CalChamber Asks Commission for Details, Full Analysis

(August 28, 2009) The impact of proposed tax structure changes on the California economy, jobs and competitiveness should be the key factor in considering whether to adopt those proposals, the California Chamber of Commerce told a special state tax commission this week at the first of two workshops focused around a proposal for a new “business net receipts tax.”

Governor Arnold Schwarzenegger created the Commission on the 21st Century Economy last fall, asking it to examine the state’s tax structure with a goal of stabilizing state revenues and reducing volatility.

In July, the Governor extended to September 20 the deadline for the commission to present its findings and said he intends to call a special session of the Legislature afterwards to consider the commission’s recommendations.

Among the goals the Governor set for the commission were promoting the long-term economic prosperity of the state and citizens and improving California’s ability to compete successfully with other states and nations for jobs and investments, CalChamber policy advocate Kyla Christoffersen reminded commissioners at the August 26 workshop.

She asked that they give those criteria at least as much weight as other issues.

Specifics, Analysis Needed

Christoffersen urged commissioners to take sufficient time to analyze the proposed new business net receipts tax and related changes to California’s tax structure, rather than be driven by an arbitrary deadline.

Moreover, specifics on the proposed tax rate, deductions and transition rules under a revised tax system are needed in order for individual companies to analyze the consequences of such changes on their own operations and provide feedback to the commission on the impact, Christoffersen said.

The commission’s own analysis should include modeling looking forward and back over several business cycles to determine what revenues a business net receipts tax would have produced in both good and bad economic times, Christoffersen said.

The proposed business net receipts tax is intended to be a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms. The intent behind this new tax is to bring a large category of services businesses into the tax base.

On August 21, the commission circulated to a limited audience an updated “Preliminary Overview” (later posted on the commission’s website) that provided some elaboration on the net receipts tax proposal, but the tax rate was not specified, nor were macroeconomic or business analyses provided.

According to the commission document, under a business net receipts tax, employers would not be able to deduct from revenues the cost of employees, an expense that is allowed under the current tax system.

In addition, the proposal fundamentally shifts business taxation from one based on net income (that is, ability to pay) to one based simply on doing business, which has nothing to do with profitability.

Questions on Net Receipts Tax

Questions for commissioners to consider in examining a business net receipts tax should include:

• Whether it is good policy to achieve a broadening of the tax base by creating industry winners and losers. For example, businesses with low profit margins and high employee expenses would be especially hard-hit by a business net receipts tax as would companies that aren’t making a profit because it appears the new tax would be collected regardless of ability to pay. Additionally, a net receipts tax has the potential of shifting a greater tax burden onto small businesses.
• The impact on California jobs, such as whether what amounts to a tax on employees (because it appears employers won’t be able to deduct the cost of employees as they do now) will push companies to outsource jobs to other states and nations, or the potential negative impact on California’s ability to compete for future investments if business loses important incentives such as the research and development credit or enterprise zone credits.
• Competitiveness concerns due to increased costs of exported California goods that must compete with lower-priced goods offered by other states and countries.

Operational and transitional concerns raised by Christoffersen at the workshop included what will happen to the proposed business net receipts tax rate if revenues generated do not reach expected levels.

In response to the question of who would be responsible for setting the tax rate if it is subject to change, commission Chairman Gerald Parsky said that task would fall to the Legislature.

At Parsky’s request, the CalChamber will be providing more detail to the commission about ongoing concerns with the proposed tax changes. 

Staff Contact: Kyla Christoffersen