The Commission on the 21st Century Economy met September 10 at the campus of the University of California in Los Angeles to discuss a package of potential recommendations to present to the Legislature. The commission has shifted direction, however, from recommending that the Legislature vote up or down on a major overhaul of the tax code. The panel now is suggesting that the Legislature use the legislative committee process to review the commission's proposals further. Gerald Parksy, chairman of the tax commission, said the commission's proposals need careful analytical consideration beyond what the commission has the staff and time to accomplish.
Mr. Parsky began the meeting by restating the commission's goals: stabilize revenue and reduce volatility; increase economic growth and job creation; increase California's ability to compete for jobs and investment; and reflect principles of sound tax policy, such as simplicity, fairness, predictability and ease of compliance. In addition, he reminded the commissioners that the commission's recommendations would be divided into three parts: (1) Statutory tax law changes that are revenue-related and can be acted upon immediately, possibly with unanimous consent; (2) Constitutional tax law changes meeting the same criteria; (3) Other areas of reform that need to be considered by others to achieve comprehensive fiscal reform.
The final tax package that the tax commission began deliberating yesterday includes these provisions:
· Reduce the personal income tax
o Two rates: 2.75 percent up to $28,000 single/$56,000 joint; 6.5 percent above those levels.
o Standard deduction of $22,500 singe/$45,000 joint.
o Itemized deductions for mortgage interest, property tax, and charitable contributions.
· Eliminate the corporation tax and minimum tax
· Eliminate the state general purpose sales tax
· Establish business net receipts tax (BNRT) (rate estimated at 4.2 percent, but not yet set)
· Institute new "rainy day" reserve fund for the state budget
· Enact new "pollution tax"
o 18 cents per gallon in 2010, with annual escalators of up to 9 cents per gallon.
o Tax would apply to gasoline and diesel fuel.
· Royalty on expanded oil drilling
· New tax dispute resolution forum (similar to tax court)
Notably, the package does not include a split roll proposal – an idea that had been included in previous incarnations, and was strongly opposed by Cal-Tax.
Commissioners Jim Cogan and Christopher Edley Jr. received kudos from Mr. Parsky for their efforts to develop the BNRT proposal. Mr. Cogan stated that he is confident that the BNRT, as a general approach, is good policy for the California economy, but was sure to qualify his endorsement by stating that the magnitude of the change was so large that the commission should not recommend an up-or-down vote by the Legislature. Mr. Edley agreed, noting, "Any effort to be bold will be fraught with uncertainty, and that produces anxiety."
Although Mr. Parsky cited the long list of proposals above as being subject to consideration, Mr. Cogan noted that the package's four key components are reducing the personal income tax; eliminating the corporate income tax and minimum tax; eliminating the general fund sales tax; and establishing a rainy day fund.
Despite proudly claiming to be a "tax-and-spend Democrat," Mr. Edley indicated that lower marginal rates are better for the economy and have fewer distortions. He expressed concern, however, over eliminating the corporate tax to implement the BNRT. He said the commission should reserve "tweaking authority." Mr. Edley also candidly admitted that it is "great politics for Democrats to eliminate the corporate income tax," and observed that the BNRT broadens the sales tax base to include services. Later in the hearing, he noted that there would be political difficulty in extending sales tax to services. In addition, he observed that combined with an exemption on business inputs, extending sales tax to services would result in "less rich revenues" than the BNRT.
Commissioner Monica Lozano urged commissioners to spend more time on the BNRT and sales tax rates. Mr. Cogan concurred, stating that there would be a problem for the economic benefit of the package if "the rate starts creeping up." He added, "You can see the uncertainty, it's not nailed down." Ms. Lozano stated that because the rates all have to work in tandem, she is very concerned.
Concerns also were noted about what to do with surplus revenue from the BNRT, were it to produce more revenue than the tax reduction. Mr. Cogan thought the money should be used to reduce the sales tax, or should be put in the rainy day fund.
Commissioner Jennifer Ito asked whether the BNRT's final rate would be known only at the end of the planned five-year phase-in period in 2017. Mr. Parsky answered that in year one, there would be a determination as to what BNRT rate would be necessary to deal with a complete program in 2012. He estimated that rate would be around 4 percent. Thus, in year one, the corporate income tax would be eliminated entirely, and the sales tax would begin to be gradually reduced while the BNRT would begin at a low rate and would be gradually increased until reaching its final rate in 2017. (Cal-Tax: How can commissioners or the Legislature make a decision regarding the economic impact of the BNRT without knowing a firm rate? How can taxpayers be guaranteed that the rate won't go beyond the estimated 4.2 percent? How can policymakers know what the rate should be in 2012 when they won't have data on the BNRT until 2013?)
Commissioner Edward De La Rosa indicated concern that the personal income tax reduction would benefit high wage earners far more than lower-income groups. "It would take but a small reduction in upper-earner tax breaks to give a larger tax break to lower-income filers," he said.
It is still unclear whether the BNRT would apply to financial institutions, although the current proposal assumes it would. "(Application to financial institutions) is an area of continuous concern," Mr. Parsky said. "We struggle."
Commissioner Ruben Barrales asked, "How does the new system make our state more competitive than the current system?" Mr. Cogan seemed to respond by claiming that lower tax rates would make California more competitive. (Cal-Tax: Without comparing tax rates to tax base between the current system and the proposed BNRT, it is unclear whether California would be a more attractive place to do business.)
The meeting became lively with an exchange between Mr. Parsky and Commissioner Richard Pomp. Mr. Pomp, the only tax professor on the commission, noted a list of concerns with the BNRT. Mr. Parsky admonished Mr. Pomp that he already had raised those concerns with staff privately, and did not need to reiterate them in the meeting. Mr. Pomp reminded Mr. Parsky that he travelled for two days to attend the hearing, and said he should be given an opportunity to present his concerns to his fellow commissioners, and not just staff. (Cal-Tax: It is also important for the public to hear the concerns of commissioners.) Many of Mr. Pomp's concerns are:
· The BNRT has not been implemented anywhere, including Europe. The BNRT is not a European-style value-added tax, and is completely untested.
· California vendors would be at a competitive disadvantage because the BNRT is a tax that would be embedded in exports.
· There is value in having a tax system that is not out-of-step with those of other states.
· Is there any evidence that lower marginal income tax rates have any beneficial economic effect?
· The commission should identify tax expenditures that can't survive a cost-benefit analysis, but the panel has not done so.
· Why is there no deduction for childcare or medical expenses under the personal income tax, but there is a deduction for charitable contributions?
· Why has the research-and-development credit been retained in the absence of empirical evidence that it pays for itself?
· The commission should see an analysis of the omnibus incidence of tax of the proposals as a whole.
· The commission is proposing to eliminate a tax on a fast-growing revenue base and move to a slower-growing revenue base.
· The issue of the constitutionality of economic nexus is the "900-pound gorilla in the room."
"I have more, but I can see that no one has patience," Mr. Pomp said.
The commission went on to hear details of the "pollution tax" proposal, which would more than double the state's tax on motor vehicle fuels, and continued the meeting into the evening. The commission will hold another meeting at UC Berkeley today. Draft language of the tax commission’s proposals is posted on the commission’s website, at www.cotce.ca.gov.
Cal-TaxReports, September 14, 2009
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