Super committee and California: Can they each break through dysfunction?

A dispiriting gridlock continues to grip Washington – as well as the capital of the nation’s largest state economy, California. It undermines the public’s faith that democracy can solve America’s problems.

As we write, the so-called “super committee” of Congress, convened to figure a way out of the nation’s fiscal crisis, is set to fail, divided along familiar partisan lines. The California government in Sacramento is similarly paralyzed.

But a more engaged citizenry can help solve this problem, at least in the Golden State. Here, a politically diverse and independent group of high-profile citizens has broken out of the untenable status quo by coming up with recommendations – including ever-elusive tax reform – to take to voters next November.

Called the Think Long Committee for California, the group –  which includes Clinton-era economic advisor Laura Tyson and Bush II Secretary of State Condoleezza Rice, Google Chairman Eric Schmidt and former California Supreme Court Chief Justice Ron George – has agreed to a bipartisan plan to reboot California’s dysfunctional democracy.

Unlike many other piecemeal reform efforts over recent years, the Think Long Committee plan seeks to modernize California’s system of governance by installing a new civic software more suited to the realities of the decades ahead.

Our integrated set of recommendations range from common sense practices such as a “rainy day” reserve fund to multi-year budgeting; two-year legislative sessions with one year dedicated to oversight; transparency on ballot initiative funding; K-12 and higher-ed reform; and speeding up regulatory approval to foster job creation.

But the core of our proposal has three parts:

Local empowerment. We recommend returning decision-making power and resources – where appropriate – from Sacramento to localities and regions. That’s where the real economy functions, and government is closer to the people – and thus more responsive, flexible, and accountable.

The Think Long plan, for instance, would dedicate new revenues annually to counties for public safety. It would give block grants to cities for infrastructure and other locally determined uses.

An independent citizens watchdog. A nonpartisan  watchdog for the long-term public interest can act as a counterbalance to the short-term mentality and special-interest political culture that dominates Sacramento.

This impartial “Citizens Council for Government Accountability” would be empowered to place initiatives directly on the ballot for public approval. It will ensure that the public’s priorities remain at the top of the policy agenda over the long-term.

The council would, for example, keep front-and-center such priorities as excellence in education and a world-class infrastructure, working to make sure that California taxpayers get their “return on investment.”

A modern broad-based tax system. It’s time to update California’s tax system to mirror the real composition of our modern service and information economy. A main component will be to tax services.

The ideologically rigid will have a hard time putting this proposal in any box. It is a pragmatic response to the nonpartisan Legislative Analyst’s October 2011 report on California’s budget woes. That report points out that the boom-and-bust “volatility” of the business cycle that wreaks havoc with state finances has increased in recent years – making the state’s reliance on personal income taxes dangerous.

In 2008-09, personal income grew at an anemic 3 percent, and, as a result, general fund revenues plummeted by 19 percent. In 1970, the report points out, personal income taxes accounted for 27 percent of revenue while sales and use taxes accounted for 40 percent. By 2011, reliance on the personal income tax was 57 percent and sales and use taxes only 22 percent.

In those same years, the California economy has been transformed from a mainly manufacturing and agricultural economy to one increasingly dominated by services and information – a metamorphosis mirrored elsewhere in the country. Nearly one half of California’s $2 trillion economy is composed of services – none of it taxed.

If you eat a donut in a coffee shop, the sales tax on goods applies. If you use a legal or financial service, it is not taxed. In other words, the coffee shop donut subsidizes lawyers, accountants, and other services.

While maintaining California’s progressive income tax structure, we would reduce rates across the board for every bracket and reduce the sales tax on goods from 5 percent to 4.5 percent while broadening the sales tax at a 5 percent rate to apply to services, which are more discretionary. Education and medical care would be exempted. Those with low income would receive a sales tax rebate. Those earning $45,000 and under would pay no income taxes.

This combination of cutting the personal income tax and broadening the tax base will help stabilize the boom-and-bust cycle of the budget in a fair way while generating $10 billion in new revenues annually. That can start paying down the state’s “wall of debt” – for K-12 schools, higher education, for local public safety, and other locally determined needs.

Small- and medium-size businesses are the backbone of the California economy. Unlike large corporations, their profits and losses are “passed through” and taxed at the personal income tax rate. Therefore, a cut in personal income taxes will boost job-creating business prospects. Further, California’s corporate tax, one of the highest in the nation, would be reduced to make the state competitive with other states and foster an improved business climate.

Bipartisanship is hard work. The committee did not come to its conclusions lightly.

In our deliberations, we have been served by the unprecedented collaboration of some of the best minds in California with decades of experience in state government. These advisors include former Republican and Democratic state directors of finance, Mike Genest and Tim Gage – often at partisan loggerheads in past years. The committee also heard from dozens of other expert witnesses from labor, business, and social services. Over the course of our year-long deliberations, we met with Gov. Arnold Schwarzenegger and Gov. Jerry Brown.

We weighed alternative plans out there – further raising the income tax on the rich or further slashing the budget and insisting on no new tax revenues. Many of us were sympathetic with one or the other of these approaches. But they simply do not face up to the real issues and solve the long-term problems of the state.

The Think Long Committee was not appointed by any official or sponsored by any special interest lobby. We came together only as an independent group of concerned citizens who believe in California’s promise and who want to get the state back on the right track.

We will seek to qualify our plan in two initiatives and place them before the public on the November 2012 ballot. We have made our best effort in good faith and hope the public agrees. It will be up to the voters of California to decide.

Nicolas Berggruen is chair of the Think Long Committee for California. Nathan Gardels is a senior advisor to the group.