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The Budget News That Really Matters

Jun15

tax-calculatorThis week’s coverage of the budget mess will surely focus on the wars of words and heavy breathing arising from Sacramento committee hearings and press conferences – but the most far-reaching California political news will unfold at UCLA’s De Neve Plaza.

That’s where the Commission on the 21st Century Economy will convene at 9 a.m. Tuesday to hear expert testimony about the “business net receipts tax,” a wonky notion that’s about to bust out of weed-whacking obscurity to take center stage in the most important political debate of 2009.

parsky

The commission – popularly known as the “Parsky Commission” after its chairman and Arnold go-to-GOP-guy Gerald Parsky – is a few weeks away from sending the governor its recommendations for retooling California’s clunky tax system. The tax structure is a vestige of Industrial Era policy-making that, as much as any single part of Sacramento’s broken governance system, is responsible for the endless and tiresome Hatfield-McCoy debates over the state’s tangled and troubled finances.

In a rare, and apparently random, moment of rationality and comity, Arnold and lefty Speaker Karen Bass got together a few months ago and appointed the group to figure out how to restructure state tax policy to avoid the boom-and-bust revenue cycles that lead Capitol denizens to panhandle one year and spend like inebriated seamen the next.

While Capitol D’s and R’s engage in yet another budget food fight with all the intelligence and wit of a Lite Beer commercial – “Tastes Great!” “Less Filling!” – some possible solutions to address the state’s long-running budget woe are hiding in plain sight, as framework proposals developed by the commission.

Calbuzz sources say that what the governor wants from the group – and what it’s likely to deliver – is a package of tax changes that raise more revenue – most likely through the aforementioned business receipts tax or a broader but reduced sales tax – and simultaneously lower other tax rates – like income and capital gains.

The political play is to produce a tax reform bill so clean it can be introduced in both houses with assurances no one will be allowed to bog it down with amendments.  Democrats will be able to avoid drastic program cuts and Republicans can claim they’ve cut taxes.  The bill breezes through both houses on an up-or-down vote and bada bing it gets signed by Arnold and everybody goes to dinner.  No muss, no fuss, no partisan fingerprints.

The commission has already assembled three basic packages, with three elements common to all: a) simplifying, flattening and reducing income tax rates; b) cutting business taxes; c) transforming the sales tax into a business net receipts tax.

The third item is the key to the whole deal. The tax, which has been put into effect in Michigan, Ohio and Texas in recent years, is similar to the “value added” tax widely used in Europe and elsewhere.

Basically, the net receipts tax would be paid by every business in the state as a percentage of its gross revenue – minus the cost of goods and services that it purchases from other companies.  Although consumers would not pay the tax directly, as they do at the register with sales tax, they would pay more to purchase goods and services because businesses would roll the tax, along with other costs, into its pricing.

The state would collect the tax on a “unitary” basis, meaning companies that operate both inside and outside of California would be assessed on a portion of their total sales volumes, not just the business they do within the state. Also, the tax would be levied on all types of business – not only on goods, but also on services, like doctors, lawyers and accountants, for example.

Here is an example of how the tax would work, as described by the California Manufacturing and Technology Association:

“The standard way to implement a NRT is to say a business owes some percentage on the price of the product minus all taxes previously paid on the goods. If NRT rates were 10 percent, a computer manufacturer would pay 10 percent of the $50 per unit price ($5) minus taxes previously paid by the semiconductor, software and peripheral manufacturers (say $2). In this example, the computer manufacturer would have a $3 tax liability…

“(The tax) is different from the conventional system of sales tax, because (it) is charged at every stage of value addition – whereas sales tax is imposed on the final value of a transaction only.”

In all three packages being considered by the commission, the receipts tax is the big revenue driver, unlike the present system, with its reliance on income and sales levies:

Package 1
Uniform personal income tax
* 6% rate – no exemption amount, no deductions, no credits
* 6% rate — $5k/person exemption amount, with certain deductions
Eliminate corporation tax
Eliminate state sales tax
Business net receipts tax

Package 2
Simplified personal income tax
* Three brackets, rates of 0%, 4%, 7% — current credits and deductions
Investment tax credit
Reduce corporation tax rate to 7%
Business net receipts tax

Package 3
Simplified personal income tax
* Three brackets, rates of 0%, 4%, 7% — $5k/person exemption amount, deductions for mortgage interest, charitable, property taxes
Eliminate state sales tax on business investment purchases
Reduce corporation tax rate to 7%
Reduce sales and use tax by 1%
Business net receipts tax

There are two other wild card factors still on the table: a possible 18 cent-a-gallon “carbon tax” on gas, diesel and jet fuel and cuts in capital gains rates, of between 1 and 5 percent.

None of this is a done deal, of course.

Getting a consensus recommendation from the commission, which includes conservatives like former Reagan economic adviser Michael Boskin and liberals like Santa Cruz County Treasurer Fred Keeley is by no means guaranteed. Even if commissioners do agree, their proposal will be fly-specked by lefty groups who will dislike elements that are not progressive, and industry groups, who will push for business-friendly changes.

As a political matter, forcing an up-or-down vote on a package in the Legislature would address what-about-me objections from all quarters, in the same way as the prohibition on amendments to congressional legislation produced by the military base closure commission in the 1990s finally solved that intractable problem. (Or like a Pete Wilson-Willie Brown deal from days of yore in Sacramento.)

After all, the impending bankruptcy of state government should be sufficient to show players at every point of the political spectrum not only that sweeping change is needed, but also that everyone will have to compromise to keep California from sinking into the 9th Circle of Hell.

For you herbivores,  Carl Joseph of the Franchise Tax Board has produced a deep-in-the-weeds analysis of the business receipts tax here.

– By Jerry Roberts and Phil Trounstine


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There are 2 comments for this post

  1. Anytime a commission gets together, I have to grab my wallet because I figure they are going to get me “in the end”. Can you imagine getting a bill from a doctor that includes a VAT? Just bloody wonderful!

  2. avatar rasky says:

    Hard to believe it all comes down to the equivalent of a cascade tax from the Middle Ages, which is what Federal tax types discovered when they played with the VAT idea back in the early ’80s. Thanks for useful rundown and esp. link to the FTB analysis.

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