Listening to the discussion on complex tax restructuring proposals floating around the UCLA meeting hall at the Commission for the 21st Century Economy, I concluded, in the end, the commission’s plan better pass the Rotary test. That is commissioners better be able to succinctly explain the plan to a Rotary Club meeting in 20 minutes. They’re not there yet.
That last comment is probably unfair, since there is no plan, yet. There are pieces of a plan. Many pieces in fact, and how they are glued together will determine if the final proposal comes out looking like a sleek speedboat or an awkward Junk.
The focus of the discussion at the meeting Tuesday was a new type of tax alternately described as a value added tax or a consumption tax. The Business Net Receipts Tax requires businesses to pay a tax on gross revenue minuses goods and services purchased from other businesses. You can wade into the intricacies of the Business Net Receipts Tax yourself at the commission’s webpage.
Notice that the value of services will be taxed. There has been much talk leading up to the commission hearings about the growing service economy that is not directly taxed. Many wanted to tap into the service industry for tax revenue while lowering the tax rate currently applied to the sale of goods. However, the concern is taxpayers would not stand for a direct tax on services.
The Business Net Receipts Tax allows a number of services to be taxed through the interactions of businesses without hitting the taxpayer in the face with a tax increase. Undoubtedly, the cost of goods and services to the public will increase when business pass their new tax obligations through to consumers. In other words, the consumers may pay more for what they purchase but the increase will not come in the form of a tax.
While making no decisions on an overall plan you got a sense the committee was leaning toward a package that balanced this new Net Receipts Tax with elimination of both the corporation tax and the state’s share of the sales tax while creating a flat income tax with an exemption and a few deductions. The package is designed to be revenue neutral.
The commission is considering as part of the Business Net Receipts Tax a $500,000 tax base exemption for small business. Still, some small businesses might run into trouble because the tax is not predicated on ability to pay. A business that does not have much of a profit will still be hit with the tax.
Commissioners themselves were uncertain about the effects of the new tax. Tax attorney and professor Richard Pomp complained that dealing with the uncertainties of a brand new tax was like “shooting craps” and suggested that the commission go slow.
Commission Chairman Gerald Parsky shot back, “We have been going slow for thirty years.”
Earlier, Parsky acknowledged that he was “petrified with the notion of putting forth a new tax.” But he argued, that California was in such a poor situation that commissioners had to think about the new tax and how it might fit with an entire package of tax reform.
Anyway, this is not the time to find fault with an unfinished product. We’ll see where the commission goes in its meeting next month. Issues of creating a more regressive tax system will be weighed against creating a system that is competitive with other states and addressing economic growth.
NOTES FROM THE BACK PAGE:
Stanford Professor Michael Boskin said he wouldn’t even consider supporting a new kind of tax if other taxes were not eliminated in the final proposal ….
UC Berkeley Law School dean Chris Edley wants property tax on the table so wealth can be taxed. There was little support for this position ….
Santa Clara treasurer and tax collector Fred Keeley continues his crusade for a carbon tax and the commission will study a proposal at the next meeting fleshed out by the staff …
At the same time Boskin argues for opening up off shore drilling and the potential for billions in oil royalties to the state over the next two decades, “The only source of revenue,” Boskin insists, “that the payers of the revenue will not complain.”…
Business Roundtable president Bill Hauck raised a warning that if the state gave up its share of the sales tax, local governments would see an opportunity to seek increased sales taxes knowing that the taxpayers are used to paying a higher sales tax rate….
The commission will vote on proposals at its next meeting July 16 in San Francisco.