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Wednesday, September 30, 2009

California Commission Proposes Dramatic Tax Reform

California Commission jpeg

The California Commission on the 21st Century Economy has issued its final report, proposing dramatic changes in the state's tax structure:

  • Reduce Personal Income Tax (PIT) for every taxpayer – Reduce the number of tax brackets from six to two. The new tax rate would be 2.75% for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5% for taxable income above that amount. These changes would retain the PIT’s progressive nature but reduce income tax rates for all taxpayers. The proposal would reduce the amount of income tax paid by 29%.
  • Eliminate the corporation tax and minimum tax – Eliminate the corporate tax, which is currently at 8.84%. The $800 minimum franchise tax should also be eliminated.
  • Eliminate the state general purpose sales tax – Eliminate the current 5% state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation. Elimination of the sales tax would phase in over five years.
  • Establish a business net receipts tax (BNRT) – Establish a new tax, not to exceed 4%, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes.
  • Create an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state.
  • Strengthen the state’s Rainy Day Reserve Fund – Increase the target for the reserve from 5% of revenues to 12.5% and restrict the government's ability to use reserve assets so that the reserve is available to help fund services during recessionary periods.

WSJ CA 

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Comments

I think this plan should be enacted in toto

Every Californian will see their personal taxes reduced. The shortfall is offset by a business tax (which everyone understands is a tax on individual customers, owners or employees).

The genius here is that many non-Californians own those businesses or buy from them, so those non-Californians will bear the burden of the VAT. For Californians who own or buy from the California business, well at least they'll see their personal rates reduced. That's something.

Posted by: guy in the veal calf office | Sep 30, 2009 3:16:02 PM

If businesses that sell their products beyond the local area have to pay 4% of net receipts with no deduction for salaries, they will need to cut pay by something more than 4%.

The pay cut plus the 6.5% income tax rate will leave workers' net pay lower than today. Elimination of the 5% state sales tax may offset this, but the pay cuts will still be quite disruptive.

Furthermore, this tax structure advantages government employees, whose employer will not pay the net receipts tax and who will therefore not face a pay cut. This could be the biggest political vulnerability of the proposal.

Posted by: AMTbuff | Sep 30, 2009 6:24:19 PM

Georgia welcomes all businesses fleeing the high taxes of California.

Posted by: Woody | Sep 30, 2009 10:10:23 PM

Those are good points, AMTbuff, but government employees already have enormous advantages (#1 being they're the largest political force in the state), so I'm don't think its a monumental enough vice to overcome the virtues of the overhaul.

Elimination of sales tax, corporate tax, dramatic simplification of personal income tax and localizing tax compliance in companies with over $500,000 in revenue just seems sensible to me. But I do acknowledge that unintended consequences may lurk....

Posted by: guy in the veal calf office | Oct 1, 2009 2:37:08 PM