CARLSBAD, Calif. — One day after a blue-ribbon commission created to reform California’s tax code held its final meeting, experts from both sides of the political spectrum declared its proposals all but dead on arrival during a panel at The Bond Buyer’s California Public Finance Conference.
“Despite good intentions, this proposal is going to run into a lot of objections from the left and right,” said Joel Fox, coming from the right as president of the Small Business Action Committee.
“If the public understands what’s going on with this, they’re going to oppose it,” said Jean Ross, executive director of the nonpartisan, but left-leaning, California Budget Project.
The panel was moderated by Edward J. De La Rosa, founder and president of public finance investment banking firm De La Rosa & Co., and one the 14 members of the Commission on the 21st Century Economy, which wrote the tax reform proposal.
The commission’s proposals, broadly, reduce the state’s income tax and the budgetary reliance on the income tax, while creating a new business net receipts tax to replace both the sales tax and corporation tax, said De La Rosa, one of seven commissioners appointed by Democrats.
The tax reform panel’s mission was to recommend changes to the state’s tax system, with the goal of mitigating the volatility created by its reliance on capital gains taxes and to adjust the system to better reflect the state’s shift to “an information- and innovation-based economy” from a manufacturing and resource-based one.
It is due to present its recommendations to the Legislature Sept. 20, after which Gov. Arnold Schwarzenegger has promised to call a special session to consider them. It is as yet unclear how many of the commissioners will sign off on the final recommendations.
Fox, who supports a flat income tax and advocates the interests of businesses, said he liked the spirit of the commission’s recommendations, but not the details, particularly the new business net-receipts tax.
Broadly speaking, businesses would be taxed on their gross receipts, minus their purchases from other businesses. Fox said it remains unclear what the final tax rate would have to be.
“The business community doesn’t like the uncertainty,” he said.
“It is a tax that no government entity in the world has,” Ross said. “Nobody really knows how it would work in practice.”
Such complexity and uncertainty mean voters are likely to be skeptical, according to public opinion expert Mark Baldassare, president and chief executive of the Public Policy Institute of California
“I don’t think you can expect the average Californian to sort through this issue,” he said.
Ross described the whole tax-reform process, and its stated concern about volatility in tax receipts, as a “smokescreen” to lower taxes on high-income earners.
People earning less than $75,000 would save an average of $4 annually from lower income taxes, but ultimately, because of the business net-receipts tax, pay far more than that in higher prices on the goods and services they consume.
Ross said the commission’s focus on income tax rates is a mistake that has them fighting the last budget war, when state revenue collapsed after the dot.com bust decimated income taxes from capital gains. “This recession and budget crisis is different, because it is consumer driven,” she said.
Ross said the tax panel’s proposals would shift state revenues to reliance on slow-growing consumption.
“That tax system would grow much more slowly than California’s current revenues,” she said.