The Commission on
the 21st Century Economy held a workshop August 28 at the University of
California at Los Angeles campus to continue the discussion of the proposed
Business Net Receipts Tax (BNRT). The meeting came on the heels of an August 26
workshop in San Francisco and may set the stage for the next full commission
meeting, scheduled for September 10 at UCLA. (The commission also has tentatively
scheduled a meeting for September 14.)
(Cal-Tax: While the agenda for the commission's final meeting does not
include any specifics, the Calbuzz.com
blog reported September 3 that Commission Chairman Gerald Parsky
"has pledged that his group's complex proposals will be available in draft
bill form for public consumption 72 hours before the commission's next meeting
on September 10." However, as of 48 hours before the meeting, the only
language available was for Commissioner Fred Keeley's
proposal to double the state's gas tax.)
At the August 28
workshop, only six of 14 commissioners (Chairman Parsky
and commission members Ruben Barrales, Christopher Edley Jr., John Cogan, Curt Pringle and Jennifer Ito) were
present to discuss the proposed BNRT. However, more outsiders participated as panelists
at the Los Angeles meeting than in San Francisco.
Panelists included Russell
Goldsmith, chairman and chief executive officer of City National Bank; Mike Rockenbach, chief financial officer of Emulex; Eric
Miethke, representing the Motion Picture Association of America; Jim Euphrat, tax manager for NASSCO GD; Jeff Barnett, vice president
for taxes for Edison International; Marty Keller, the governor's appointed director
of the California Office of Small Business Advocate; Greg Lippe,
managing partner at Lippe, Hellie,
Hoffer & Allison LLP; and Hatef
Behnia, tax partner for Gibson, Dunn & Crutcher.
Commission Chairman Gerald
Parsky opened the hearing by reiterating that a
transition period for the BNRT is being contemplated. He said the BNRT may
begin in 2011-12 and be phased in over five years. The plan would be to
gradually phase out the corporate income tax and reduce personal income tax rates
while phasing in the BNRT.
The ultimate rate
for the BNRT still has not been revealed. (Cal-Tax:
This is very troubling. The proposal is moving closer and closer to a
legislative vote, but a thorough economic assessment cannot be conducted unless
the tax rate – a critical factor for any tax – is disclosed.) Under Mr. Parsky's plan, corporate income tax and PIT rates would be
reduced over five years, while the BNRT rates would increase. This proposal has
caused some to be skeptical that the BNRT could be phased in, but the corporate
and personal income taxes might not be phased out or reduced as promised.
The first panelist
was Mr. Goldsmith of City National Bank. He suggested that banks should receive
differential treatment under the BNRT due to their business model, in which money
is equivalent to goods, and interest is equivalent to rents received for those
goods. He stated that any tax structure that includes gross receipts also should
contemplate interest income and expense (interest income should be included in
gross receipts and credit losses and risk should be deducted as costs).
Mr. Goldsmith also
said that disallowing deductions for employee compensation would discriminate
against labor-intensive companies, including banks, that
succeed as a result of highly compensated employees. "If the new tax
system makes hiring people more difficult, then it is harder to grow and create
jobs," he said.
The need to preserve
venture capital in California was another of Mr. Goldsmith's concerns. He
mentioned that start-ups endure a number of unprofitable years, and that this
should be taken into account when crafting a new tax structure.
Mr. Goldsmith stated
that the number-one rule should be, "Do no harm." Consistent with that
principle, he asked commissioners to consider several questions: How would the
new tax structure impact the tax liability of California industry? Would the
new tax structure hurt the business climate? Would the new tax structure hurt
job creation? How would the new tax structure impact prices and competition?
Mr. Parsky concluded the discussion by admitting that applying
the BNRT to banks is very complicated, and he suggested that examples be
developed to demonstrate how a BNRT would affect banks.
Mr. Miethke provided
testimony on how the BNRT would impact the movie industry in California. He voiced
several concerns and questions:
·
The BNRT
has a built-in incentive to outsource and offshore, which is inconsistent with
California's efforts to encourage in-state film production.
·
The BNRT's inclusion of "tax havens" in the
apportionment formula could create issues with trading partners.
·
The BNRT
may be unconstitutional, due to issues surrounding economic nexus.
·
The BNRT
would be tough on start-up companies without a deduction for interest payments
or net operating losses.
·
The BNRT
would increase the cost of production in California, as small companies that provide
specialty services that aren't currently taxed would be subject to the BNRT.
·
What
would happen to the movie production tax credit?
·
How will
capital assets be amortized?
·
The
local share of sales tax would still be as high as 4.75 percent in some
districts.
·
Concerns
regarding business vs. nonbusiness income and
interstate and intrastate apportionment would continue under the new system.
·
What
happens to tax credits and NOLs at the end of the
phase-in of the BNRT?
·
How would
deferred gains be treated?
In response to Mr. Miethke's concerns, Mr. Pringle noted that even if the
local share of sales tax remains at 4.75 percent, it still would be a large
reduction from the current 10.75 percent in the worst-case scenario. Mr.
Pringle did not seem troubled that the BNRT would create winners and losers.
Mr. Barnett of
Edison International said that since interest expense would not be deductible
under the BNRT, it would have a significant impact on capital-intensive companies.
Also, he mentioned that Edison has more than 16,000 employees – a $4.5 billion
labor expense. He indicated support for deductibility of employer benefit
costs. He also questioned whether five years is sufficient to carry forward tax
assets acquired prior to the transitional period, and expressed a desire to
know the BNRT rate, as a small change in rate would have a large impact when
applied to a large base.
In response, Phil Spillberg of the Department of Finance stated that employee
health insurance costs would be deductible under the BNRT.
Mr. Pringle stated
near the end of the hearing: "Most businesses will be paying more. Our job
is not to look at any of them in isolation. … I don't feel a major momentum
away from the BNRT just because business is concerned about it."
Ms. Ito, a Democratic
appointee to the commission, said she sees "an incentive to go to
independent contractors" under the BNRT.
Cal-TaxReports, September 8, 2009
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Association.
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