Later this month the Commission on the Twenty-First Century Economy, also known as the “Parsky Commission” after its chairman, Republican fundraiser Gerald Parsky, is to finally release is proposals for overhauling the state’s tax system.

Or so we’re told. This is their second deadline, and current reports suggest they’re not a whole lot closer to agreement now than they were back in July when they blew past another deadline. The conflict is fundamental: given the absurd straitjacket requirement that the proposals be “revenue neutral”, commissioners are battling over which taxes to cut and which to raise. They do so against a backdrop of political pressure to openly embrace regressive taxation.

One of the commissioners, tax expert Richard Pomp, has decided to lay out his objections to the proposals and to the overall concept of scaling back progressive taxation in the form of a “Red, White and Blue Plan.” Pomp is based at UConn’s law school and served in a similar advisory role on a commission examining New York State’s tax code. Pomp’s letter gives a solid case for protecting and strengthening California’s landmark and successful corporate and income tax policies, while proposing other sensible tax reforms, including an oil severance tax, that would help California deal with its crisis.

You can read the whole letter here. Below are some excerpts and my own commentary. Overall it does nothing to challenge my own belief that this commission is not likely to offer us anything of value, was created by Arnold primarily to advance an attack on progressive taxation and to massively transfer wealth to those who already possess it. But at least Pomp is pushing back on some of the worst ideas.

On the idea of eliminating the corporate income tax:

The California corporate income tax was adopted in the early 1930’s. The tax is similar to that used by 90% of the states. Based on information provided to the Commission, the tax introduces an element of progressivity to the State’s tax structure and to some extent falls on nonresidents who exploit the California market and benefit from the State’s public services and infrastructure.

Those wishing to eliminate a hoary tax that is part of the national tax consensus have the burden of proof of demonstrating compelling evidence that the gains from doing so would outweigh the losses. This is especially true in California where the 2/3 vote requirement makes it unlikely that once eliminated, the corporate tax will ever be reinstituted. I have reviewed our meetings and submissions and find nothing that even purports to make a credible case in support of eliminating the tax.

Because the tax has existed for more than 70 years, it has accompanied both periods of strong State growth and periods of weak growth. The tax can no more be given credit for the former than it can be blamed for the latter.

The California corporate income tax was once viewed as a model for other states and was emulated and replicated. California was looked to as a leading state on sensible corporate tax policy. California has now abandoned that role. Today, the tax has been emasculated and eviscerated through secret closed door deals. The solution is to reinvigorate it, not eliminate it.

In other words, the corporate income tax works very well, and no case has been made for its elimination. I can only conclude the obvious – that those on the right proposing its elimination are doing so for ideological and kleptocratic reasons. In a state governed by reason and common sense this idea would be dead as a doornail. The fact that it lives is a sign of how much our politics have been taken over by the practitioners of a reverse Robin Hood economics.

On volatility, Pomp agrees with the widely known fact that California’s tax income is “volatile” because we have a lot of wealthy people (a situation Pomp rightly notes most other states envy). Pomp goes on to state that the problem with volatility is, from his perspective, a “spending problem” – the state should not spend unusual revenues on ongoing expenditures. He uses a personal example to illustrate this:

To use a personal illustration, consider that my own income is also volatile. Not so much my teaching income, which (unfortunately) is fairly predictable from year-to-year, but rather my consulting income. But rather than shun that volatility I welcome it. I look forward to tripling my consulting income next year, even if it subsequently returns to this year’s level. I also wouldn’t mind hitting the lottery some day, notwithstanding the resulting volatility and the likelihood of never hitting it again. I also don’t mind receiving a large contingency fee upon winning a case, even if I will never receive one again. What I would not do, however, is to commit to a long term mortgage on the romantic hope that I will continue to receive such income every year. Yet that seems to be what the Legislature does.

Now I disagree with Pomp’s assessment of how California has spent in the past. He seems to be embracing the idea here that part of California’s problem is “overspending,” though he is making a specific point about the problems inherent with spending unusual revenue spikes (referring to the dot com boom of 10 years ago) on things with long-term costs. I don’t believe this to be as big a part of the state’s problems as Pomp implies – California’s actual problem is that we have a structural revenue shortfall where the state does not take in enough money to fund the basic programs we need to survive and thrive.

Still, I get what Pomp is saying. When I get an unexpected bit of revenue, I usually put in the bank, pay down debt, or buy a piece of infrastructure (such as a new, more reliable, and lighter bicycle, enabling me to save money by riding around Monterey instead of driving).

It is natural to want to translate this to public budgeting. But it is also not so cut and dried. It’s not always easy to determine what is “unexpected” revenue and what is normal. The California economy was generating lots of tax revenue in 2005, but 3 years earlier and 3 years later it wasn’t. And even though our tax receipts have fallen off a cliff of late, there will be some recovery in the future (even if the sales tax may slowly or even never recover).

All tax revenue is volatile, because economic activity itself is volatile. So instead of worrying about how to deal with volatility, we are better off figuring out how to pay for the programs that the people of California want – like schools, health care, parks, transit.

Here I tend to agree that we need some form of a “rainy day fund” – but only one that is filled during prosperous years, after we have attended to restoring cuts made to programs in the last 2 years. There’s nothing wrong with saving in the fat years to get you through the lean years, but that shouldn’t be the centerpiece of spending policy, especially for a government. Government budgets aren’t necessarily supposed to behave like household budgets, after all.

Pomp also blasts the “callous” notion of eliminating the deduction for medical expenses (I hadn’t even known that was being floated) and then lays out some of his own proposals:

Summary of Red, White and Blue Plan Proposals

• Adopt a severance tax at competitive rates

• Adopt an independent tax court pursuant to the ABA Model State Tax Tribunal Act

• End Pay-to-Play, that is, eliminate the requirement that the tax must be prepaid as a precondition to challenging an alleged deficiency

• Eliminate the special corporate tax provisions adopted in 2008 and 2009 (elective single factor apportionment; new provisions on NOL carryback; tax credit sharing), until a rigorous cost-benefit analysis justifies them

• Reinstate the double weighted sales factor

• Publish the name of any publically traded corporation receiving more than $5 million in tax expenditures and the amount and nature of those tax expenditures

• Publish the names of publically traded corporations and the amount they paid in California corporate income tax

Given the strictures and limitations of the commission these aren’t half bad ideas, and Pomp remains open to the nebulously defined and poorly understood “net business receipts tax.” But it may be the case that Pomp’s letter is best used as an argument for implementing these fairly straightforward proposals beyond the scope of the Parsky Commission while we also continue to work on making the tax code even more progressive.

Ultimately California’s wealthy, its large corporations, its commercial property owners, and those making over $250,000 need to be paying higher taxes. That isn’t likely to happen overnight, and we have to first remind Californians that they want the services more than they want the tax cuts.