Tax Law

Is California Commission Ahead of the Curve or Off the Tracks?

if California's Commission on the 21st Century Economy gets its way, the state will embrace radical changes in how it generates revenue to pay for essential state services. The state's economic problems seem all but insurmountable.  Fresh ideas are needed to rescue the state's finances and provide a viable compass for long-range guidance. 

Unfortunately, California's best efforts over the years to reconcile its revenue stream with the meritorious services it provides to its citizens are not working well enough.  In creating the Commission, Gov. Arnold Schwarzenegger and state Senate President pro Tem Darrell Steinberg recognized that the distressed economy isn't helping. The Commission has been conducting monthly meetings since the beginning of this year, and its charge to conceive new ways to balance the state budget is ongoing.  

A flat personal income tax recommendation, as may be expected - or something close to it, would be coupled with repeal or reduction of sales and corporate taxation.  These measures would cut against the grain of progressive taxation, a cardinal principle in many jurisdictions - but especially California.  This sounds improbable, but no more so than the two-thirds legislative majority the state constitution requires to pass tax increases.

The Business Net Receipts Tax conceived by the Commission is apparently modeled after the Michigan Business Tax (MBT), an arguably reactionary model that introduced additional complexity to the Michigan Single Business Tax it replaced.  The California Commission purports to establish a "revenue stream that is more stable and reflective of the California economy." This objective aligns with the impetus behind the Michigan Business Tax.  But is the MBT track worth following? Skepticism is not surprising.

In the end, after the Commission issues its recommendations, expect hot debate on the need to repeal the nettlesome constitutional provision.  A more regressive tax structure, especially one that favors corporate taxpayers, is abhorrent to state legislators - and the electorate.  The Commission's expected proposals would yield a greatly simplified tax structure.  But simplicity takes a back seat to politics, especially where progressive taxation is at risk.  So expect a serious attempt to scuttle the two-thirds majority requirement and a tax increase in due course, perhaps also accompanied by evisceration of Proposition 13 limitations on commercial property tax increases.

For information about the California Commission on the 21st Century Economy, visit:

http://www.cotce.ca.gov/