The Work of the California Tax Commission

Today was one of the last meetings of the California Commission on the 21st Century Economy - a special group established to examine the California tax system. In recent years the state has been blessed with the odd circumstance of having a tax system with confiscatory rates and uneven revenues. For both sales and income taxes we have one of the highest rate structures among all the states yet because of the structure we have wild swings in revenues. Some casual observers blame our tax problems on the initiative process. That is nonsense. The rates and the structure of the personal income tax came from legislative enactments. It could be argued that the two thirds requirement for raising taxes, which was the product of an initiative, is the only thing that has kept state rates from going even higher.

The easiest way to understand any tax system is with this simple equation - Rates X Base = Revenue. Rates can either be flat or progressive (under the modern definition when income increases so do rates). Base includes all those things that are taxed. For example, in the sales tax, if you buy a steak in a market to take home it is not taxed. But if you buy a steak in a restaurant, it is. The base includes prepared food and not food which will be prepared at home.

Around the turn of the Twentieth Century the state had a couple of tax commissions to think about how revenues should come to local and state government. At the time a UC Professor named Carl Plehn staffed a number of commissions to think about the tax system. The current commission, chaired by Gerald Parsky, is reminiscent of the Plehn Commissions.

The Commission is looking at some fairly significant changes in California's taxes. Each includes, as a central feature, a business net receipts tax - which is similar to a value added tax (VAT). At each stage of production, the manufacturer adds elements of the product and is then taxed for those additions.

All three of the broad proposals have a BNRT. That addition allows some interesting possible changes in the overall system. Depending on what is covered in the BNRT and the rate, it could yield substantial revenue. Thus one model would a a 6% personal income tax with no credits or deductions and also be able to eliminate the sales and corporation tax. Another would simplify the current rate structure of personal income taxes and lower the top rate to 7% while allowing an investment tax credit, a reduction in the current corporate tax top rate to 7% and all of the current credits and deductions. A third alternative would reduce both the number of deductions and credits in the personal income tax (to the homeowner's deduction and charitable deductions), eliminate the sales tax on business investment decisions, reduce the corporate tax rate to 7% and lower the sales tax rate by 1¢.

A variation of the Business Net Receipts Tax is something that was used a lot in the 1930s. Opponents of it claimed it was complicated, and depending on how unitary the calculation is (how much of it is applied to non-California purchases) it can be. But the tradeoffs of revenue stabilization and lowered rates may be a very good deal for long term growth in the state.