On July 16, the Commission on the 21st Century Economy held its sixth meeting, on campus at the University of California at San Francisco. Instead of concluding what was expected to be the commission's last meeting, however, the panel asked the governor to extend the commission's deadline until September 15. The commission also put a variety of new tax proposals on the table, including a split roll property tax and an oil severance tax.
Tension was evident in a flurry of correspondence between commissioners before the meeting began. Weeks prior to the meeting, Commissioner Fred Keeley met with Democratic legislative staff and tax agency staff to discuss the packages that were to be considered at the July 16 meeting. From that meeting developed the so-called "Blue Proposal," reportedly named for its Democratic conception. After the "Blue Proposal" was forwarded to the other commissioners, some commissioners expressed concern that the chair might allow a full hearing on that proposal when other commissioners had refrained from offering their own alternatives in the interest of comity.
After the exchange regarding presentation of the "Blue Proposal," commission staff sent a letter to all commissioners reminding them "about the responsibilities commissioners have under California's Open Meeting Law (Bagley-Keene Act or Act)." The July 14 letter from Mark Ibele stated: "Serial Meetings are prohibited under the Act. A serial meeting occurs when there is a series of communications, each of which involves less than a quorum but which taken as a whole involves a majority of the body's members. The Attorney General's Office has opined that an e-mail discussion by members regarding upcoming board business is a serial meeting. … Given this, Commissioners are reminded to refrain from communicating with each other either in writing or verbally, as a quorum or in serial meetings."
Under this backdrop, Chairman Gerald Parsky opened the July 16 meeting with a public comment period in which individuals were encouraged to submit their full comments in writing, but to limit oral presentations to one minute each.
In his opening remarks, Mr. Parsky laid out the framework for the commission's work and stated that the commission "shouldn't shy away from differing points of view." The chairman reiterated that he would like unanimous consent from the commissioners for a complete package. He also revealed that the Legislature had made a commitment to consider the package as a whole for an up-or-down vote. Mr. Parsky indicated that he would like to present the package in two sections: the first will include revenue-related statutory changes that can be voted on and endorsed unanimously; the second will include constitutional changes with the same characteristics.
Mr. Parksy also stated that he would like to identify non-revenue-related ideas for reform to recommend to others to achieve comprehensive fiscal reform. In addition, he laid out four criteria for evaluation of the proposals: economic growth, revenue volatility, fairness and simplicity.
The proposals before the commission for consideration were:
Tax Package 1
·
Personal Income Tax
o
Uniform
rate of 6 percent
o
Exemption
Amount (0 percent bracket for non-itemizers)
o
Deductions
for mortgage interest, charitable giving, property taxes
o
Phase-out
of deductions
·
Eliminate
Corporate Income Tax
·
Eliminate
State General Fund Sales Tax
·
Impose
Business Net Receipts Tax (rates of 2.7 percent and 3.3 percent have been
discussed.)
Tax Package 2
·
Personal
Income Tax
o
Simplified
Structure (3.75 percent and 7 percent brackets)
o
Exemption
Amount (0 percent bracket for non-itemizers)
o
Deductions
for mortgage interest, charitable giving, property taxes
o
Phase-out
of deductions
·
Corporation
Tax
o
Reduce
rate to 7 percent
·
Fuels
Tax
o
18 cents
per gallon on transportation fuels
Substantive discussion began with presentation of a revenue chart comparing year-over-year revenues for five years resulting from current law, Tax Package 1 (which includes the Business Net Receipts Tax [BNRT]) and Tax Package 2 (which includes a fuels tax). The chart showed that after five years, revenues would be roughly the same under the three options.
Commissioner Bill Hauck questioned whether revenue could be predicted accurately when the BNRT has yet to be defined. Mr. Parsky responded that the BNRT needed further vetting, but the analysis before the commission was to determine whether a BNRT is worth pursuing further. Department of Finance representative Phil Spillberg, who has provided staff support for the commission, acknowledged that the numbers in the chart do not reflect transition issues or possible behavioral changes.
The staff indicated that under the evaluation criteria, Tax Package 1 would: (1) increase economic growth by encouraging investment and eliminating the sales tax on business inputs; (2) reduce volatility by flattening the Personal Income Tax rates, eliminating the corporate income tax and sales tax, and expanding the tax base by increasing the number of taxpayers subject to tax; (3) increase fairness by reducing progressivity and increasing the number of taxpayers; and (4) increase simplicity by reducing the number of PIT brackets and eliminating the corporate income tax. However, the measure also would reduce simplicity by adding the BNRT.
Under the same criteria, Tax Package 2 would: (1) encourage investment but increase taxes on fuels, which would lead to higher business costs; (2) moderately reduce volatility due to tax rate reductions; (3) reduce progressivity somewhat by increasing the number of taxpayers; and (4) increase simplicity by reducing the number of PIT brackets, but increase complexity by adding the fuels tax.
Most of the commissioners' questions involved the BNRT. Notably, Commissioner John Cogan and others were concerned about an embedded incentive in the BNRT to use independent contractors outside the state to avoid tax. Commissioner George Halvorson, a former small business owner, was troubled by the complexity of the BNRT regarding depreciation schedules. Commissioner Richard Pomp noted the complexity of the BNRT with respect to apportionment of royalty income, and the fact that the BNRT would necessitate an economic nexus standard that has not yet been upheld by the United States Supreme Court. Commissioner Curt Pringle observed that both proposals rely heavily on the Personal Income Tax, and yet that is the origin of California's revenue volatility.
Professor Pomp was most concerned that the commission would propose to swap a known tax structure for the unknown. He used the example of two businessmen who are considering swapping businesses. The first businessman says, "I would like to swap my business with you, but I don't really know my projected earnings or have a record of what I've earned in the past." Professor Pomp stated that a businessman would be nuts to swap out his business with such unknown data. Similarly, he said, "It's nuts to swap something known for the unknown" when it comes to the state's tax structure.
Mr. Parsky acknowledged that the commission needs to do "significant additional work" and ask outside experts for input, but said the commission should not be afraid to adopt a new tax just because it is new. Mr. Edley reminded the commission that the BNRT would be phased in.
Mr. Parsky listed a host of items that would be on the table for potential evaluation and inclusion in the commission's final recommendations. They are:
·
Extension
of sales tax to services.
·
Elimination
of the corporate income tax.
·
A new
tax on fuels.
·
Oil
severance tax.
·
Hard "rainy
day" fund.
·
Tax
court.
·
Split
roll.
Mr. Parsky ended the meeting by suggesting that it may be possible for commission staff to put together an analysis of a split roll property tax, and by suggesting an extension of time for the commission's recommendations to September 15. Mr. Pringle suggested an extension until the end of the year. An executive order from the governor is needed to extend the deadline beyond the current July 31 date.
The commission also announced that it has canceled the meeting that had been tentatively scheduled for July 22 in Los Angeles.
Cal-TaxReports, July 20, 2009
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