Tax Policy in the New Economy

by Councilman Scott Peters
April 2003

In early 2002 Governor Davis appointed me to the California Commission on Tax Policy in the New Economy. The Commission was formed through an act of the legislature, SB1933, to recommend strategies to bring California's tax structure from the last century into the next, with an economy still dependent on tourism, agriculture and manufacturing, but increasingly based on information, communications and services. Our Commission arose out of the debate over Internet taxation, but our assignment is much broader: "to evaluate our entire system of tax policies and collection mechanisms in light of this new economy," including sales and use taxes, telecommunications taxes, income and property taxes. And with the State in major fiscal crisis, the Governor has asked the Commission to put forward ideas for structural changes in the tax system that will insulate California from large swings in revenue that have created the budget problems we see today.

My particular interest is to bring some certainty to local governments about the type and amount of revenue that they receive each year. In the Governor's proposed budget for the next fiscal year, the City of San Diego faces a $50 million reduction, due mostly to the elimination of a program known as the "Vehicle License Fee backfill." This practice involved shifting property tax revenues from local government to the state government and replacing those revenues with car tax revenues. The Governor has indicated that, at least for now, he is unwilling to continue this backfill. In other words, the property taxes still go to Sacramento, but the car taxes no longer come back to San Diego. The fact that any City would need to rely on a tax like the vehicle license fee, instead of locally generated property taxes, shows how far our tax system has moved from linking revenue sources and public services.

Before 1978 it was inconceivable that a California city could not maintain its streets, equip its libraries or build and maintain attractive parks. Everyone knows that Proposition 13 limited property tax revenues, but few citizens are aware that it also shifted power over those revenues from local governments to Sacramento. The separation of local responsibility for services from authority over the revenue needed to fund them has led to an unfair and unwise local tax policy. The state's allocation formula attempted to soften the blow of Prop 13 by freezing 1978 property tax distribution levels. This unfairly rewarded high tax cities and penalized conservative cities. Now, San Diego receives 17 cents on the property tax dollar while Los Angeles receives 26 cents. That's obviously unfair.

In 1991, Sacramento began keeping money that had gone to local governments in order to balance the State budget. The $311 million shifted from the City of San Diego since then would be enough to pave every street and fix every sidewalk in the City, with enough left over to build several parks and libraries and properly pay and equip our police and fire forces.

This unbalanced and unfair tax structure is placing our cities and now our state at risk and it is important that we use the current crisis as a catalyst for change and examine how to develop a tax system that fairly shares revenues and creates a nexus between the revenue source and the services rendered. If we are to compete for "new economy" jobs and businesses we will need to keep and improve the very infrastructure that kept the "old economy" moving -- roads and transit, housing, water and sewer lines, schools and public safety. In the coming months the California Commission on Tax Policy in the New Economy will be meeting to debate issues and ideas that can help improve California's fiscal structure. You can read our first interim report on my web site at www.sandiego.gov/cd1/ and I look forward to bringing you updates on these very important issues that are fundamental to the way we conduct business in San Diego.