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BNA’s Laura Mahoney on the Final COTCE Meeting

Here is BNA’s Laura Mahoney’s report on the final meeting of the “Tax Commission” which took place in Berkeley on September 14. Her report on the September 10 meeting is here.

Reproduced with permission from Daily Tax Report, 177 DTR H-1 (September 16, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033)

Plan to Overhaul California Tax System May Get Lukewarm Commission Support

SACRAMENTO, Calif.—An appointed commission will recommend that lawmakers consider a vast overhaul of the state taxation system, but with at least three commissioners saying Sept. 14 they will not endorse the plan, it is unclear how strong a message of change the report will send to lawmakers and the public.

At its final meeting in Berkeley, the 14-member Commission on the 21st Century Economy fine-tuned its core proposal to enact a new tax on business net receipts of no more than 4 percent as a way to cut the state’s reliance on volatile receipts from personal income taxes and capital gains.

In exchange for a new business tax, which is modeled on a value-added tax, the commission will call for elimination of the corporate income tax, complete or near elimination of the state portion of the sales and use tax, and a reduction and flattening of the personal income tax to only two brackets.

Also in the core proposal are a call for a strong “rainy day fund” to capture revenue in strong years to be used during economic downturns, and creation of a new tribunal, such as a tax court, to adjudicate disputes between taxpayers and state tax authorities.

Chair Gerald Parsky said at the end of a six-hour meeting Sept. 14 that he will circulate the report among members in the next few days, and he hopes at least 10 commissioners will sign it. Only Parsky and two or three other commissioners have clearly stated they back the proposals in recent weeks, and another three have said they will not sign on.

Difficult Task, Parsky Says

Parsky acknowledged the difficultly of the commission’s task — to recommend revenue-neutral ways to reduce the volatility of the state’s tax system that promote economic prosperity and ensure the system is sound, fair, and equitable.

“It’s like pushing Jell-O,” he said.

Parsky also acknowledged that lawmakers may not embrace the complex proposals. He said he will craft an introduction to the final report, to be presented to Gov. Arnold Schwarzenegger (R) and lawmakers by Sept. 20, that asks them to “seriously consider” the recommendations for further study and eventual adoption.

“We recognize as well as anyone that we didn’t have the time nor capacity to explore all elements, but we have had enough time to say that the overlying problems that exist within California require thinking outside the box,” Parsky said.

“Inherent in this proposal is a signal to the entire populous and certainly the Legislature to please hold your fire.”

The core package has the backing of commissioners John Cogan, a senior fellow at the Hoover Institution and public policy professor at Stanford University; and Christopher Edley, dean of the University of California, Berkeley Boalt Hall School of Law. They support the package because they believe it would reduce revenue volatility and overall tax rates, expand the tax base, and be more reflective of the modern economy.

Several other members appeared to support general principles in the plan, but did not say during the meeting whether they would sign on to the final report.

Parsky and several other commissioners defended the proposal from criticism that it reduces the progressivity of the current tax system, especially with its changes to the personal income tax, because it would mean a significant tax cut for taxpayers earning more than $100,000 a year.

“It is unfair to characterize what is being suggested as turning a progressive system into a regressive system,” Parsky said.

Perception Could Be Problem, Halvorson Says

Commissioner George Halvorson, chief executive officer of Kaiser Foundation Health Plan, pointed out that even if it is not a regressive plan, “it could be perceived as that and be dead on arrival” at the Legislature.

The three commissioners who said they will not endorse the proposals had differing ideological reasons for their decision, but each of them pointed out that the commission heard scant evidence to justify or validate the dramatic change in the state’s tax system.

“I am not convinced it’s the direction California should go,” said Commissioner William Hauck, president of the California Business Roundtable. “I think this is an idea that is nowhere near cooked.”

The business net receipts tax proposal is based on assumptions that he said he has not been able to verify, and may or may not turn out to be true. Still unknown is the potential impact on a range of businesses, from sole proprietors to major corporations, he said.

Hauck said not enough information about the consequences of the proposal are available “for us to have the kind of confidence in this tax that seems to be imbedded in the discussion we’ve been having.”

Commissioner Fred Keeley, a former member of the Assembly and current treasurer of Santa Cruz County, also said he would not endorse the report, partially because no other commissioners supported his proposal to impose a new, indexed tax on gasoline and diesel fuel purchases that would begin at 18 cents a gallon. That proposal, which Keeley presented to the commission in draft legislative form, was dropped completely from the final report.

But Keeley also said the core plan lacks evidence that it would be a positive move for California. He also raised concerns about the impact of the proposal on low- and middle-income taxpayers, some of whom would see a slight increase in their overall tax burden at the same time that wealthy taxpayers would benefit from a large tax overall tax cut.
“I don’t think that at this time, in this state, that any regressivity makes sense,” Keeley said. “It has been difficult during the last two and a half months to identify any of the support for this. There is a stunning lack of any visible organized or unorganized support.”

‘Wrong Direction,’ Pomp Asserts

Commissioner Richard Pomp, a law professor at the University of Connecticut, could not attend the meeting but submitted a 21-page memo Sept. 14 titled, “Why I think We Are Heading in the Wrong Direction.”

In the memo, Pomp restated misgivings he aired in previous meetings about the untested business net receipts tax, and its multiple complications from the question of nexus to the disadvantage it would create for California-based companies.

He continued to press for retaining the corporate income tax, but revitalizing it by examining and eliminating tax currently available tax credits and deductions if they are not effective, and eliminating several major corporate tax breaks enacted in recent months. Key among those breaks is a new elective single-sales factor formula for multistate corporations.

“I am at a loss to explain why we would replace a tried and true tax, the corporate income tax, one that can be rehabilitated, with an unknown tax,” Pomp said.

The final report will contain three sections: one that lists recommended statutory changes that can be enacted by the Legislature, a second that lists recommended constitutional or other changes that would need approval from voters, and a third that lists other ideas worth further study. The core package will be contained in sections one and two. The third section will contain other ideas raised by commissioners over the past nine months, including a suggestion that the state allow oil drilling in offshore waters and raise revenue from oil royalty payments. The third section might contain a suggestion that the state charge a minimum tax to low-income individuals and businesses to promote a direct stake in the state.
Schwarzenegger has said he will call a special session of the Legislature to weigh the commission’s report in the next few months.

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