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THE CALIFORNIA FIX

Tax commission report falls flat, but it's a start

Proposals to eliminate the sales tax and levy an experimental business tax are said to have 'zero percent' chance of passing. But an overhaul is needed, and the ideas may provide a jumping-off point.

September 21, 2009|Eric Bailey

SACRAMENTO — It was to be the sort of big-game victory that California political leaders rarely pull off. Gov. Arnold Schwarzenegger and legislative chiefs set out to shake the roots of the state's tax system to spur the business climate and resuscitate the treasury.

But as the commission they formed for that purpose prepares to release its final report this week, business leaders are grumbling, labor unions have turned wary and once-bullish lawmakers are backing away.

The recommendations from the Commission on the 21st Century Economy, which include some revolutionary ideas such as scrapping the sales tax and imposing a broad and untested new business levy, have been met with shrugs and even a few snickers.

"It's not cooked," said state Treasurer Bill Lockyer, who was a tax lawyer for decades. "It probably needs years of work."

For The Record
Los Angeles Times Tuesday, September 22, 2009 Home Edition Main News Part A Page 4 National Desk 1 inches; 47 words Type of Material: Correction
California tax plan: An article in Monday's Section A on a state commission's recommendations for changing the tax system said state Treasurer Bill Lockyer "was a tax lawyer for decades." Lockyer, an attorney, served as chairman of a legislative tax committee but has not practiced tax law.

Republicans like some of what they see, such as the plan's call for a flatter income tax, but they don't expect to make much headway in a Capitol dominated by Democrats.

"This is the most significant tax policy proposal in three decades," said Assemblyman Chuck Devore (R-Irvine). "But the chances of this getting approved, as is, are zero percent."

Such conclusions have not completely derailed the prospects for change in a state that Forbes magazine ranks 50th out of 50 for its big tax bite and other high costs of doing business.

Schwarzenegger is expected to call a special session of the Legislature to address the commission's findings.

Assembly Speaker Karen Bass (D-Los Angeles), an early proponent of the commission, has backed away from a vow to hold a yes-or-no vote on the package. But she calls the commission's principal suggestions "intriguing."

While that is not a warm embrace, she and other lawmakers see the package as a worthy starting point for debate on changes considered long overdue. They say the commission report should spark a full reappraisal of California's tax structure, and possibly a push toward a bipartisan compromise that might actually take flight in the fickle political winds of Sacramento.

"The issue is not going to go away," said Senate President Pro Tem Darrell Steinberg (D-Sacramento). "But it's important to get it right."

Sacramento has long been an epicenter of debate about taxation.

The state's tax system was fashioned during the Great Depression, when small manufacturers churned out retail products subjected to a sales tax. As recently as 1950, the sales tax provided nearly 60% of the state's revenue.

But in the years since, California's economy has shifted to one dominated by service industries -- lawyers, engineers and other professionals whose sales are not taxed. Although the state has the nation's highest sales tax, it now accounts for barely a quarter of revenue.

The result has been an increasing dependence on income taxes, which grew from 11% of state revenue in 1950 to more than 53% in 2008. In recent years, the wealthiest 1% of the state's population has generated a big percentage of that.

Liberals say the tax burden borne by the wealthy simply reflects the astronomical rise in incomes of the super-rich in Silicon Valley, Hollywood and other enclaves. But that revenue, too, has proven volatile, soaring or stumbling with the rise or fall of the economy and the stock market.

As the economy slumped and tax proceeds plummeted late last year, Bass and Schwarzenegger got together to form the 14-person tax commission and sidestep the usual Capitol bickering.

But the commission -- attempting to do in months the kind of wholesale reconstruction some states have taken years to accomplish -- slogged along. Partisan fissures cracked open, and the group's ideas fell well short of unanimous approval from participants.

Still, Schwarzenegger believes the panel's proposed changes in the tax system are "the most significant action we can take in ending our perpetual budget crises," said Aaron McClear, the governor's spokesman.

Under the plan, the state's current half-dozen income tax rates would be replaced by two -- 2.75% for those making up to $56,000 a year and 6.5% for those earning more. Sales and corporate taxes would be replaced by a single new business levy that would spread the burden -- at a tax rate of about 4% -- more broadly and would include service professions.

The proposals have drawn heavy fire from all sides.

Business leaders are worried it could make things worse for their bottom lines and the broader economy.

"There is simply too much at stake to adopt this proposal before the implications for jobs and the economy have been fully assessed," said Allan Zaremberg, president and chief executive of the California Chamber of Commerce.

With some tax experts saying the changes would favor the rich and could cost jobs, labor leaders don't like what they see.

"This feels like a dangerous experiment," said Courtni Pugh, executive director of SEIU California, the state's largest union with more than 700,000 workers.

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