Federal Dollars Won’t Be Coupled to Tax Reform

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Slightly more than a decade ago as California was working its way out of the last devastating recession, Governor Arnold Schwarzenegger and the legislature created the Commission on the 21st Century Economy, chaired by financier Gerald Parsky. Often referred to as the Parsky Commission, it boldly followed its mandate to create a new tax structure for California to deal with the state’s rollercoaster finances. Because California relied heavily on high end income taxpayers, revenues rose and fell precipitously with market cycles. 

The Committee produced a unique plan that was soon ignored and brushed aside. Until now. 

Writing in this weekend’s Wall Street Journal, Parsky tried to revive the Commission’s plan arguing that any more federal stimulus money to help state and local government in California should only occur once the tax structure is re-worked. 

The Commission plan called for reducing the personal income tax rates and reducing or eliminating many deductions; eliminating the corporate tax and the sales and use tax and establishing a broad, new business net receipts tax.  

Being California, the plan was attacked from both the left and the right. 

Advocates on the left wanted the rich to pay higher income taxes. They still do, even though they got their wish a few years later when California voters passed a Jerry Brown engineered plan, Proposition 30, to boost California’s income tax rate to the highest in the nation. 

On the right, there was the no new taxes chant but also resistance from the business community. Business was upset with the net receipts tax proposal.

As I wrote about the problem the Parsky Commission plan faced at the time: 

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. 

In the end, both the leader of the state Chamber of Commerce and the head of the Labor Federation opposed the tax plan. 

Parsky thinks Washington’s interest to help fund distressed state and local governments should be tied with tax reform in the Golden State. He wrote, “With Mr. Newsom requesting federal funding to balance his state’s books, however, there is an opportunity for the Trump administration to link any federal assistance to an overhaul of the way California taxes its residents.” 

Despite an example he offers of the federal government coming to the rescue in a flat-broke New York City in the 1970s, I can’t see the administration worried about California tax reform. After all, the stimulus package would not be geared for one government entity, as in the New York City example, but the relief package would be national in scope. 

However, Washington should be concerned about increased taxes on businesses as the economy attempts to rebound.   

There is a path to secure federal funds for state and local governments if compromise is had in Washington and business would welcome the deal. Tie liability protection for businesses during the Covid outbreak to a stimulus package. Additionally, business is concerned it will be the target of tax increases to help shore up state and local budgets during the pandemic.  Such an effort would hurt the recovery by not only slowing business but by costing jobs. Passing a bill to provide tax relief to state and local governments would relieve some of the government budget stress and at the same time take the target off of businesses back. 

As much as California might need tax reform—and credit the Parsky Commission for thinking outside the box–the more likely scenario to get federal stimulus money to the Golden State doesn’t come with a California tax reform proposal.

 

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