(September, 21, 2009) Discussion at the final meeting of a special state commission on September 14 seemed to indicate members were not prepared to recommend a massive reshaping of California’s tax system from the form it has held for close to 70 years until additional and substantial study is done by the Legislature.
Before the meeting, the California Chamber of Commerce and a coalition of more than 40 business and employer groups raised questions and concerns about the new business net receipts tax and called for details in writing.
Gerald Parsky, chairman of the Commission on the 21st Century Economy, said the recommended changes for a new business net receipts tax would be presented to the Legislature and Governor, but “only after the proposal is fully vetted and fully understood by the public.
“It’s sufficiently promising, but should be adopted only upon satisfactory completion of this process.”
Likely Proposal
If a sufficient majority of commissioners support the proposal (which Parsky said would be circulated for signatures rather than voted upon), it likely will consist of the following:
For consideration and study by Legislature
- A new business net receipts tax, phased in over five years. No fixed rate has been specified, but Parsky said the goal is to cap the rate at around 4 percent.
- Partially flatten the personal income tax, reducing the number of brackets to two and reducing the top rate from 10.3 percent to 7.5 percent.
- Eliminate the corporate income tax.
- Eliminate the state portion of the sales and use tax.
Requiring approval by the people of a constitutional amendment
- Rainy day budget reserve.
- Independent tax body to replace the state Board of Equalization for taxpayer appeals.
Reforms for future
Parsky described the following as reforms the Legislature should consider, but that are not formal commission recommendations:
- Additional royalties from new offshore drilling.
- Minimum tax for all income taxpayers.
- Tax agency consolidation.
- Multi-year budget.
Rejected proposals
The commission rejected two controversial and far-reaching proposals by Commissioner Fred Keeley, a former member of the Assembly. Keeley proposed recommendations for a split roll property tax and an 18-cent-per-gallon gasoline tax, which would escalate annually.
More Study Needed
The proposed business net receipts tax is designed to be a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms.
The intent is to reduce revenue volatility by basing the tax on total receipts rather than profits. The tax also would bring a large category of services businesses into the tax base.
But in testimony presented to the commission before this week’s meeting, the CalChamber and coalition raised questions and concerns about the new business net receipts tax and called for a detailed written proposal, including the tax rate and a full analysis of the policy, operational and transitional implications.
The CalChamber pointed out that to understand the impact of the new tax on companies and industries, businesses must have time to calculate how the tax will affect often-complicated operations. To understand whether the new tax would enhance or harm California’s investment and jobs climate, CalChamber called on the commission to further study the economic impacts of the tax.
Massive Change
Observers have noted that the changes outlined by Parsky amount to a massive shuffling of tax sources, repealing about $50 billion in annual revenues from three existing taxes and replacing them with the equivalent amount from the new business net receipts tax. This is more than half the revenues in the state General Fund and about 3 percent of the state’s gross domestic product.
Many of the economic, industry, transitional and operational questions raised by the CalChamber and coalition remain to be answered (see September 4 Alert), which likely prompted the commission to recommend to the Legislature and Governor that the proposal be studied further, rather than adopted as is.
In creating the commission last fall, Governor Arnold Schwarzenegger asked the group to examine the state’s tax structure with a goal of stabilizing state revenues and reducing volatility, as well as promoting California’s prosperity and competitiveness.
In July, the Governor extended to September 20 the deadline for the commission to present its findings and said he will call a special session of the Legislature afterwards to consider the commission’s recommendations.
In light of the new direction the commission took with its recommendations, it is not known whether the Governor will immediately call a legislative special session to consider them.
Staff Contact: Kyla Christoffersen