Info Hearings Held on Recommendations of 21st Century Economy Commission

On October 8 & 9, 2009, the CA Assembly Revenue & Taxation Committee held informational hearings on the final report approved by 9 of the 14 members of the CA Commission on the 21st Century Economy (COTCE). Several commissioners, including those who did not vote for the report, testified (see agendas). There was also testimony from some public interest groups.

I don't see that any transcript has been posted anywhere yet, but here are some links to observations of people or groups that are listed on the hearing agenda.

• California Budget Project - here - this group does not favor the plan, calling it "fatally flawed" and finding that it shifts too much of the current tax burden from higher income individuals to low and middle income individuals. This group notes that the Business Net Receipts Tax (BNRT) will be paid directly by businesses that can deduct it in calculating their federal income tax, but the higher prices paid by consumers does not produce a deductible tax. Of course, today's sales tax does not produce a tax deduction for California consumers and neither does any of the corporate income tax passed along to consumers. The only taxes individuals can deduct on their federal return are state income taxes (unless they chose to instead deduct sales tax and for those in AMT, neither tax is deductible) and property taxes. There is some interesting data and observations in the CBP presentation.
• California Tax Reform Association - here - I don't know if this is the exact testimony delivered on 10/8/09, but it is an earlier statement voicing opposition to the COTCE report. The concern is disproportionate tax relief to high income individuals. Concern is also expressed over many uncertainties of the operation and effect of the BNRT. There is a statement that the BNRT falls disproportionately on rental housing. I'm not sure of that. Certainly, rental income is subject to the BNRT and expenses paid to other businesses are deductible. Perhaps it is that there are not many expenses paid to other businesses. I haven't read through the many pages of statutory language for the BNRT, but fixed assets purchased by the landlord should be fully deductible when purchased which would reduce the BNRT.
• California Chamber of Commerce - here - they expressed concern the day after the release of the COTCE report. “We must not rush into replacing our 70-year-old tax system with an unproven experiment that may fail to deliver the promised results."

Some observations:

• While there is statutory language (lots of it) for enactment of the BNRT, it would be nice to see more explanatory language. That allows those not comfortable with deciphering statutory language to better understand the BNRT and for those comfortable deciphering it, to be able to verify it against what the COTCE expect the BNRT to do.
• More explanation is needed from the 9 commissioners as to why they would want to replace a direct income tax with an indirect consumption tax. A personal income tax is transparent in showing what each income group pays. However, a tax that is paid directly by businesses but indirectly paid by consumers, investors and employees is not transparent. It is unlikely that the thousands of dollars of personal income tax reduction of high income individuals will be replaced with their "share" of the BNRT. This is because high income individuals do not consume all or most of their income while low income individuals do consume most of their income and some portion of the BNRT will be included in prices of many goods and services purchased if a BNRT is in effect.
• Why was there no proposal for some type of carbon tax given California's aggressive plans to reduce greenhouse gas emissions? One example I've suggested before is to replace some part of the personal income tax (to reduce its volatility somewhat) with a sales tax on utility bills of individual consumers. There would be relief (either on the utility bill or via a refundable income tax credit) such that there would be no tax on a bill representing utility expense for a 1200 square foot home with 4 inhabitants. There could also be an increased gas excise tax.
• I would like to see more study on the BNRT to answer the various questions mentioned in this blog and in many other places, such as the oft-mentioned letter from nine law and economics professors to the COTCE.

Please post comments - were you at the info hearings on October 8 and 9? if yes, what was your reaction? What should be the next step regarding the COTCE report? Other comments on CA tax reform?

CA Commission on 21st Century Economy Report and Vote Due 9-20-09

The California Commission on the 21st Century Economy had its first public meeting in January 2009 and is to issue its report, which should indicate how the 14 commissioners voted on the proposal, on 9/20/09 (the original deadline of 4/15/09 was extended twice).

The proposals discussed at their final meetings on 9/10 and 9/14 are fairly bold - reducing the personal income tax for high income individuals, and replacing the corporate income tax and state level sales tax with a business net receipts tax. The big question is - are these appropriate changes to improve California's tax system to make it one appropriate for the 21st century economy.

Well, I'd say "yes and no."

Yes - 21st century improvements offered in the Commission's plan include:

• Reducing the sales tax for businesses. This will reduce (but not eliminate) a flaw with our current sales tax in that it is a pyramiding tax. We make businesses pay sales tax on equipment. That tax makes its way into the price of the goods sold by the business on which customers pay sales tax again. Most states do not make businesses pay sales tax on manufacturing equipment (or sometimes R&D equipment is also exempt). This reality makes California very uncompetitive for manufacturing - why pay an extra 9.25% on manufacturing equipment when you can avoid it in most other states? However, the proposal reduces the sales tax for all taxpayers and still makes businesses pay the local portion of the sales tax. Thus, businesses have the continued complications of sales tax and other states still look more competitive. So, while this proposal helps move us into the 21st century economy where businesses face fierce global competition, it doesn't go far enough.
• Elimination of the corporate income tax - why not? Small companies either don't owe it or owe very little. Large multitstate companies work to reduce their state income tax with the help of tax professionals and the state legislature that provides a lot of tax credits. Elimination of this tax might lead companies to want to locate more payroll and property here as doing so won't raise their CA corporate income tax (because there would not be one) and would lower their state income taxes elsewhere. However, our high sales tax would still be a deterrent. Big question - which should be eliminated for corporations - the sales tax or the income tax? Definitely the sales tax. That along with the option of a single sales factor should make California attractive to manufacturers and R&D operations - activities with high wage labor that should boost state tax collections.

No - aspects of the plan that don't move us into the 21st century:

• Flattening the personal income tax. For years, the trend has been a growing income gap between individuals with the highest incomes and those with the lowest. What is the point to reduce the top income rate and eliminate some deductions, such as the medical deduction that might benefit a middle-income taxpayers? AND, at the same time continuing to allow for deductions of interest on home equity loans (something only homeowners can get, not apartment dwellers), a vacation home (something also for higher income individuals) and on up to $1.1 million of debt! Greater equity could be achieved by eliminating inequitable deductions like the parts of the overly generous home mortgage deduction.
• I've written before about ways to reduce the volatility of the personal income tax while not necessarily giving a tax cut to high income individuals (here).
• The business net receipts tax - it is not clear if this moves us into the 21st century. I've heard a lot of misstatements about this tax which concerns me. For example, it has been likened to the European VAT. However, all of Europe and most of the rest of the world use a credit invoice VAT that appears on sales invoices (it is a transparent tax and a non-pyramiding one). The BNRT is a subtraction method VAT. Only Japan uses a version of this and Michigan. I've heard that the BNRT is better because it has a broader base. Broader than what? I'm concerned that people mean compared to the corporate income tax. That is correct - the BNRT has a broader base because wages are not deductible, BUT, we should not be comparing the bases of the BNRT and the corporate income tax because they are two different types of taxes!! The BNRT is a consumption tax while the corporate income tax is an income tax. Perhaps those saying it has a broader base mean in comparison to the sales tax. That might be, but it is not clear. Compared to the sales tax we have today in CA, the BNRT has less pryamiding, so represents a narrower base, rather than a broader one. Of course, in that it applies to all businesses, not just those that sell tangible personal property, the base is broader. But, how does the narrowing and broadening aspects of the BNRT compare to our current sales tax?
• Where is a polluter pays tax? CA has ambitious greenhouse gas emission reduction targets. One way to help us reach them would be to increase the cost of carbon-based fuels, such as gasoline. So, why not increase the gasoline tax? That would help our tax structure tie to our state strategic goals and raise some revenue. Some of that revenue could be used to provide a rebate to low-income taxpayers.

That's just a few comments. I hope the final report will have a longer narrative on the personal income and sales tax changes (there is only a detailed explanation for the BNRT). While statutory language has been provided, it is hard to know if the changes are the correct ones if we don't have detailed explanatory text to go along with it.

For more information:

• Commission's 2-page explanation of the plan
• Commission's Powerpoint presentation on the plan
• Proposed statutory language from the Commission

Questions for you:

1. How many commissioners do you think will vote for the plan?
2. Would you vote for the Commission's plan? Why or why not?

California 21st Century Comimssion Proposal Due September 20, 2009

A second extension has given to the California Commission on the 21st Century Economy (COTCE). Per a press release by Governor Schwarzenegger, the Commission's report is due September 20, 2009 (rather than July 31). The announcement also states that the legislature will be called into special session to hear the proposals.

It seems that the Commission is focusing on one multi-faceted proposal. A memo from the Commission chair Gerald Parsky notes that there will be two "workshops" on the Business Net Receipts Tax Proposal on August 26 and 28 (no location details are posted to the COTCE website yet). The COTCE will also hold its final meetings in early September (details not posted yet).

The COTCE has considered a variety of problems and fixes for California's troubled tax system. It will be interesting to see what the final proposal is and if it gets anonymous endorsement from all 14 commissioners. I have written a bit about the net receipts tax recently (7/17/09 post). I've written a fair amount about problems with California's tax system and possible solutions - see reports here. Hopefully some of these problems will be addressed without creating new ones. I'll write more soon.

What do you think of the proposals, process, likelihood for reform, etc.?