After yesterday’s session of the Commission on the 21st Century Economy it appears we are still a long way off from seeing a new, dramatically different tax plan approved for California. But when the plan does face a legislative vote will it need a majority vote to pass or a two-thirds vote required for tax increases?
Commissioners underscored the uncertainty of what a new Business Net Receipts Tax would produce in revenue. The BNRT is the key to the new tax plan. Revenue raised by the BNRT, which would include capturing taxes on services as well as goods, will be used to offset tax cuts in the proposal. The plan calls for elimination of both the corporate tax and the state portion of the sales tax and lowering the personal income tax rates.
The goal of this revenue-balancing act is to produce a package that is revenue neutral. The search for revenue neutrality is an important legal distinction because the legislature would mark the proposal as a majority vote bill.
Interpretation of the state constitution by the Legislative Counsel declares that if a tax is lowered and another increased in equal amounts then a simple majority vote is necessary to pass the package.
However, Jon Coupal of the Howard Jarvis Taxpayers Association says the two-thirds vote requirement would still have to be met because the plan will increase taxes on some taxpayers. “It makes little difference whether the proposal – in its entirety – is revenue neutral. If there are big winners and big losers, the big losers may still invoke the two-thirds vote requirement under Prop 13. Although Legislative Counsel may disagree, this issue has not been addressed in a published judicial decision. Unless marked as a two-thirds vote bill, litigation is a near certainty.”
Commissioners often acknowledged that no one knows the consequences of the BNRT.
UC Berkeley Law School Dean Chris Edley said it was an “unavoidable uncertainty” how much revenue would be produced during the plan’s five year phase in period beginning in 2012.
Commissioners discussed creating a panel to monitor the effects of the BNRT during the transition period. The plan would allow for corrections if the revenue comes in either over or under estimates. The tax proposal calls for adjusting the sales tax reduction if revenues goals for the BNRT are not met.
Given this uncertainty on the effects of the BNRT, declaring the package revenue neutral appears to be a guessing game, at best. The commission puts the tax rate on the BNRT at 4.2% but commissioners working on the BNRT admitted that rate is not certain to capture desired revenues.
Commission Chairman Gerry Parsky is still attempting to get unanimous support for the direction the commission is proposing. But, there were protests to pieces of the plan yesterday from across the political spectrum.
Notably, University of Connecticut professor Richard Pomp, an appointee of the Democratic leadership, complained that the plan was reducing taxes on the wealthy while moving toward a consumption tax. He contended that as soon as the recession is over, the business and higher end taxpayers would produce more revenue for California than a consumption tax. He also objected to eliminating the corporate tax while at the same time losing the deductions individuals are allowed for medical purposes on their personal income tax.
Gubernatorial appointee Michael Boskin of the Hoover Institution objected that the plan had no minimum tax on taxpayers. He pointed out that with the personal income tax exemptions and elimination of the state sales tax fifty percent of the taxpayers would pay no tax to the state, which he called an “explosive” situation.
The commission will attempt to put all the pieces together at what is expected to be its final meeting Monday in Berkeley.