Nine members of the tax commission signed the final report submitted yesterday to the governor and the legislature. Five members refused to sign. Ironically, if this proposal were a tax measure it would fail because it did not receive a two-thirds vote.
Justification for the two-thirds vote found multiple times in the state and federal constitutions means consensus has been achieved on important matters. There was no consensus within the commission that this tax plan is the remedy for what ails California.
The final report from the Commission on the 21st Century Economy was a bold attempt to re-make the state’s tax landscape. The spirit of what was attempted – restructuring tax codes to fund government through economic growth – should be applauded. There should be no penalty for producing a daring, experimental plan.
However, the plan is centered on a new tax proposal that violates a basic canon of good tax policy. The business nets receipts tax (BNRT) is unclear. Taxpayers do not know how it will affect them.
At the governor’s press conference, reporters were admonished not to judge pieces of the plan independently. Commission Chairman Gerry Parsky argued that the plan was a set of interrelated measures that contain big ideas. Aside from the BNRT, the plan consists of reducing the state sales tax, ending the corporation tax, and flattening the income tax.
Yet, the new BNRT is the heart of the proposal and if the heart falters the system fails.
The BNRT works like a value-added tax. Businesses take their gross receipts; subtract purchases from other firms and multiple the balances by the BNRT tax rate. What that tax rate will be is uncertain. And, there lies one of the problems with the new tax.
The commission declared the BNRT tax rate should be no higher than 4-percent and the entire plan should be phased in over a five-year period. The tax plan is constructed so that if the BNRT does not produce the revenue that is expected, the state sales tax, recommended for elimination, would not totally disappear to keep revenues in balance.
But, perhaps the gravest concern about the BNRT is its lack of transparency to the taxpayer. The BNRT was designed to capture California’s growing service economy. The plan would capture taxes on services paid from business to business. As each business adds a tax at every level of production the amount of the tax becomes part of the cost of the product. Without knowing the tax consequences, the consumer pays the cumulative tax built up and passed along.
Simply lowering the sales tax rate and applying that rate to services would have been clearer for the consumer/taxpayer. However, there was no appetite to take on the challenge of direct taxation.
Following the results of the May special election, support for taxes is low. So is trust in the legislature. The voters probably would not trust a tax rate lowered and spread to services, believing that the legislature can then turn around and raise the tax rate again.
Avoiding direct discussion on taxes was built into the commission from the beginning. Governor Schwarzenegger admitted the commission got its awkward name (Commission on the 21st Century Economy) because legislative leaders did not want to use the word “tax” in the commission title.
One place the commission did not go was a split roll property tax to increase property tax on commercial property. Commissioner Christopher Edley said the split roll was a non-starter. “Forget first base, it couldn’t get out of the batter’s box.”
The tax plan has many hurdles to overcome. When challenged with the fact that the leader of the Chamber of Commerce and the head of the Labor Federation both opposed the tax, Parsky responded, “Maybe we have ideas worth considering.”
The larger question is has the commission created ideas worth adopting? The response from the political set seems to be: No.