The most obvious thing about the big, complicated tax reform scheme that will go to the Legislature this week is that millionaires would save an average of $109,000 a year. Taxpayers making between $40,000 and $50,000 would save $4. This is not a typo.
The plan, still awaiting a final draft, is the work of the grandly named California Commission on the 21st Century Economy, which held its final official meeting last Monday. But it's been clear from the beginning that Gov. Arnold Schwarzenegger, in setting it up last fall, was aiming to do precisely that: enact big cuts for upper-income taxpayers and create what's become a pea-under-the-shell tax system to make up the lost revenue.
The system the commission proposes includes the elimination of both the state sales tax and the corporate income tax, a flattening of the personal income tax by eliminating the top brackets, and replacement of the lost revenue with a novel, untested business net receipts tax, or BNRT.
The official rationale for the creation of the 14-member commission, half appointed by the governor, half by leaders of the Legislature, was to reduce the volatility in state revenues resulting from excessive reliance on the state income tax, and especially on those upper-bracket taxpayers. That volatility, in the view of the governor's office, drives Sacramento to wild spending in good times, when fat stock dividends, capital gains and other boom-era windfalls push up tax receipts, and leaves the state broke, as now, when the economy tanks.
But in the process of trying to plan a system that will even out those cycles, the commission -- chaired by Gerald Parsky, head of a Southern California investment firm and a heavyweight in Republican politics -- has created an economic Frankenstein's monster whose behavior even the commissioners are unable to predict. Last week, underlining the doubt, nine leading tax economists and lawyers sent the panel a detailed letter citing "the numerous uncertainties relating to the administration, compliance, legal challenges and economic distortions of such a tax." With one possible exception, no state has a tax system remotely like the BNRT, and that exception, Michigan, imposed its new business tax so recently that it can't possibly be a model.
