The Hertzberg Plan: Tax Reform at a Cost?

Joel Fox, editor of Fox & Hounds and President of the Small Business Action Committee, discussed Senator Robert Hertzberg's tax reform legislation, SB 8, on foxandhoundsdaily.com. Fox stated that Hertzberg hopes to improve business conditions in the state with the reform. Fox, however, questions why this objective comes with a " $10 billion price tag." 

Fox states that Hertzberg calls for reviewing the corporate income tax to see whether it is meeting its intended purpose. He wants to incentivize an increase in the minimum wage by lowering or eliminating the corporate income tax. At the same time, he wants to adjust the personal income tax arguing that small business will benefit because most small business people pay taxes though the personal income tax. Ease the tax burden and entrepreneurs will have more to invest in their businesses, he suggests.

Taxing services, however, has received the most attention in his plan. Adjusting the tax rates on income and adding taxes to services are said to bring in an additional $10 billion a year. Hertzberg has a plan to spend that money.

Putting aside for now some of the discussions and concerns that arise with such a major tax change, zero in on the additional billions when making changes to a tax system that are intended to help the economy. If, as Hertzberg asserts, his tax changes will boost the economy and keep businesses from fleeing the state, wouldn’t the change to a more robust business climate provide new revenue over time through economic growth? Why set the rates to have an immediate large increase in revenue (equivalent to about nine percent of the current state general fund)?

Tying an immediate big revenue boost to the new tax formula probably hurts the economy and threatens the proposal’s chances. For many in the state, such a big tax increase is like waving a red flag in front of a bull. Such an add on seems contrary to the overall tax philosophy that Hertzberg is promoting—broaden the base and lower the rates.

Hertzberg said that he believes strongly in the philosophy behind his tax change proposal but admits selling his plan will be hard.

Hertzberg plans to listen to reactions to his plan and hold hearings around the state. He told me that it might be wise to lay in the tax changes over time. He’ll assess after being involved in "serious discussions" about the plan.

However, he sees danger ahead if the status quo is maintained. Hertzberg called Prop 30 a bridge to get past a difficult time. He stated that we are coming to the end of the bridge and now is the time to consider reforming the state’s tax system.