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What’s Next for the 21st Century (Tax) Commission

Jun18

weedwhackerUpdated with new info from the California Finance Department.

The blue-ribbon commission rewriting California’s tax code moved ahead on a policy framework Tuesday – but the nut-cutting politics are still to come.

As Calbuzz forecast in eye-glazing detail on Monday, the California Commission on the 21st Century Economy is focusing on a new, broad-based “business net receipts tax” as the centerpiece of its proposed revision of the state’s creaky tax code.

The commission included the tax as part of one overall outline for tax reform. In advance of their next – and final – meeting on July 16, the panel instructed staff members to flesh out this broad strokes outline into a full, detailed proposal, complete with economic forecasts and models that show who pays how much under the proposed new tax structure. Staff also will prepare a look at a less radical option.

That’s when the fun will start.

Ostensibly, the commission has two basic, essentially mechanical, goals in their re-do of the tax system: 1) evening out tax collections from year-to-year with a revenue stream that is less volatile and more predictable than the current spike-and-trough system, which makes long-range fiscal planning a fool’s errand; 2) making changes that are “revenue neutral,” i.e. ensure that the new system doesn’t generate a big tax increase or decrease.

Inevitably, however, any change to the tax system results in winners and losers, and debating that inherently political issue will likely be the focus of the economic debate when the commission meets next. Chairman and Arnold ally Gerald Parsky has made clear he wants the ideologically diverse group to reach consensus on a final proposal, in order to deliver a package to the governor that is politically palatable to both parties in the Legislature.

The first package to be considered  approved yesterday has these key elements:

– Flattening the progressive, steeply-stepped state income tax rate system to a structure with essentially one rate of about six percent.

– Eliminating the state sales tax (local sales tax levies that have been approved for special purposes like transportation would remain in effect).

– Eliminating the corporation tax.

– Imposing the business receipts tax. It would be assessed on nearly 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.

– Charging a “carbon tax” on gasoline, diesel and jet fuel, calculated at the refinery at $20 per ton of carbon emissions. This would amount to about 18 cents-per-gallon of gas.

The second scenario would flatten the income tax structure, but not include the receipts tax.

As a political matter, there are at least three crucial issues that will underlie all the green eyeshade talk in the devil-in-the-details debate when the commission meets again:

** How regressive will the new system be? It seems clear that flattening income tax rates will redistribute some of the state tax burden away from the very wealthy and towards the middle class. In making its final recommendations, however, commissioners can make adjustments in this area – by increasing the income level at which people pay zero tax, for example, or by directing some carbon tax revenue to offset an increase in the earned income tax credit – as part of its effort to calibrate a tax calculus that will sell politically.

** How revenue neutral will it be? Although the commission is charged with designing a system that does not raise taxes, the net receipts tax, with its application to more businesses than the sales tax, plainly carries with it the possibility of expanding the base of state tax collections, thereby increasing general fund revenues in future years.

** How will it play with the Legislature? The answers to the first questions will largely determine whether the commission’s proposal will attract the kind of bipartisan support Schwarzenegger hopes to win. This means that Republicans must feel they’re not voting for a tax increase in disguise, while Democrats feel assured that over time the new structure will produce enough revenue to pay for their favored education, welfare and other programs.

As we reported earlier, Schwarzenegger would like the commission to deliver a report that can be quickly transformed into a clean bill for introduction and swift action in the Legislature. He is hoping to win support of the legislative leadership on the policy merits, in order to gain the political backing to force an up-or-down vote on the package in the Legislature.

Given the current toxic climate in Sacramento, passing major tax legislation would be an impressive victory, and give Arnold a second major accomplishment – after voter approval of the Prop. 11 reapportionment reform last fall – to use in pushing back against the widespread perception that his governorship has been a failure.

– By Jerry Roberts and Phil Trounstine


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There are 4 comments for this post

  1. avatar jskdn says:

    From the very beginning the implicit “mandate” for this commission was to cut back the progressiveness of the income tax in California, with its inclusion of capital gains, which is the greatest source of variability of revenue for the state. The irony is that Capital “P” Progressives, with their unwillingness to flatten spending and bank boom time revenue for the inevitable downturns, create the rationale it’s using for removing progressive taxation.

  2. avatar Roberts and Trounstine says:

    Thanks to Jessica Mar of the Department of Finance for clarifying a couple points we mis-reported in earlier version: the commission did not formally adopt the revision we described in the post; as we said, they will consider it at their next and final, meeting, but will also look at a less radical set of changes that would flatten the income tax rates but not include the business receipts tax. Calbuzz regrets the error.

  3. avatar Brian Leubitz says:

    The plans leaking out of the Tax Commission are completely unacceptable, and should be completely dismissed by Democrats out of hand. In the name of predictability, we’re going to tax the rich less? Our problem isn’t the income tax. With a few tweaks, like adding some brackets between $50K and $1million, it is fairly workable.

    The problem is Prop 13. Income tax is inherently a variable tax. Most states balance that out by using the more stable property tax. Unfortunately, Howard Jarvis and his gang of henchmen kneecapped the state in the 70′s and we’ve been struggling ever since.

    Cutting taxes on the rich isn’t sound policy, it’s just Bush tax cuts in California.

  4. avatar siessdav says:

    Only a person that can’t manage his own finances would go for gutting Prop 13

    Whenever bad times come, spending or outgo must be curtailed to make ends meet.

    This budget was paved over with DEBT for 5 years, even with ever increasing revenues. Spending increases outstripped the revenues, and now we are in a very bad recession. The solution is to re-tool the govt and rip up the deals with public employee unions. Don’t cover illegals that don’t add much to the tax revenue base in the first place. Cut out all the commissions, and start pumping oil off the coast to get revenue that way. (the technology is there, do you see any oil spills in the gulf, no!)

    As long as Democrats own the two legislative bodies, we will be in the pickle. Vote for any other party that will take a real look at spending and cut to sustainable levels .

    The rich already are taxed to the hilt. They will just move their businesses elsewhere and move their ability to HIRE PEOPLE out of the state to Arizona and Nevada.

    Don’t listen to people like the person above. There is no more money.

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