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California tax overhaul plan almost ready

Special commission's proposal, meant to solve the state's worsening budget crises, would shift the burden off the wealthy and change how businesses are levied. But the Legislature may not go for it.

September 15, 2009|Eric Bailey

BERKELEY — A government commission hammered out the final outlines Monday of revolutionary changes it will propose in the way Californians pay taxes, including a flattened income tax that would largely benefit the wealthy and a broad business levy to replace existing sales and corporate taxes.

The proposal by the Commission on the 21st Century Economy will soon head to the state Legislature, which is being prodded by Gov. Arnold Schwarzenegger to embrace the overhaul this fall. It is unclear whether the Legislature will do his bidding, or even how many of the commission's 14 members will sign the report.

The commission was formed late last year by Schwarzenegger and legislative leaders in hopes of reducing the state's dependence on income tax revenue, its boom-and-bust volatility blamed for spawning this year's gargantuan budget deficits and the resulting deep cuts in health and welfare programs that largely serve the poor.

Under the panel's plan, the existing variety of state income tax rates would be reduced to just two: 2.75% for a married couple making up to $56,000 annually, and 6.5% for those making more. Itemized deductions would remain only for mortgage interest, property tax and charitable contributions.

Someone making less than $50,000 might pay $4 less in taxes, a 1.8% reduction, while Californians making $1 million or more would reap, on average, nearly $109,000 -- a cut of more than 31%.

Personal income taxes currently amount to 44% of the state's total tax revenue. Under the commission's plan, that figure would drop to 31%. The new regimen would phase in over three years.

To offset the income tax reduction, the commission would create a wide-ranging business tax that would encompass virtually every corner of California capitalism, including the service sector -- lawyers, engineers, business consultants -- that currently are not taxed. Such businesses are viewed as growth industries.

After a five-year transition period, the new business tax is expected to be about 4% on net receipts -- gross receipts minus the cost of purchases from other businesses. The current corporation tax would be eliminated the first year.

Sales and corporation taxes today account for 43% of the state's revenue. Along with a small sales tax that would remain, the new business tax would provide 56% of state revenue.

"This is a massive shift in the way state government is financed from the very wealthy to middle-income taxpayers," said Jean Ross, executive director of the California Budget Project.

The effort could face a tough test in the Democrat-dominated Legislature, where members have watched with growing unease as the tax commission, designed to be bipartisan, has struggled for months to bridge philosophical issues at the heart of the partisan divide.

"It's very hard to believe the Legislature will go along with this," said Richard Pomp, a University of Connecticut law professor appointed to the panel by Democratic leaders.

Other commissioners, however, expressed confidence that lawmakers would give the plan a fair hearing, given the depth of Californians' despair over the performance of their debt-wracked state government.

"Nibbling around the edges isn't going to make anything better. . . . Business as usual is not acceptable," said Gerald Parsky, a wealthy businessman and Schwarzenegger ally who served as chairman.

The commission's final report is scheduled to be delivered to state lawmakers this weekend, five months after the original April deadline.

Most of the commissioners appeared ready to sign onto the report.

Christopher Edley Jr., dean and professor at Berkeley's Boalt Hall School of Law, acknowledged that the plan could be a difficult sell but said, "I do believe, in balance . . . it's good for California's future.

At least two members have signaled that they won't sign.

One is Fred Keeley, a former Democratic assemblyman from Santa Cruz who failed to win support for a carbon tax to reduce global warming gases.

"I don't think it gets anywhere close to where we want to be," Keeley said.

Another is Pomp, who served during the 1980s on a panel that modernized New York state's tax system.

He said the California plan could have the unintended consequence of undercutting business and employment in the state by prompting some firms to export jobs overseas.

He pushed to "revitalize" the corporate tax instead, by eliminating loopholes that have allowed some big firms to pay virtually nothing.

"This freight train has the potential to really damage the California economy," Pomp said.

--

eric.bailey@latimes.com

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