Can a discussion about taxes lead to widespread agreement?
It turns out that sometimes it can, at least when it comes to the proposals put forth by the Commission on the 21st Century Economy (COTCE), the 14-member panel charged with restructuring the state’s tax system.
It seems no one – from the state’s business community to self-described advocates for tax equity, such the California Budget Project – finds much to like in the plan. And though our reasons may differ, they boil down to a similar concern: relying on an untested, new tax used by almost no one else in the world is too risky – both for California and the state’s economic competitiveness.
The Commission’s proposals, which will be detailed in a report that will soon and belatedly be delivered to the Governor and Legislature, would substantially reduce the personal income taxes paid by Californians at the high-end of the income distribution; eliminate the corporate income tax and the state’s share of the sales and use tax; and replace the revenues lost through a new business net receipts tax (BNRT.)
If you’ve never heard of a BNRT, you’re not alone. There’s nothing exactly like it anywhere in the world today. Michigan – hardly an economic model California would want to emulate – has a somewhat similar tax, albeit at a much lower rate that avoids many of the unintended consequences that would likely occur under the COTCE proposal. The BNRT is essentially a tax on workers’ wages and benefits. It would be paid by businesses based on the value of the goods and services they sell minus the amount they spend purchasing goods and services from other firms. Herein lays the hook. Businesses that pay high wages and provide a good benefits package to attract and retain high skilled workers will face a larger tax bill than a firm that pays minimum wage and allows its workforce to go without health coverage.
But that’s not the worst of it. The structure of the tax, and laws governing what states can and cannot tax, create incentives for firms to turn employees into independent contractors and outsource Californians’ jobs to offshore vendors. While that may preserve corporate earnings, it would do so at the expense of the state’s workers and the economic well-being of their families.
Consultants retained to advise the COTCE argue that the BNRT would be passed on first to consumers in the form of higher prices and second to workers in the form of lower wages. It would be a hidden tax that, in essence, taxes groceries to give six-figure annual tax breaks to millionaires and taxes child and medical care to eliminate the corporate income tax.
In a fair fight, taxing necessities to give tax cuts to the wealthiest Californians would have little chance in the arena of public opinion. That’s why the COTCE has chosen an approach that is without precedent and that epitomizes the opposite of transparency.
Last but not least, some might argue that the potential downsides are worth the risk if they would bring an end to California’s persistent budget crises. Unfortunately, the Commission’s own estimates suggest that the COTCE proposal would result in a tax system that grows more slowly over time.
With so much agreement that there’s so little to like, this is one proposal that deserves a swift and complete dismissal.
Jean Ross is the executive director of the California Budget Project, a nonpartisan public policy research group. For more information, go to www.cbp.org or the CBP’s blog, www.californiabudgetbites.org.