The Associated Press
SACRAMENTO, Calif. (AP) -Coming up with a simple, fair tax system that can help California prevent more multibillion-dollar budget deficits is no easy feat, yet that's the task of a commission attempting to lead the state out of its boom-and-bust cycles.
The state is searching for an improvement after 30 years of growing increasingly reliant on income tax, which has been a volatile funding source.
Nearly 50 percent of state revenue in 2007 came from those who make more than $495,000 a year, a wage bracket where incomes are greatly affected by gyrations of the stock market, said H.D. Palmer, a spokesman for the California Department of Finance.
"When the market tanks, those taxpayers sneeze," Palmer said. "When those taxpayers sneeze, the state budget catches a very bad cold."
Meanwhile, revenue from the more stable sales tax has declined from about 40 percent of revenues to a little more than 25 percent as the economy shifted from producing goods to providing untaxed services.
Gov. Arnold Schwarzenegger this week gave the Commission on the 21st Century Economy a second extension of its April 15 deadline to come up with a solution. He said he will call a special session of the Legislature in September to take up the panel's recommendations.
The commission, created last October, has considered several fixes. It is now looking at a simplified income tax structure that reduces taxes for all income groups andreplaces the revenue with other taxes, said commission chairman Gerald Parsky.
"No bracket should have an increase in taxes," said Parsky, a former assistant U.S. treasury secretary and University of California regent. "That's the charge given to me and the staff."
One approach the commission studied would replace California's seven income tax brackets with a single, 6 percent tax rate, limit the number of income deductions, eliminate corporation and state sales taxes, and impose a new business net-receipts tax.
Another would leave the state with just two income tax rates, 3.75 percent and 7 percent, while also limiting deductions, reducing taxes on corporations and imposing a new fuels tax that would amount to 18 cents a gallon on gasoline.
Supporters say those proposals would reduce revenue volatility and simplify the system, but critics complain that they would shift billions of dollars in taxes from the wealthy to the middle class.
"Tax cuts for the rich would only serve to exacerbate the income gap," said Jean Ross, executive director of the California Budget Project, a Sacramento-based nonprofit that advocates for low- and middle-income people. "I don't think that is in the best interest of Californians."
Under the first plan, Californians with annual adjusted gross incomes of more than $200,000 would see their taxes drop by $4.4 billion, while taxes would rise by $6 billion for those who make between $20,000 and $200,000, according to figures provided by the commission.
The second approach would cause a somewhat smaller tax shift.
Parsky said the commission has dropped both those approaches in favor of a simpler system.
How to make up for lost income tax revenue is the toughest part of the equation.
It could come from a net-receipts tax on businesses that sell goods and provide services. The tax would be determined by deducting the cost of goods and services it buys from other businesses from its sales.
For example, a business that had $1 million in sales and bought $600,000 in supplies or services from other companies would pay a tax on $400,000 in net receipts.
The tax wouldn't show up at the bottom of a receipt like sales tax, but businesses would likely pass it on to consumers through higher prices ‚Äî not just for merchandise, but for services ranging from accounting and legal fees to haircuts and golf lessons.
"If we can make the business net-receipts tax work, we would have a whole sector of the economy that's not contributing to the tax base that we would be incorporating, namely the service sector," Parsky said.
That might be a more sellable approach than trying to extend the sales tax to cover services, a proposal that has failed before.
Two business groups, the California Taxpayers Association and the California Chamber of Commerce, declined to comment on the proposals the commission is considering, but the chamber has criticized the idea of taxing services, calling it a "tax on labor." Kyla Christoffersen, an advocate for the chamber, said small businesses would be disproportionately affected.
"We have no doubt that such an increase would result in substantially less business and, in turn, fewer jobs in repair shops, attendance at entertainment events and care for ailing pets," she said in previous testimony to the commission.
Lenny Goldberg, executive director of the union-backed California Tax Reform Association, said the net-receipts tax is worth studying.
"A lot depends on what it is replacing," he said. "It should not be replacing the corporate tax; it should replace the sales tax."
Goldberg said the commission also should consider eliminating corporate tax loopholes, reducing the salestax while broadening what it covers, giving manufacturers a sales tax exemption on equipment and lifting property tax limits on commercial property.
A number of other proposals could also be on the table before the commission finishes its work and gives its recommendations to the governor on Sept. 20.
During a recent meeting, the panel agreed to consider proposals from Santa Cruz County Treasurer Fred Keeley, a Democrat, to retain the multi-bracket income tax, allow periodic reassessments of commercial property, and impose a new tax on gasoline and other carbon-based fuels.
At the same meeting, Parsky told another legislative appointee, University of Connecticut law professor Richard Pomp, that he was free to try to put together a tax package that could get unanimous support from the commission - half of whom were appointed by the Republican governor and half by the Democratic legislative leaders.
"Start with the gentleman next to you," Parsky said, referring to Michael Boskin, a senior fellow at the conservative Hoover Institute and the chairman of President George H.W. Bush's Council of Economic Advisers.
Bridging ideological differences could make it more likely that the committee's ultimate recommendation survives the legislative process.
"It would send a signal to Sacramento and the state that the citizenry really wants some changes to happen," Parsky said.