California Controller Betty Yee said tax reform proposals need to be studied in the context of comprehensive tax reform with a focus on fairness to all taxpayers.

LOS ANGELES — Tax reform proposals in California are spreading like mushrooms.

Lawmakers, think tanks, and State Controller Betty Yee are among those getting in on the action, which includes ideas about changing sales taxes, income taxes and property taxes.

"California needs a tax system that reflects the 21st century economy, is less vulnerable during economic downturns, and is more sustainable, providing greater certainty from year to year," Yee said when she launched a tax reform panel in April.

"While multiple reform proposals have merit, they must be examined within the context of comprehensive tax reform with a focus on fairness to all taxpayers," Yee said. "My Council of Economic Advisors will serve as the singular nonpartisan source of perspectives for tax reform proposals."

The urgency behind tax reform comes from the upcoming presidential election date in November 2016 and expiration of the temporary income and sales tax increases that begin to phase out next year, said Jim Mayer, executive director of California Forward, an organization formed in 2008 to tackle the state's economic problems.

Since presidential elections draw the highest number of voters, Mayer said legislators and others are racing to get measures placed on that ballot.

One such bill, Senate Bill 8, introduced by State Sen. Robert Hertzberg, D-Los Angeles in January, would broaden the sales tax base to include services. The bill tackles concerns that sales taxes are heavily weighted to manufacturing and other sectors of the economy that are not huge economic drivers in today's world.

Another proposal would substantially change the state's property tax system.

State Sens. Loni Hancock, D-Berkeley, and Holly Mitchell, D-Los Angeles, in mid-June introduced a bill to split the property tax backed by the Make it Fair campaign, a coalition of unions and activists who have pushed for changes to Proposition 13 limits on property tax assessments.

Prop. 13, passed in 1978, limits annual assessed valuation growth on a property to a 2% maximum unless the property is sold, at which point it is reassessed at the sale price.

The Hancock and Mitchell proposal would eliminate those assessment growth limits for commercial real estate.

The change could raise $9 billion for schools and local governments, helping to reduce classroom sizes, hire more cops and patch potholes, according to supporters.

So far, Yee's nine-member expert panel has met three times, researching and discussing various tax topics, but primarily advising Yee and her staff, according to chair Tracey Grose, who is vice president of the Bay Area Council Economic Institute.

At this point Yee's council isn't planning on drafting a report on its findings, but California Forward and Stanford University's Hoover Institution already have that covered. Both published reports outlining potential tax reform vehicles for the state.

The two think tanks have both issued reports over the past two weeks outlining the various tax reform proposals. An article in Eureka, the free-market-oriented Hoover Institution's bi-monthly magazine, was critical of the fact that comprehensive tax reforms studies have been done before only to result in little change in California's tax structure.

According to Hoover author Bill Whalen's article, about half of California's income taxes come from the state's top 1% of earners, and two-thirds of the state's revenues come from income taxes.

Though California's bond ratings have rebounded, with two agencies assigning double-A-minus-level ratings, analysts continue to caution that the volatility of the state's revenue remains a problem.

The robust recovery, reduced debt levels and last year's creation of a rainy day fund do not eliminate the volatility inherent in the state's tax structure, dependent on income taxes and capital gains from high-net individuals, Standard and Poor's Analyst Gabriel Petek wrote in one report.

That means the state's fortunes rise and fall with the stock market, according to analysts.

If the economy should go south, it could take California's budget with it, analysts warn.

With Proposition 30, which boosted income taxes on those earning more than $250,000 and raised the sales tax, set to begin phasing out next year the discussions have gained urgency.

Tax reform is not a new idea in California. It's easier to talk about than accomplish, however, since any change to the tax system would create winners and losers, and the losers would make their voices heard in Sacramento.

A 2007 report from former Gov. Arnold Schwarzenegger's Commission on the 21st Century Economy outlined methods of modernizing what it termed an outdated tax system.

It recommended a new business net receipts tax to replace the sales tax, and lowering and flattening the progressive income tax structure.

Grose said solutions based in a 2007 reality would likely fail in the state's changed economic environment.

"We have greater income disparity than we did in 2007," Grose said. "Other taxes, like the property tax, provide more stability than income taxes, so I am very interested in creative models."

Grose said the committee is mainly designed to explore various options helping to further educate Yee and her staff on what will work and what will not. She added that she is speaking for herself and not the committee.

Grose said the state needs to go over the "third rail," which is how politicians have previously referred to discussions of altering Proposition 13 in any way.

"Clearly something needs to be done," Grose said. "We have severe problems in the Bay Area related to land use."

Because of Proposition 13, Grose said, new housing doesn't generate revenue cities need to support services to those homes. It has resulted in cities supporting commercial real estate over building needed housing, because retail boosts city revenues through sales tax, she said.

Cities have lost nearly half of their revenue thanks to Proposition 13, she said.

One thing Mayer would like to see result from tax reform is an end to the battles between the state and city governments over revenues stemming from the current tax structure.

"To fix the system, it is going to take more than one measure," Mayer said. "We got into this mess through a series of poor choices. It is going to take a series of better choices to fix it."

California Forward not only explained proposals floated so far in its report, but has asked different constituencies to score each one.

Mayer's hope is that lawmakers, advocacy groups and business leaders will begin a discussion on what is actually workable without having polling numbers make a decision for them.

"The first part of what we are trying to accomplish is to get interest groups to weigh in on these tax measures," Mayer said. "We often have a tax debate that is driven by the poll numbers toward what the interest groups think the public might accept. And that has iteratively led to the crazy system we have."

The hope is to get the interests to weigh in through the score card early in the process — in the hope that something workable could be adopted next year, he said.

California Forward has done outreach to representatives in Congress and civic and economic organizations toward that end.

Mayer said his organization wants to get various constituencies to contemplate tax reform proposals and potential unintended consequences before they come out against what might be a workable solution or back a proposal that could hurt the state.

California Forward was launched in 2008 to provide bipartisan and nonpartisan discourse on key governance issues that were making it difficult for the state to resolve its problems, Mayer said.

It was organized to create a "civic platform for communicating and advocating for fiscal and political reforms," he said. "We needed a cure to the fiscal management and antagonism between governments if we wanted to be able to see anything get better."

In the mid-2000s, Sacramento was seen as the place "where good ideas go to die," and The Economist ran a cover story describing California as a failing state, Mayer said.

"We are starting to untangle the complex web and fixing some of the structural problems we inherited," Mayer said. "Unless we get engaged in the process of decision-making, we can't expect government to be able to deliver the basic services we need."

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