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Posts Tagged ‘value added tax’



What’s Wrong with the Parsky Panel Tax “Reforms”

Monday, September 14th, 2009

threecardmonteBy Jean Ross
Special to Calbuzz

The Commission on the 21st Century Economy,  the “blue ribbon” panel chaired by Republican Gerald Parsky and charged with recommending changes to California’s tax system, appears poised today to  recommend a massive shift in the cost of financing public services from the wealthy and corporations to middle-income families.

The biggest winners would be the state’s millionaires, who would receive personal income tax breaks averaging $109,000 per year. The biggest losers would be middle-income families who would receive a tiny, if any, reduction in their personal income taxes and who would pay substantially more for goods and services due to the new “value-added” tax the Commission proposes to replace revenues lost due to the tax cuts for the wealthy and repeal of the corporate income tax.

The magnitude of the shift proposed by the Commission is nothing short of stunning. The changes to the personal income tax structure alone would reduce income taxes paid by the poorest 62 percent of California taxpayers by $4 per year, on average, while providing six-figure breaks to the millionaires. The bottom 81 percent of the income distribution – the vast majority of all Californians – would receive 10 percent of the personal income tax cut, while the top 0.2 percent would receive 27 percent of the benefits.

And that’s the “good news.” The Commission would repeal the corporate income tax and the state’s portion of the sales tax and replace it with a new tax on business net receipts – a tax that has never been tried anywhere in the US – that the Commission’s own consultant notes would raise prices of goods and services, while exerting downward pressure on wages and benefits.

The Commission’s proposal is designed to tax a broader range of goods and services than the state’s existing sales tax. That’s not entirely a bad idea. There are many services that could and probably should be taxed in order to eliminate some of the biases of the state’s existing sales tax. But the Commission would throw the good “loopholes” out with the bad. It would, for example, tax groceries to finance tax cuts for millionaires, while taxing child care so that oil companies would no longer have to pay the corporate income tax.

The new tax would also encourage relocation of California jobs to foreign firms that would be beyond the reach of California’s tax collectors. Incentives for offshoring could be created by provisions rooted in a highly technical, but extremely important, area of tax law. So-called “nexus” issues are among the most contentious in tax law and govern what activities states can and cannot legitimately tax.

There are considerable grounds to worry that courts would constrain the state’s ability to tax service providers – such as call center operators or consulting firms – located entirely outside of California. Should the courts rule against the state’s ability to collect the tax, billions of dollars of revenues – sorely needed to balance an out-of-balance budget – could be lost, and businesses would receive substantial tax savings from moving jobs out of California.

A letter signed by some of the of the nation’s most prominent tax policy experts notes the potential for the new tax to be challenged based on the “nexus” issues discussed above and notes that “there is almost no experience in the United States or abroad” with a tax similar to that proposed by the Commission. [Note: This important letter, dated Sept. 5, is NOT posted on the Commission web site, where public correspondence is posted only up to Sept. 4.]

Some might be willing to support these changes if they ended California’s persistent budget crises. But again, the Commission’s own estimates predict that revenues raised by the new tax system would grow more slowly over time than those raised by the state’s current tax system. Thus, the Commission’s recommendations would lead to larger, not smaller, budget shortfalls in the future.

Over the five-year period covered by Commission estimates, the difference in revenue growth would be substantial – the increased deficit under the proposed tax code would be approximately equal to what the state spends for today for the University of California and California State University systems combined.

Finally, it is important to note that the Commission totally side-stepped straightforward options for aligning the state’s tax system with the 21st economy that could be accomplished without shifting taxes from the top to the middle or imposing an entirely new, very risky, tax regime.

The Commission could have encouraged lawmakers to aggressively pursue collection of sales tax on out-of-state retailers that currently go untaxed, leaving California businesses at a competitive disadvantage. It could, as noted above, have recommended extending the state’s existing sales Jean-Ross-smalltax to a broader array of services and using the additional revenue raised to lower the sales tax rate.

Similarly, the Commission could have used tax policy as a tool to mitigate, rather than exacerbate, the widening gaps between the top and middle- and top and lower-income households. This, alas, is the path not taken and an opportunity for real progress foregone.

Jean Ross is the executive director of the California Budget Project (CBP). The CBP’s analysis of the Commission’s proposals is available here.

Red-Blue Clash Emerges in 21st Century Commission

Monday, July 13th, 2009

fred keeley_0102The Commission on the 21st Century Economy, headed by Schwarzenegger pal and Republican bigwig Gerald Parsky, has been developing a plan to overhaul California’s tax system that includes flattening personal income tax rates and broadening the sales tax, as loyal Calbuzz readers know.

Instead of achieving the consensus sought by Parsky,  however, the commission faces an ideological (and factual) conflict at its meeting in San Francisco on Thursday, as liberal members are now proposing an alternative plan. Their draft proposal, among other things, rejects as too regressive a flat income tax system, and also suggests amendments to Proposition 13.

The commission’s Blue Wing (as in blue state/red state) is questioning underlying assumptions of the Red Wing flat-taxers, like: 1) Is California actually unfriendly to business? 2) Are jobs and businesses actually fleeing California? 3) Does improving competitiveness demand elimination of the progressive tax system and the sales tax?

The introduction of the Blue Plan has already raised partisan political hackles between appointees of the Republican governor and those of Democratic legislative leaders.

Former GOP Assembly Speaker Curt Pringle, in a letter obtained by Calbuzz, accused former Democratic Assemblyman Fred Keeley, one of the leaders of the liberal wing of  “crafting a plan in private” and end running commission procedures with “an 11th hour presentation.”

“Why shouldn’t every commissioner gather their respective philosophical mates and assemble and submit competing plans in the weeks and even the months ahead,” Pringle said.

But Keeley, now the Treasurer of Santa Cruz County, insisted he has honored commission procedures, and has been raising similar issues in meetings since March.

boskinThe conservative Red Wing, led by Parsky and Michael Boskin of Stanford, previously had hoped that their plan was on track for recommendations to flatten and simplify the income tax, eliminate the business tax and create a net receipts tax, like a European value added tax, to replace the sales tax.

But after the elements of that idea – which became known as the Red Plan — were well-publicized and thoroughly examined by the commission’s staff, the liberal wing on the commission, led by Keeley and Christopher Edley, dean of the Boalt Hall School of Law, came forth with an alternate Blue Plan.

Still in draft form, their plan would:
– Require that all state revenues that are 5% or higher than Department of Finance estimates be placed in a rainy day reserve fund.
– Make no change to personal income taxes, but reallocate capital gains tax revenue, with one-third going to the General Fund; one-third to debt and retirement fund payments; and one-third to the reserve fund
– Reduce the sales tax by 2% and expand it to cover, not just goods, but also a wide variety of services.
– Reduce the rate of the corporations tax, but broaden its base by restricting deductions on business losses and rolling back tax breaks for companies that operate outside California
– Subject the controversial business net receipts, or value-added, tax to further study.
– Adopt a pollution surtax on carbon-based fuels
– Amend Prop. 13 elements of the California Constitution to allow local governments (cities and counties) to increase existing local sales tax by up to 1.50% (or any .25% fraction thereof) by a majority vote of its electorate, instead of the currently required two-thirds,.
– Amend Prop. 13 to change the non-residential property tax rate from 1% to 1.50%, effective upon change of ownership, essentially establishing a “split roll” assessment system.

The Blues also would require display of all tax expenditures – special tax breaks, credits, deductions and exemptions – in the governor’s budget, and require them to sunset in no more than five years.

At this Thursday’s meeting at UCSF, the Blue Wing will ask that their proposals be given the same thorough analytical treatment that the Red Wing proposals have received and then be considered at the July 22nd meeting at UCLA.

The Blue Wing rebellion was first reported by Dan Walters of the Sac B-, who suggested the commission is headed for deadlock. That’s certainly possible, given the stark differences in world view commissioners have, but Keeley, for one, isn’t so sure.

He believes the commission can come up with a compromise, Purple Plan that combines elements of the two approaches.

It wouldn’t include a flat tax on income, but it might mitigate some of the brackets and could easily address capital gains. And while it might not replace the sales tax with a net receipts tax (which Michigan has had trouble predicting), it might lower the sales tax rate and broaden its application to services, as many other states have done.

“It depends how deeply people want to hold onto their ideology versus producing a game-changing product,” Keeley said.

The Budget News That Really Matters

Monday, June 15th, 2009

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