The Commission on the 21st Century Economy

The Commission on the 21st Century Economy (Tax Commission). 

The Commission on the 21st Century Economy met September 10 at the campus of the University of California in Los Angeles to discuss a package of potential recommendations to present to the Legislature. The commission is due to present a report and recommendation for tax policy changes to the Governor and the Legislature by September 21.  The following information was adapted from information provided by Caltax or obtained from the Commissions web-site.

The commission announced that they are no longer recommending that the Legislature vote up or down on a major overhaul of the tax code. They are now suggesting that the Legislature use the legislative committee process to review the commission's proposals further. Gerald Parksy, chairman of the tax commission, said the commission's proposals need careful analytical consideration beyond what the commission has the staff and time to accomplish. 
 
Mr. Parsky began the meeting by restating the commission's goals: stabilize revenue and reduce volatility; increase economic growth and job creation; increase California's ability to compete for jobs and investment; and reflect principles of sound tax policy, such as simplicity, fairness, predictability and ease of compliance. In addition, he reminded the commissioners that the commission's recommendations would be divided into three parts: (1) Statutory tax law changes that are revenue-related and can be acted upon immediately, possibly with unanimous consent; (2) Constitutional tax law changes meeting the same criteria; (3) Other areas of reform that need to be considered by others to achieve comprehensive fiscal reform.
 
The final tax package that the tax commission began deliberating yesterday includes these provisions:
  • Reduce the personal income tax
    • Two rates: 2.75 percent up to $28,000 single/$56,000 joint; 6.5 percent above those levels.
    • Standard deduction of $22,500 singe/$45,000 joint.
    • Itemized deductions for mortgage interest, property tax, and charitable contributions.
  • Eliminate the corporation tax and minimum tax
  • Eliminate the state general purpose sales tax
  • Establish business net receipts tax (BNRT) (rate estimated at 4.2 percent, but not yet set)
  • Institute new "rainy day" reserve fund for the state budget
  • Enact new "pollution tax"
    • 18 cents per gallon in 2010, with annual escalators of up to 9 cents per gallon.
    • Tax would apply to gasoline and diesel fuel.
  • Royalty on expanded oil drilling
  • New tax dispute resolution forum (similar to tax court)
Notably, the package does not include a split roll proposal – an idea that had been included in previous incarnations, and was strongly opposed by Cal-Tax.
 
There was considerable discussion about the BNRT.  Commissioner Cogan stated that he is confident that the BNRT, as a general approach, is good policy for the California economy, but was sure to qualify his endorsement by stating that the magnitude of the change was so large that the commission should not recommend an up-or-down vote by the Legislature. Commissioner Edley agreed, noting, "Any effort to be bold will be fraught with uncertainty, and that produces anxiety." 
 
There was discussion about the rate  that would be imposed as a BNRT.  Commissioner Parsky stated that in year one, there would be a determination as to what BNRT rate would be necessary to deal with a complete program in 2012. He estimated that rate would be around 4 percent. Thus, in year one, the corporate income tax would be eliminated entirely, and the sales tax would begin to be gradually reduced while the BNRT would begin at a low rate and would be gradually increased until reaching its final rate in 2017. (Cal-Tax: How can commissioners or the Legislature make a decision regarding the economic impact of the BNRT without knowing a firm rate? How can taxpayers be guaranteed that the rate won't go beyond the estimated 4.2 percent? How can policymakers know what the rate should be in 2012 when they won't have data on the BNRT until 2013?)
 
Commissioner Richard Pomp, the only tax professor on the commission, noted a list of concerns with the BNRT. Many of Mr. Pomp's concerns, several of which Cal-Tax disagrees with, are:
  • The BNRT has not been implemented anywhere, including Europe. The BNRT is not a European-style value-added tax, and is completely untested.
  • California vendors would be at a competitive disadvantage because the BNRT is a tax that would be embedded in exports.
  • There is value in having a tax system that is not out-of-step with those of other states.
  • Is there any evidence that lower marginal income tax rates have any beneficial economic effect?
  • The commission should identify tax expenditures that can't survive a cost-benefit analysis, but the panel has not done so.
  • Why is there no deduction for childcare or medical expenses under the personal income tax, but there is a deduction for charitable contributions?
  • Why has the research-and-development credit been retained in the absence of empirical evidence that it pays for itself?
  • The commission should see an analysis of the omnibus incidence of tax of the proposals as a whole.
  • The commission is proposing to eliminate a tax on a fast-growing revenue base and move to a slower-growing revenue base.
  • The issue of the constitutionality of economic nexus is the "900-pound gorilla in the room."
The commission went on to hear details of the "pollution tax" proposal, which would more than double the state's tax on motor vehicle fuels, and continued the meeting into the evening. The commission will hold another meeting at UC Berkeley on Monday. Draft language of the tax commission’s legislative proposals were sent to the member of the CCTA Tax Committee on September 9, but are also available on  the commission’s website, at www.cotce.ca.gov.
 
It was also noted that the package's four key components are reducing the personal income tax; eliminating the corporate income tax and minimum tax; eliminating the general fund sales tax; and establishing a rainy day fund.
 
Jerome Horton Confirmed as member of the Board of Equalization.  Former Assembly Member Jerome Horton’s appointment to the Board of Equalization was confirmed by the Senate and Assembly on September 10.  Mr. Horton was approved on a 40-0 vote of the Senate, and on a 64-1 vote of the Assembly, and can now be sworn in to represent the BOE's District Four, encompassing a large area of Southern California.  Members of both political parties spoke in favor of confirmation, praising Mr. Horton's experience as a long-time Board of Equalization employee (he worked at the BOE as a civil servant for almost 20 years)n and as a state lawmaker.  We are uncertain exactly when Mr. Horton will be sworn in as a board member, but it could be as soon as next week.  CCTA has a good relationship with Mr. Horton.