(October 20, 2009)  Fundamental questions remain unanswered about a proposal to adopt a new business net receipts tax, a California Chamber of Commerce-led coalition of more than 50 business and employer groups reminded legislators last week.

As recommended by the Commission on the 21st Century Economy, much further analysis is needed on the group’s final report, including the new tax on business, the CalChamber and coalition said in an October 14 letter to legislators.

Nine of 14 commissioners, including Chairman Gerald Parsky, signed onto the final report, which recommended the new business net receipts tax to offset revenue losses from flattening the personal income tax and eliminating the corporate income tax and the state portion of the sales tax.

  Watch testimony.

Untested Tax

The CalChamber and coalition support the commission recommendation of a stronger rainy day fund in the belief that volatility is primarily a spending problem rather than a revenue problem.

They also applauded the commission’s recognition that California’s high personal and corporate income tax rates and taxation of business inputs has a negative impact on economic growth and competitiveness.

Replacing these taxes with a new tax, however, absent a thorough understanding of its impacts, could have its own set of harmful consequences, the CalChamber and coalition warned lawmakers.

The coalition questioned whether it is fair and equitable to impose a significant tax even when there is no income, as the business net receipts tax would do.

The only comparable tax not based on ability to pay is the property tax, which was the subject of a tax revolt 30 years ago when it became unaffordable for major parts of California society. High inflation then exacerbated the perceived unfairness of the property tax, which could also be the case for a business net receipts tax.

CalChamber Testimony

CalChamber Policy Advocate Kyla Christoffersen summarizes business community concerns with the new net receipts tax proposed by the Commission on the 21st Century Economy at an October 8 informational hearing of the Assembly Revenue and Taxation Committee.   Watch testimony.

In testimony to the Assembly Revenue and Taxation Committee and in the letter to legislators, the CalChamber emphasized that absent a full analysis of potential consequences of the business net receipts tax and how it interacts with the other proposed tax changes, it will be impossible for businesses to determine its full implications.

The coalition urged that California jobs and the economy should be top priorities in evaluating the tax system.

Key Concerns

Key concerns that were not addressed in the commission’s final report and which should be included and addressed in the Legislature’s analysis:

Rate and deductions unknown. No tax rate or rate cap is specified in the proposed legislative language and many questions remain about the nature of the proposed specific deductions. Without this information, businesses will be unable to calculate the impact of the proposed business net receipts tax.

No modeling of proposed business net receipts tax rate. A crucial part of the Legislature’s analysis should be to conduct independent modeling of the business net receipts tax both backward and forward over several economic cycles (about 10 years) to determine the ability of the tax to generate revenue and stem volatility.

Insufficient evidence that business net receipts tax better than current taxes. The business net receipts tax may be imposed on companies even when they are losing money and cannot be passed on as a transactions tax. There is insufficient data that such tax burden shift will meet the goal of stemming volatility.

Danger that business net receipts tax creates winners and losers. For example, businesses with low profit margins and high employee expenses presumably would be especially hard-hit as would companies in a loss position. Additionally, it appears the business net receipts tax may shift more of the tax burden onto small businesses, since many pay personal income taxes and would not benefit from the elimination of the corporate income tax.

Business net receipts tax is a tax on employees. As proposed by the commission, the business net receipts tax would not allow any deductions for the cost of employees.

Harm to startups. There is a danger that the business net receipts tax will be especially harmful to startup companies, since many could exceed the miniscule small business exemption threshold.

California goods priced out in national and global markets. The business net receipts tax will undermine California’s ability to compete with other states and countries if the cost of exported California goods and services becomes substantially higher than those products, such as software, offered by other states and countries.

Harm to small businesses and consumers because of services tax. The commission states that one of the purposes of the business net receipts tax is to expand the tax base to include services. An additional tax on services businesses will kill jobs in industries such as dry-cleaning and auto repair because the new tax will be difficult to pass on as a transactions tax and, if it is passed on, will result in a nearly 4 percent price jump for consumers.

Revenues from federal government and out-of-state companies questionable. The cited $6.8 billion in revenues anticipated to be generated from federal deductions and out-of-state companies may rest upon unreliable assumptions.

Staff Contact: Kyla Christoffersen