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

Thursday, June 18th, 2009

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

What Happens If (When) Budget Props Go Down

Friday, May 1st, 2009

By Greg Lucas, Calbuzz Capitol Bureau

arnoldshotupThe state’s budget plot sickens.

April income tax and corporate tax collections fell nearly $2 billion short of expectations – and voters seem poised to reject three key propositions on the May 19 special election ballot, adding $5.8 billion to an already serious problem.

Given the sorry state of the state’s economy, the gap between revenue and spending commitments is only going to get bigger – the consensus being double digit billions for the foreseeable future. So what will Governor Arnold Schwarzenegger and the Democrat majority Legislature do on the morning of May 20, assuming current polling trends hold?

First will come the mandatory, flat-footed dance macabre: Rounds of obligatory teeth-gnashing and garment-rending over how draconian spending cuts will devastate the most vulnerable among us – that would be the Democrats — and, from the other guys, how hard-working Californians will be crippled by stealing more of their livelihood through higher taxes to feather the nests of soul-less bureaucrats.

Then what will really happen?

There are basically only three ways to balance a budget – increase revenues, decrease spending or a combination of both. A combination of both would seem the most rationale strategy – but don’t look for that to happen.

In February, Democrats were able to lure a handful of Republicans into voting for a budget that temporarily increased taxes by more than $12 billion, including a 1-cent boost in the sales tax that took effect April 1. Those tax increases will be in place for this and next fiscal year, even if Prop. 1A, which would extend the taxes two more years, loses on May 19.

The price tag charged by GOP senator Abel Maldonado for his vote – in the dead of night – included allowing a statewide vote on a constitutional amendment to allow open primaries; getting rid of an increase in the gas tax in the budget; and placing Prop. 1F on the May 19 ballot prohibiting lawmakers from receiving salary raises in ugly budget years.

Because Democrats blithely paid his ransom, they effectively set a new floor. Now, similarly minded vote-traders will raise the extortion bar far higher. High enough that even Democrats eager to strike a deal, any deal, may find the price too dear.

Some Republicans, like several members of the Assembly, voted for the budget without any political quid pro quos, earning the ire of their party and, in two instances, recall attempts. Senate Republican leader Dave Cogdill of Fresno lost his post when a majority of his caucus opposed the taxes he had negotiated in the budget. They replaced him with Dennis Hollingsworth of Murrieta who has repeatedly voiced his refusal to lend Republican support to any further tax increases.

The GOP governor has gotten over his pledge not to increase taxes but legislative Republicans simply don’t fear or even respect him and would be more likely to do the opposite of whatever he says – just as, in most cases, they have already.

So if the chances of Republicans voting again to jack up taxes are slim to none – and slim left town – that means even further ratcheting down of state spending. So where would the cuts fall?

Mostly on public schools. The budget signed by Schwarzenegger in February gives schools 43 percent of the state’s $92 billion general fund. Like Willie Sutton, who robbed banks because that’s where the money was, budget cutters turn first to the biggest ticket item, irrespective of numerous speeches by lawmakers and the governor about education’s importance.

Second biggest call on general fund revenues is health and human services programs like welfare and Medi-Cal, the state’s health care program for the poor. Those programs comprise 34 percent of general fund spending for the fiscal year beginning July 1. Higher education is 13 percent; prisons are 11 percent.

Democrats are not eager to cut further into state spending – some $15.7 billion was axed in the current budget. Their leadership has also been snubbed by some of their most generous givers – public employee unions who were angered by this year’s spending cuts.

So, as they have in the past, Democrats likely will try to close some of the budget gap through “fees” which can be approved by majority vote, rather than general taxes, which require two-thirds.

The Hail Mary play would be what the Democrats threatened to do in December – pass a “revenue-neutral” majority-vote budget that cuts out the ability of the GOP to influence it.

Cities and counties fear that, as it has in past fiscal crises like 1991, the state will transfer some of its responsibilities to reduce state expenditures. This time, though, cities and counties worry all that will come their way will be responsibilities and no cash to pay for them.

If passage of this most recent budget – and the previous one, which set a record for tardiness – are any indication, rigid Republican lawmakers, unfettered by a governor capable of reining them in, are going to hold what Willie Brown calls the “whip hand” until California ditches its two-thirds vote requirement.

Greg Lucas is a Sacramento-based political writer who covered state government for the San Francisco Chronicle. He blogs about the people, policies and plots of the Capitol at www.californiascapitol.com.