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Three key elements of tax reform: simple, transparent and steady

The Commission on the 21st Century Economy has delivered its recommendations for some tune ups to the current tax system.  The report was nine months in the making, and as you’ll see, this little bundle of joy has something for everyone (to love and to hate).One thing is for sure:  the status quo has some serious problems.  Our state revenue is all over the place, year in and year out.  Is there the political will to pass any or all of the recommendations?  That remains to be seen, but the Governor has said that he will call for a special session of the Legislature to consider the Commission’s recommendations.  Of course, this comes on the heels of one of the worst budget crises in California history, leaving me to wonder if there might be something in this report to stymie the revenue volatility of the budget merry-go-round.  

Most notably, the commission calls for a drastic simplification in the current income tax brackets.  The current system consists of six brackets; the commission proposes reducing this to two: a 2.75% tax rate for incomes up to $56,000 for joint filers ($22,500 for single filers) and a 6.75% rate on taxable incomes above that amount.  This is liable to be one of the more controversial elements of the report, as it lowers the tax rate on the very wealthy.  The State of California enjoys a love-hate relationship with its richest citizens.  One one hand, the current tax system depends heavily on them doing well; we need them to stay put, in California, paying their taxes.  It is not in our best interest to foster an environment that drives these individuals elsewhere.  For many, it can be tempting to lose sight of this strategy and go right for the deepest pockets.

Reckless overspending in good times has landed the legislature in crisis too many times to count—to this end, the report recommends beefing up the rainy day fund: from the current 5 percent to 12.5 percent of the General fund.  This is an idea that I have championed throughout my term in the Legislature.

The report also recommends eliminating the corporate tax rate, phasing out the sales tax over 5 years and replacing all of that with a Business Net Receipts Tax (BNRT).  Businesses would pay a 4 percent BNRT on the difference between their gross receipts and the costs they pay to other businesses for the purchase of materials and services.  Small businesses with less than $500,000 gross annual receipts would be exempt.  

The BNRT is very similar to expanding the base of the existing sales tax to services as well as goods and lowering the rate.  That is a volatility calming move.  Since we would also be eliminating the corporate income tax, this is a very interesting proposal.  I still have many concerns with this proposal, the biggest of which is transparency.  Since this receipts tax is paid by businesses and will likely be passed through in their costs of what is sold, consumers will essentially pay the tax without knowing it.

If nothing else, we must remember as we consider these proposals to think strategically and keep an eye toward the health of the economy.  As a Legislature, I think we tend to suffer from myopia.  This is chess, not checkers; the ripple effect will always extend far beyond the immediate impact of our actions.  Transparent, simple, and steady.  This ought to be our mantra as we consider these proposals in the coming months.


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