Alternatives to the COTCE Recommendations

Today (1/13/2010), the California Assembly Revenue & Taxation Committee held an informational hearing on alternatives to the recommendations of the CA Commission on the 21st Century Economy (COTCE). The schedule included testimony from:

• Paul Warren - Legislative Analyst's Office (LAO) - testimony
• Richard Pomp - law professor at University of Connecticut Law School and a member of the COTCE
• Annette Nellen (me!)
• Fred Keeley - Santa Cruz County Treasurer-Tax Collection and a member of the COTCE

It was very interesting, particularly to hear from the two COTCE members (neither endorsed the COTCE recommendations). They pointed out some unfortunate aspects of the process of the COTCE including that they never really talked about what the 21st century economy is and what tax system features made sense for it; the revenue estimate for the BNRT was generated before there was statutory language; and the BNRT basically just appeared one day without any discussion.

The hearing was webcast - you might find it posted at the Assembly page (see link above).

The LAO has run some estimates of the revenue potential and affect on volatility of the BNRT. They found that it is not revenue neutral at a 4% rate (which many already view as too high for this type of tax). LAO projects a $10 billion annual drop in state revenues from the proposals. Also, they found little improvement in volatility under the COTCE proposals.

Professor Pomp noted several concerns with the BNRT and COTCE process and offered alternatives. He stated that most of what he said was in the four letters he had shared with fellow commissioners - but were not included in the final report (the final report does not include any statements from those who did not endorse the recommendations (9 or 14 commissioners endorsed the final report)).

Here are links to three of his letters (can't find the 4th on the COTCE website):

• 9/25/09
• 9/14/09
• 9/4/09

Ive got my testimony posted at the 21st Century Taxation website - see link towards top of page. The alternatives I suggested are almost all discussed at the 21st Century Taxation website, including expanding the sales tax base to include personal services, digital items and entertainment while also lowering the rate and hopefully using some of the funds to start to reduce pyramiding in the sales tax such as by creating a sales tax exemption for R&D equipment. I also note the need to apply accountability measures to all tax expenditures and phase-out ones that do not meet an important purpose (such as subsidizing one's mortgage on their second home). Something we don't hear mentioned too often, I noted that the legislature should encourage and work with Congress to reduce the tax gap because the state would also be a beneficiary of this initiative. You can read the rest (here). The testimony also compares the sales tax to the BNRT which really then highlights some significant problems with the BNRT.

I have more on the COTCE proposals on this blog (search for COTCE). Also see links at top of this page on California tax reform.

Comments?