Tax Commission Plan = $10 Billion Drop In State Revenues?

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Governor Schwarzenegger used his State of the State address last week to urge the Legislature into acting on reforming the state's tax system, while also jabbing lawmakers that a bipartisan commission's ideas had "disappeared" somewhere under the Capitol dome.

Well, those ideas came out from their hiding spot this morning. And with quite a splash: a calculation by the Legislative Analyst's Office that the marquee recommendation -- a business net receipts tax -- would, as crafted, actually lower state tax revenues by $10 billion a year.

That calculation, presented to a hearing of the Assembly Revenue and Taxation Committee, may be the final nail in the coffin for the business net receipts tax (BNRT), a novel proposal pushed by the chairman of last year's Commission on the 21st Century Economy, Gerald Parsky.

But its inclusion in the final commission report was part of why only nine of the group's 14 appointed members officially endorsed the document. The commission's marching orders were to come up with a proposal that was, in budget parlance, "revenue neutral" -- that is, neither raised nor lowered tax revenues, and thus avoiding the familiar partisan political battles.

The BNRT is complicated tax and would impose a tax on business activity based on business profits, adjusted for purchases. The commission recommendation (again, not unanimous) attached the BNRT to a lowering of personal income taxes and an elimination of the state sales tax and corporate tax.

"According to our preliminary calculations," the final report says, "the BNRT rate that would achieve revenue neutrality once the tax has been fully phased in is approximately 4 percent."

But in a presentation delivered this morning (read it here), Paul Warren of the Legislative Analyst's Office told assemblymembers that LAO calculations estimate the BNRT would cut $10 billion a a year out of the state's revenues.

The report uses 2007 tax data in finding that the commission plan would lower personal income taxes by $13 billion and completely wipe out $28 billion in sales taxes and $8.7 billion in corporate taxes. The BNRT, says the LAO report, would bring in $39.2 billion... thus, a loss of $10. 2 billion.

That's obviously a non-starter with Democrats, most of whom who already believe the state's revenues are too low for its needed services. And the data will also find some critics on the Republican side, as the LAO's Warren told legislators that "a lot of businesses would get very large increases in taxes" under the tax commission plan. That's because many businesses that currently do not pay an income-based tax would be subject to the new BNRT. Partnerships, for example, currently are not subject to corporate taxes according to the LAO; under the tax commission's plan, the BNRT would impose $7.3 billion in annual taxes on these businesses.

"What this demonstrates is how the BNRT shifts the burden of corporate taxes," said the LAO's Warren. The tax commission's plan would also benefit many -- but not all -- of those who now pay personal income taxes. The volatility of those tax revenues has been pointed at by many as one of the big problems in the state's boom and bust budget saga. But Assemblymember Charles Calderon (D-Montebello) said today he believes the volatility issue is a "red herring" that obscures some of the real revenue problems of the state.

And Annette Nellen, a professor at San Jose State University who testified later in the morning, said while the commission strived for "revenue neutrality," it's unclear whether the recommendations achieved what she calls "distributional neutrality" -- whereby the tax burden isn't shifted from one group (the wealthy, for example) to another (the poor).

"I don't see a siren call" for tax relief for the state's highest earners, said tax commission member Richard Pomp in testimony this morning. (Pomp was not one of the backers of the commission recommendations.) Pomp said that a flaw in the BNRT is that it doesn't allow a tax deduction for businesses in the wages they pay workers. He said by the time the tax is fiddled with by elected officials, the BNRT will end up looking more like an income tax than something new... and so, he said, why spend all that time reinventing the wheel?

Late last year, the governor called a special session to deal with tax reform. Democrats didn't move quickly on the issue, in part because of their concerns with the recommendations from members of the tax commission. Those recommendations may not, in Schwarzenegger's words, be "lost" inside the Capitol. But based on today's discussion, they're probably going to be placed on a shelf... and kept there.

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About John Myers

John Myers is senior editor of KQED's new multimedia California Politics & Government Desk.  He has covered California politics for most of the past two decades -- serving previously as Sacramento bureau chief for KQED News and, most recently, as political editor for KXTV News10 (ABC) in Sacramento. He moderated the only gubernatorial debate of 2014, and was named one of the nation's top statehouse reporters by The Washington Post. Follow him on Twitter @johnmyers.
  • Rob

    Two things: One, put the VLF (car tax) back up to its statutorily-mandated level of 2.00 percent.
    Two, tap the Business property tax side of Prop 13
    Not only will we no longer have budget deficits, but, in fact, we will once again have budget surpluses. (Ignore those who say that businesses will leave CA if we charge them the appropriate property tax level, as we were charging them that level until ’78. Jarvis-Gann spoke of little old ladies losing their homes, not Bus prop tax breaks

  • Stevefromsacto

    This would matter if the governor and his staff really cared about the consequences of their actions.

    For example, look at his plan to eliminate the IHSS homecare program. Yes it’s morally questionable. But, as the LAO pointed out yesterday, it’s also fiscally irresponsible.

    Check out what the LAO said about the IHSS cuts:
    “…the budget does not appear to include additional funding for long–term care costs which are likely to increase when former IHSS recipients seek out–of–home care. We believe a cut of this magnitude (in IHSS) could result in increased long–term care costs which could exceed the estimated savings in IHSS.”