The meeting had ended a half hour earlier, but members of the state’s Commission on the 21st Century Economy – the tax reform body put together by the governor and assembly speaker – were eagerly talking and joking in a UCLA hall late Tuesday afternoon.
“You have to admit,” said commissioner member Fred Keeley, the Santa Cruz County treasurer and former assemblyman, “that the package is a game-changer.”
It is, as the rest of the state will discover next month when the commission is scheduled to approve recommendations to the governor and legislature.
In the post-meeting conversation, the commission’s chair, Gerald Parsky, wondered aloud if the legislature was ready for what was coming. Parsky told members that he thought lawmakers were expecting the group to recommend some reductions in income tax and extension of the state sales tax to services. In fact, there was surprising consensus for more extensive changes.
Here’s the headline: the panel appeared to favor a package of changes to state taxes that would include elimination of the corporation tax and the state sales tax. Instead, the state would establish a business net receipts tax (essentially, a tax on gross revenue minus purchases from other businesses), akin to a value added tax.
While there was plenty of debate during the meeting, I heard (I was there for about 5 1/2 of the 7 hours) little substantive objection to this approach. When commission member Richard Pomp wondered whether establishing a new tax like the business net receipts tax might seem too bold, Parsky responded: “We’ve been going slow for 30 years, and we are where we are.”
The commission discussed three possible packages of recommendations, all of which would establish a business net receipts tax. The particular package that drew the most interest – labeled “Package 1B” on a slate of three – also would establish a flatter – or less progressive – state income tax, setting the rate at 6 percent. It would include a $5,000 per person exempt and preserve some deductions.
It was that income tax piece that drew the strongest objection of the day, from UC Berkeley law school dean Christopher Edley Jr., who has come to dominate the discussion with his intellect and sense of humor. (One way to produce new business in California: get the dean a national talk show. Now). Edley, in a sober moment, said he worried that a flatter income tax would look like a “crass transfer” of the tax burden from the rich to the middle class, and predicted it would be “dead on arrival” in the state legislature.
Edley suggested that the flatter income tax be paired with higher property taxes to make the package more politically palatable. Addressing Parsky – a wealthy lawyer who serves as chairman of a private investment firm — Edley said he’d be willing to give Parsky an income tax break if he could take more from his real estate wealth. Despite the objection, property taxes appear to be off the table.
The rest of the tax code may not be as lucky. Also discussed: an 18-cent-a-gallon carbon tax, and reductions in capital gains rates.