Dan Walters

Dan Walters
Observations on California and its politics
04/27/2015 12:01 AM

Some call them “tax expenditures,” while others use the more pejorative “tax loopholes.”

Whatever the name, exemptions from taxation are many and costly.

A recent report by the Legislature’s budget analyst, Mac Taylor, says that they reduce state revenues by $55 billion a year.

As noted in this space earlier, the biggest, in terms of financial impact, are broadly applied and probably untouchable. For example, neither legislators nor voters are likely to apply sales taxes to food or prescription drugs, exemptions worth $7.5 billion a year in savings to consumers.

Exemptions for employer-provided health insurance and pension contributions, Social Security benefits and mortgage interest are equally sacrosanct.

But what about the dozens of much smaller and much narrower loopholes that specific interest groups have persuaded the Legislature to enact? Tax-reform advocates beat the drums constantly for closing them, and many politicians pay lip service to the cause.

However, there is a structural impediment to closing unjustified tax loopholes that are, in effect, gratuitous gifts from the state treasury.

While it takes only a simple majority vote by the Legislature and approval of the governor to create a new loophole, closing one is considered, legally, to be a tax increase and therefore requires a two-thirds legislative vote.

Beyond legalism, however, those who benefit from lucrative loopholes will spend whatever it takes on lobbyists and campaign contributions to maintain them, while there’s no offsetting clout for reform.

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