The governor is serious about tax reform. This is legacy stuff. The call for a special session to deal with the recommendations from the Commission on the 21st Century Economy indicates how important this matter is to him.
Given the wide ranging changes to the tax system that could – emphasize could – come from the commission, it is probably a smart move to dedicate a special session to discuss the tax proposals.
One wonders if the legislature, or the commission for that matter, has enough information to calculate the outcomes of the more complex tax proposals or combination of proposals.
For business people and the general taxpayer, the simple question that will be asked is: How do these tax changes affect me?
The commission set out to deal with the volatility of a tax system that gives legislators and the governor a headache when the revenue rollercoaster rises then dips at breakneck speeds. Proposals to meet these ends range all the way from flattening the income tax, to adding a carbon tax, to eliminating the state sales tax, to raising taxes on business property. However, the tax that could be the heart of the new California tax system is a bit of a mystery.
The Business Net Receipts Tax (BNRT) is a form of a value added tax. A VAT is defined in the Dictionary of Economics as a general tax applied at each point of exchange of goods or services from the primary production to final consumption.
Creating a new tax has its pitfalls. And this one will certainly face critics. Some may charge that a BNRT lacks transparency because the taxes are added on each level of production with the tax increases rolled into the final cost of a product when purchased. Others will charge that this tax does not take into consideration an ability to pay. But, the big concern will be: Why create a new tax whose effects are uncertain?
The reason for going through this extraordinary exercise to create a new levy is to tax services without stirring up a tax revolt. In recent decades, the state economy has relied much more on services. Sales tax on goods doesn’t have the impact it used to. One way to tax services would be to apply a direct sales tax on the consumption of services. But given the mood of the electorate that may not be a wise political move. Tax increases were batted away in the May special election.
By including a tax on services through the business production and consumption cycle, the expenditure added at each stage will be passed on to the consumer in the final costs of goods without declaring that the end consumer has suffered a new tax.
So, to be able to tax services without seeming to tax services, we have this new tax animal. Maybe we should think of it as a goose. For Jean Baptiste Colbert, the French minister of Finance under King Louis XIV, famously said, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
To determine how the BNRT will affect businesses and the public is the main reason the Commission asked for more time to complete its work. As Commissioner Chris Edley, the UC Berkeley Law School Dean, wrote to his colleagues, there are “high stakes with respect to getting it “right.””
Two workshops on the tax will be conducted at the end of August with the final report from the commission now due September 20. Then the special session will begin to consider the proposal.
While the BNRT does need examination, no one should lose focus on the other proposed tax changes. While the BNRT is new, some longer in the tooth tax reforms considered by the commission cause concern among many interests.
For example, there’s the split roll property tax, which would tax commercial property at a different rate or method than residential property. Might proponents for a split roll on the commission offer to accept a flat or flatter income tax in exchange for a split roll in a compromise tax plan?
Given all the variables, even a special session may not provide time necessary to complete restructuring the California tax system.