The California Commission on the 21st Century Economy convened its second meeting February 12 on campus at the University of California at Los Angeles, and appeared to narrow its focus. Unlike the first meeting, in which the commission appeared to lack direction with respect to the type of structural reforms to pursue, the Los Angeles meeting's agenda honed in on a few key items, with a sales tax on services apparently topping the list.
The day before last week's meeting, Governor Schwarzenegger issued an executive order expanding the commission from 12 to 14 members, with one new member appointed by the governor and one appointed jointly by the Assembly speaker and Senate president pro tem. The governor did not explain his reasons for expanding the size of the commission when it is halfway through its four-month existence.
In the same press release announcing the expansion of the
commission, the governor announced that he appointed California Business
Roundtable President William Hauck, a Democrat from Sacramento, to fill one of
the new positions. The other new slot is filled by Democrat Edward De La Rosa,
who sat on the commission at its January meeting but had not been formally
announced as a commissioner.
Commission Chairman Gerald Parsky began the meeting by reiterating the policy goals of the commission: 1) Establish a "21st century tax structure for a 21st century economy"; 2) Provide revenue stability; 3) Promote long-term prosperity; 4) Improve California's ability to compete for jobs and investment; 5) Reflect principles of sound tax policy, such as simplicity, ease of compliance, and predictability; 6) Apply the principles of fairness and equity. He admonished commissioners that the commission's focus ought to be on the revenue side of the equation, not on state spending reforms, and urged them to view the commission's work in the context of what lawmakers already are accomplishing regarding the overall budget and tax structure.
The bulk of the agenda was devoted to evaluating the idea of a sales tax on services. Charles McLure, senior fellow at the Hoover Institution at Stanford University, suggested that California "reduce the nuttiness of our state's tax system" in part by expanding the sales tax base to include services, while excluding services and products provided to businesses. He opined that with those exclusions, a rate increase would be necessary to achieve revenue neutrality.
Eric Miethke, a partner in the law firm of Nielsen, Merksamer, Parrinello, Mueller and Naylor, was the first panelist to question data supporting the push toward tax base expansion – the erosion of the sales tax base. He pointed out that of the 6.25 percent state share of the California Sales and Use Tax, 20 percent has been diverted to uses outside the general fund. According to Mr. Miethke, in 2007-08, almost $5.4 billion in sales tax revenue was diverted from the general fund to earmarked uses. "These diversions could be viewed as 'erosion of the rate,' which is just as relevant to discuss as 'erosion of the base,'" he said.
The commission's discussion also included Proposition 13. Jon Coupal, president of the Howard Jarvis Taxpayers Association, explained that Proposition 13 has stabilized revenues for local government, as untaxed equity provides a cushion during recessionary times. In addition, he disapproved of a split-roll property tax (a system in which commercial property does not receive Proposition 13 protection), claiming that it would lead to increased revenue volatility.
Lenny Goldberg, of the California Tax Reform Association, a tireless advocate of a split-roll property tax, claimed that Proposition 13 protection for commercial property is irrational and has been a "fiscal policy failure." Siding with Mr. Goldberg, Mr. Keeley indicated that Proposition 13's acquisition value assessment system has resulted in unfairness, as it is "indifferent to underlying land use." Commissioner Becky Morgan expressed belief that Proposition 13 was unfair based on the variations in property taxes paid among similarly situated homeowners.
The business community, including Cal-Tax President Teresa Casazza, Kyla Christoffersen of the CalChamber, Joseph Crosby from the Council on State Taxation, and Michael Shaw of the National Federation of Independent Business, were allotted five minutes each to discuss their "observations."
Ms. Casazza recommended that the state regularly realign state tax laws to conform to non-controversial provisions of federal tax laws to ease taxpayer compliance burdens. "Fewer taxpayer errors resulting from differences in state and federal tax laws will improve taxpayer compliance and increase revenues that are due to the State of California," she said. She also recommended a rainy day fund as a means of balancing out ebbs and flows in California revenues. Other panelists echoed Cal-Tax concerns regarding a split roll, aggressive state tax nexus policies, and a sales tax on services. All agreed that a healthy economy would provide the greatest source of state revenue.
Commissioners Keeley, Parsky, Richard Pomp and Christopher Edley Jr. were dismayed that the business community did not offer recommendations for major tax law changes, stating that their "remarks were not helpful." (Cal-Tax: It would appear that, in the eyes of the tax commission, "helpful" remarks are limited to those that support the premise that the tax system actually needs a major overhaul.)
Fred Silva of California Forward closed the last panel discussion with a suggestion for a multi-year budgeting approach that is performance-based and requires new programs to identify a funding source. He stated that the revenue volatility problem should be solved by the budget process rather than the tax structure, with a rainy day fund.
Mr. Parsky told the commission that an April 9 meeting in Davis, previously listed as a tentative date, will be needed.
Cal-TaxReports, February 17, 2009
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