%. According to the National Center of Policy Analysis, this trend is a direct result of lower tax rates leading to an increase in output growth.

Several states, such as Illinois and Massachusetts, have also successfully adopted flat-tax structures. Others, such as Rhode Island and Utah, have a voluntary flat tax with no deductions. In these states taxpayers can opt to pay the flat tax instead of paying taxes under the progressive tax structure.

Studies show that a flat tax carries long-term benefits that increase with each year the system is in place. So much so, that many flat-tax based countries have been able to reduce their tax rates. Cutting the tax rate is something we haven’t seen for years in California. The number of tax evaders has also declined in these countries. There is a direct correlation between the lower tax rate and the reduction in tax evaders. This draws more people into the system, thereby reducing the burden on everyone.

The goal of our legislation is not to increase the dollar amounts collected, but rather to find a more equitable, simplified, and less erratic source of funding for state government.

As a practical point, anyone who has ever filed a tax return in California can attest to the confusing and convoluted paperwork involved. A simple flat tax could be filed on a form the size of a postcard. This would reduce compliance costs to the taxpayer and administrative costs to the state.

Reforming California’s broken tax system is a fiscally responsible first-step. Adopting a revenue-neutral, flat-personal-income and business-value-added tax will make California a more attractive place to live and do business.

Now is the time to think outside the box and look for solutions that stimulate the economy, make things simpler and fairer for taxpayers and most importantly, bring stability and common-sense to our tax code.

TOM HARMAN represents the 35th District, which includes Huntington Beach.