California Sen. Robert Hertzberg, D-Van Nuys said he and Controller Betty Yee agree that "it's time to make the tough decision on tax reform – and stop kicking the can down the road."

LOS ANGELES — California should overhaul its tax system, State Controller Betty Yee says in a new report.

The report, issued Thursday, is the result of several months of meetings by Yee's Council of Economic Advisors on Tax Reform.

"California needs a tax system that reflects the 21st century economy, is less vulnerable during economic downturns, and is more sustainable, providing greater certainty from year to year," Yee said when she launched the panel in April.

State lawmakers are contemplating tax reform measures that include ideas about changing sales taxes, income taxes and property taxes.

Critics say a state tax system that is heavily weighted toward income taxes on high earners leaves California vulnerable to revenue crashes when the economy or the stock market slows down.

The sales tax on physical goods ignores the rise of the services-based economy, some critics say.

Yee said she asked the committee not to recommend specific tax changes, but to instead identify principles, concepts, and questions to spark broad public discussions to be led by policymakers and constituents.

"If comprehensive tax reform were easy, we would have achieved it long ago," Yee said. The report "pulls together all the pieces of the puzzle to lay a foundation for real change."

"It's time to make the tough decisions on tax reform – and stop kicking the can down the road," said state Sen. Robert Hertzberg, D-Van Nuys.

"I compliment Yee and her Council of Economic Advisors on Tax Reform for taking a comprehensive, sober look at California's tax structure, it's volatility and its inequities," Hertzberg said. "This report leaves no doubt that the present tax system is woefully out of date, inherently unfair and in desperate need of reform."

California Sen. John Moorlach, R-Costa Mesa said he just attended a dinner at the governor's mansion a few days ago to meet with Hertzberg and other senators about what form tax reform should take.

While Moorlach, a CPA, said the report was good, he hopes senators will read the appendixes. He pointed to a chart on Page 25 of the report that ranks California 44th out 50 states on its tax structure.

"Since I have been elected, we have moved up to 44th place, but I can't take credit for that, because Hawaii and Kentucky have dropped down as they have had to reveal what their unfunded pension liabilities are," Moorlach said.

The states ranked near the bottom tend to be largely Democratic, are union run, provide high wages to state workers and attractive pensions – and they also have the highest tax rates, Moorlach said.

Moorlach said he wants to see more research around the services tax that Hertzberg is floating, which he says would solve some of the volatility problems, but could have unintended consequences. He does not support tax reforms, like a split roll for property taxes between residential and commercial properties, that could shift the tax burden to small business owners.

"We keep yakking about the symptoms, but we haven't gotten to the core reasons that we are in such poor shape," he said.

There isn't currently a working group looking at tax reform that includes both Democrats and Republicans, but Moorlach said he might create one.

"I get nervous about Sen. Hertzberg's bill with his services tax," Moorlach said. "I haven't seen any hard proposals from Bob, but I am open. I want to work and understand, because I think we do need reform."

Hertzberg introduced Senate Bill 1445 on Feb. 19, which "updates California's antiquated tax system to reflect modern economic activities, including information and services. The bill helps reduce the volatility of state tax revenues and create a more stable tax base by broadening the sales tax to include non-essential services."

It would impose a tax on retailers measured by the gross receipts from the sale of tangible personal property sold at retail, or on the storage, use, or other consumption in this state of tangible personal property purchased from a retailer for storage, use, or other consumption in this state.

The bill is aimed at "broadening the tax base by imposing a modest sales tax on services."

It would also establish a fund to provide tax relief to middle- and low-income Californians to offset the effect of a sales tax on.

"The present system is not fair to Californians, and to continue with this unstable system that produces wildly fluctuating, zig-zag revenues will hurt Californians and the services they depend on and will undercut the state's future," Hertzberg said.

California Gov. Jerry Brown said in his May revise budget speech that "reducing revenue volatility would be good."

As for tax reform, Brown said, "I'm willing, and maybe over the next year or two we can get Republicans to join us and we can do something."

Changing the tax structure "is not that simple," Brown said.

"There's a reason why we tax the one percent. It's because that's a tax that people have shown they are willing to vote for. And that's the way it is," Brown said.

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