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.
