San Diego Newsroom, Getting Off the Roller-Coaster: California’s Volatile Tax Base:

As the governor signed California’s belabored budget this week and sleep-deprived Legislators agreed to cuts that would have previously been unthinkable, finger-pointing was in full force. Politicians on both sides of the aisle, however, agree that the state’s volatile tax base is particularly to blame for the boom-or-bust cycle that keeps California’s budget from holding steady. In September Gov. Arnold Schwarzenegger will call legislators into a special session to overhaul what he calls a “broken tax system.”

Gov. Arnold Schwarzenegger set up a bipartisan, 14-member Commission on the 21st Century Economy last year to end the state’s dependence on volatile revenues and modernize the tax system. The commission’s recommendations will factor heavily into the September special session.

“What the governor is hoping might come out of this exercise is a dramatic alternative that people can get excited about and perhaps overcome the inertia of special interests,” said Paul L. Caron, a visiting taxation professor at University San Diego School of Law and editor of the TaxProf law blog. Caron cites President George W. Bush’s failed attempt to overhaul taxes with his Tax Reform Commission as “not dramatic enough to galvanize folks.”

“It’s hard to enact small changes,” he said. …

“Because we have a personal income tax, in strong economic times there’s a bump in revenue,” said Daniel Simmons, a professor of tax law at UC Davis. “Also, in the 1990s and early-2000s, a lot of people in high-tech industries were being compensated in capital gains.” California heavily relies on personal income taxes and capital-gains taxes paid by the rich. Those revenues soar in good years and plummet in bad, much more so than property or gas taxes. …

“A flat tax (on personal income) has some real appeal as an economic matter,” Caron said. “Experience in other states and federally has shown that it really works… you read about how businesses and high-income individuals are fleeing the state, and you want to keep those people here.” …

Caron notes that the commission may not significantly change the amount of taxes Californians pay, but more likely restructure the way they are paid. “The governor wanted it to be revenue-neutral and just reallocate the tax burden,” he said. “Of course, I subscribe to the view that there is a window for dramatic reform… there’s the hope that doing something big might be possible.” Come September, “something big” might be the only option California has left.