Sen. Bob Hertzberg pushes plan to modernize California’s tax structure, promote upward mobility by revitalizing education funding, job creation

Lawmaker’s first Senate measure lays groundwork for future

PHOTO CAPTION: SACRAMENTO (Dec. 1, 2014) -- On the same day Sen. Bob Hertzberg, D-Van Nuys, formally introduces Senate Bill 8, the Upward Mobility Act, he is joined by his son, Daniel, center, standing to the senator's right. (Photo by Lorie Shelley).

January 12, 2015

SACRAMENTO – In a bid to spur upward mobility for all California residents, Sen. Bob Hertzberg has released his plan to revitalize education funding, jumpstart job creation and foster improved state finances and business climate through a review of the state’s boom-and-bust tax structure.

“California has long been known as the land of opportunity, the republic of the future, but for too many of our residents the future is receding and inequality continues to rise,” said Hertzberg, D-Van Nuys, chair of the Senate Committee on Governance and Finance and a former Assembly Speaker who returned to public service after a 12-year hiatus in private business and as a public-policy leader. “We must once again provide Californians with the opportunity to thrive in the 21st century global economy beyond temporary solutions like Prop. 30. We should refocus on the overall outcome that can be achieved through investing in the means of upward mobility – job-creating infrastructure and public higher education – and modernizing our tax system.

“California of the 1950s and 1960s was governed with an eye toward the future and was renowned for the opportunities this created,” Hertzberg said. “California’s investment in education and infrastructure paid off big time as agriculture, aerospace and then technology boomed and drove California into the 21st Century as the then fifth-largest economy in the world.

“Business thrived and created an abundance of middle-class jobs and broad opportunities for workers to better their standard of living for themselves and their families.”

As California’s economy thrived, however, its eye on the future wavered, Hertzberg said. “Today, Californians find themselves restricted to the investments made more than three generations ago,” he said. “Something more, something visionary, is needed.”

The lynchpin of that ‘something’ is a new philosophy of governance where there’s more relief for low-income wage earners, Hertzberg said. Senate Bill 8, his proposed Upward Mobility Act, would be funded by a restructured tax system to generate the needed cash and stabilize funding.

Hertzberg pointed to the following facts supporting the need to do more to help residents succeed: Since 1970, the poorest 20 percent of Californians have seen their household income grow by just 3.1 percent while the income of the richest 20 percent has climbed 74.6 percent.

Since 1987, 71.3 percent of all the gains generated by California’s economy have gone to the state’s wealthiest 10 percent. Moreover, today California accounts for three of the 10 American cities with the greatest disparities in wealth—San Francisco, Oakland, and Los Angeles.

Hertzberg emphasized that the initial goal of the Upward Mobility Act would be to explore problems with the current tax structure and discuss reform alternatives. Key provisions of his bill would expand the application of the Sales and Use Tax law by imposing a tax on specified services; incentivize entrepreneurship and business creation by evaluating potential changes to the corporate tax law; and examine the impacts of a simpler Personal Income Tax Law.

“The Upward Mobility Act would help ensure California’s residents and businesses can thrive in the 21st Century global economy,” he said, adding that education can play a key role. “In addition to opening professional and economic doorways for students, California’s higher education system has been one of our most important economic engines.

“Despite its proven value, however, California’s public higher education systems have not prospered. Fees have skyrocketed, but unstable funding has resulted in diminished opportunities for Californians and continues to fuel the growing income inequality in California.”

A better-educated populace can help all residents prosper by increasing education funding as funds become available, and by making the following key changes as money becomes available:

  • $3 billion to K-14 education.  These new annual revenues would help rebuild classrooms and help protect classroom spending from pending pension fund demands.  “Investing in its residents through education is the foundation on which California has always built its economy,” Hertzberg said.
  • $2 billion to the University of California and the California State University. Similarly, Hertzberg’s measure would restore investment in California’s prized higher education system. Revenues would be split evenly between the University of California and California State University systems.
  • $3 billion to local governments. Investing in local governments would more closely connect Californians to government spending on their behalf and support new public-safety realignment burdens on local government. Moreover, guaranteed funding to provide additional public safety, parks, libraries or local development would allow local governments to best meet the specific needs of their particular communities.
  • $2 billion for a new earned income tax credit for low-income families. The Upward Mobility Act would establish a refundable earned income tax credit to help low-income families offset the burden of proposed sales and use tax on services.
  • Small business and minimum wage relief. This would enhance the state’s business climate, create jobs, and incentivize entrepreneurship by evaluating the current corporate income tax to determine whether it is meeting its intended purpose while at the same time linking changes to a more reasonable minimum wage.

Hertzberg said implementing the Upward Mobility Act will be a challenge, but the goal is to foster discussion that will result in a final measure that is fair, improves services and better positions California for the future.

“During the past 60 years, California has moved from agriculture and a manufacturing-based economy to a services-based economy,” Hertzberg said. “As a result, state tax revenues have become less reliant on revenues derived from the Sales and Use Tax on goods and more reliant on revenues derived from the Personal Income Tax.”

Records show that in 1950, the Sales and Use Tax comprised 61percent of all state revenues. Today, it accounts for about 30 percent. The Personal Income Tax accounted for 12 percent of total state revenues in 1950; today, it accounts for more than 60 percent.

During the same time, California’s General Fund tax collections became heavily dependent on the earnings of its top earners. This has led to dramatic revenue swings year over year. During the dot-com economic boom of the 1990s through the early part of the 21st Century, state revenues soared by as much as 20 percent in a single year.

“But as personal incomes tumbled during the Great Recession, state revenues plummeted disproportionately,” Hertzberg said. “These swings in revenue have led to the suffering of California’s residents. Essential services, such as health care and child care for low-income families, were cut at a time when they were needed most.”

In addition, the state cut billions of dollars to education, including adult vocational and literacy education, which could have helped low-income families recover from the recession.

“Relying on the wealthiest taxpayers to support California’s needs is outdated and dangerous fiscal policy,” he said. “Not only does it increase the uncertainty of tax collections, but there is evidence that California’s high tax rates may be driving high income earners out of the state, which only deepens revenue shortfalls.”

Specifically, Hertzberg said SB 8 seeks to impose three broad changes to California’s tax code:

  • Broaden the tax base by imposing a sales tax on services to increase revenues. Health care and education services would be exempted from the tax, as well as small businesses with under $100,000 gross sales.
  • Enhance the state’s business climate and incentivize increases in minimum wage. The corporate income tax would be reviewed to determine whether it is meeting its intended purposes, including whether it is bourne equitably among California’s businesses and what impact it has on the business climate, while at the same time linking changes to a more reasonable minimum wage.
  • Examine the impacts of simplifying the Personal Income Tax while maintaining progressivity.

“Small businesses, like plumbing contractors, auto repair shops, and restaurants account for more than 90 percent of the state’s businesses and well over a third of all jobs” Hertzberg said. “They are a key rung on the ladder of upward mobility. But they need a tax policy that will enable them to grow and add employees.

“The underlying problem is, while California’s economy has evolved, its tax system failed to keep up with the times,” he said. “Taxing only goods and not services when our economy has been so fundamentally transformed makes no sense and is manifestly unfair. This has to change.”

The first hearing on SB 8 has not yet been set.

Background newsclips:

Read an endorsement of SB 8 by the San Diego Union-Tribune editorial board HERE.

Read an Op-Ed in the San Jose Mecury News explaining why SB 8 is needed HERE.

Read a column by Los Angeles Times political columnist George Skelton on Gov. Brown talking about Hertzberg's tax-reform ideas HERE.

Read a Dec. 24 column by Skelton on Hertzberg and SB 8 HERE:

Read a Jan. 12 Times business page story on SB 8 HERE.

Read a Jan. 17 San Francisco Chronicle column by Editorial Page Editor John Diaz HERE.

Read a Jan. 18 column by Sacramento Bee's Dan Walters HERE:

Read a Jan. 30 editorial in support of SB 8 by the San Francisco Chronicle HERE:

Read a Sacramento Bee story on how SB 8 will be a key issue in 2015 HERE.

Read the actual bill language for SB 8 as it was introduced, HERE.

For more, including a Fact Sheet on SB 8, visit Hertzberg’s Web site at the address below.

Bob Hertzberg, chair of the Senate Committee on Governance and Finance, represents nearly 1 million San Fernando Valley residents of Senate District 18, which includes part of Burbank and the following communities in Los Angeles: Arleta, Granada Hills, Hansen Dam, Lake View Terrace, Mission Hills, North Hills, North Hollywood, part of Northridge, Pacoima, Panorama City, Sherman Oaks, Studio City, part of Sun Valley, Sylmar, Toluca Lake, Valley Glen, Valley Village, Van Nuys, the City of San Fernando and Universal City. See a district map HERE or at http://sd18.senate.ca.gov/district.  After serving in the Assembly from 1996-2002, including two years as Speaker, Hertzberg built an international renewable energy business; invested in solar, wind and electric-car projects; and worked for structural changes in government through two civic groups: California Forward and the Think Long Committee of California. More HERE or at www.senate.ca.gov/hertzberg

MEDIA CONTACT:
Ray Sotero
Communications Director
Sen. Bob Hertzberg, Senate District 18
Capitol Building, Room 4038
Sacramento, Calif. 95814
(916) 651-4018 office; 916 834-1128 cell
www.sen.ca.gov/hertzberg