Tax Commission:
Tax Commission's First Hearing: Goal to Reduce Volatility May Be Members' Only Common View

The California Commission on the 21st Century Economy held its first meeting January 22, leaving many questions and few answers.

Commissioners heard from five witnesses: Phil Spilberg, chief of financial research for the state Department of Finance; Mac Taylor, California's legislative analyst; Jed Kolko, associate director of research for the Public Policy Institute of California; Scott Pattison, executive director of the National Association of State Budget Officers; and Jim Eads, executive director of the Federation of Tax Administrators. Professor Roger Gordon, vice chair of graduate studies at the University of California at San Diego's Department of Economics, testified during the public comment period at the beginning of the hearing.

Commission Chairman Gerald Parsky announced at the outset that the goal of the commission is to figure out how to make reforms to help lawmakers avoid the volatility that California has experienced over the years. He also indicated that legislative leaders had expressed their desire to take an up or down vote on all of the commission's recommendations as a package. (Cal-Tax: This idea, used by the federal government when voting on military base closures, does not translate well to the field of tax policy. A package of ideas may include some very welcome changes along with some clunkers that would cause huge problems for the state. Such ideas should be considered separately, so flawed proposals can be weeded out.)

The first witness was Professor Roger Gordon, an economist from UC San Diego. He discussed the possibility of a consumption tax, which would tax income minus net savings. In addition, he thought more restrictive limits on state spending would be in order.

After Professor Gordon's testimony, the commissioners were asked to say a few words and to pose any questions they may have for the economist. At this point, some of the commissioners clarified their view of the commission's role, leaving no doubt that consensus on the commission's recommendations may be difficult.

Commissioner Fred Keeley, a former member of the state Assembly and current treasurer of Santa Cruz County, issued the opening salvo of contention when he noted that he did not believe the commission was obligated to seek "revenue neutrality." The Democratic official dismissed remarks made by Assembly Speaker Karen Bass, Senate President Pro Tem Darrell Steinberg and Governor Arnold Schwarzenegger that the commission's task was to revamp the tax structure in a revenue-neutral manner, stating that the governor's executive order laying out the goals of the commission made no mention of revenue neutrality.

Mr. Parsky stated that while the text of the executive order did not mention revenue neutrality, the legislative leaders and governor all agreed that recommendations would be aimed at the tax base, and that the commission would leave to the Legislature the task of raising rates as it deems fit. (Cal-Tax: "Do as I write, not as I say?") Commissioner Curt Pringle, mayor of Anaheim, and Commissioner John Cogan, a member of the Governor's Council of Economic Advisers, echoed Mr. Parsky.

Mr. Keeley and commission member Christopher Edley Jr., dean of the Boalt Hall School of Law at UC Berkeley, both indicated that the commission should explore a carbon tax.

While most commissioners seemed to agree that reducing revenue volatility was an appropriate goal for the commission, Mr. Pringle explained that volatility would result in any plan that the commission produces, and it shouldn't be the "main thing" that is considered.

Taxation of services was another major element of the commission's discussion. Again, Mr. Keeley indicated an interest in this type of sales tax base expansion, requesting more information on the New York law that would tax Amazon based on the company's affiliation with in-state "associates" that provide click-throughs to Amazon on their websites in New York. However, many commissioners, including Commissioner Richard Pomp, a nationally renowned tax expert, were concerned about the taxation of services provided to businesses, as this would result in double-taxation of business inputs.

The commission's next meeting will be held at UCLA on February 12. The time, exact location and agenda have yet to be announced. The meeting is rumored to include testimony from the perspective of businesses and union groups.

On the day of the commission's first hearing, The Sacramento Bee's Capitol Alert blog ran an item comparing the commission's condensed timeframe to the hit television show "24," where a decade's worth of political machinations, terrorist attacks and other actions are packed into a single day. "The limited time allotted has drawn skepticism from both ends of the ideological spectrum," the story says. Cal-Tax Director of Communications David Kline is quoted, saying, "We're not going to pre-judge them before their first meeting, but it definitely is a daunting task."

The story also quotes Jean Ross, of the liberal California Budget Project: "It certainly is rushed. I think you would want more time. These are incredibly complex issues that touch every Californian in terms of both the taxes they pay and the public services supported by those taxes." Ms. Ross said "it deserves more attention." The story states that "Ross noted that not all of the commissioners even have a background in tax policy."

In a January 22 column in the Capitol Weekly newspaper, Cal-Tax President Teresa Casazza also discussed the importance of thoroughly vetting proposed tax code changes before taking any action. (Cal-Tax: This column originally appeared in last week's Cal-Taxletter.) (Sources: Cal-Tax coverage of commission hearing; The Sacramento Bee's Capitol Alert blog; Capitol Weekly, all January 22.)

Cal-Taxletter, January 23, 2009

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