California Taxes: When You Hear the Word "Reform," Reach for Your Gun

The “blue ribbon” California State Commission of the 21st Century Economy, chaired by Republican heavyweight Gerald Parsky, was created by Gov. Schwarzenegger to provide bipartisan recommendations for changes to California’s tax system. According to Jean Ross, executive director of the California Budget Project, the commission is recommending "a massive shift in the cost of financing public services from the wealthy and corporations to middle-income families."

Writing on Calbuzz, Ross says

the biggest winners would be the state’s millionaires, who would receive personal income tax breaks averaging $109,000 per year. The biggest losers would be middle-income families who would receive a tiny, if any, reduction in their personal income taxes and who would pay substantially more for goods and services due to the new “value-added” tax the commission proposes to replace revenues lost due to the tax cuts for the wealthy and repeal of the corporate income tax.

The magnitude of the shift proposed by the commission is nothing short of stunning. The changes to the personal income tax structure alone would reduce income taxes paid by the poorest 62 percent of California taxpayers by $4 per year, on average, while providing six-figure breaks to the millionaires. The bottom 81 percent of the income distribution – the vast majority of all Californians – would receive 10 percent of the personal income tax cut, while the top 0.2 percent would receive 27 percent of the benefits.

And that’s the “good news.” The commission would repeal the corporate income tax and the state’s portion of the sales tax and replace it with a new tax on business net receipts – a tax that has never been tried anywhere in the US – that the commission’s own consultant notes would raise prices of goods and services, while exerting downward pressure on wages and benefits.

"Reforms" would "flatten" taxes

Specifically, the commission wants to tax groceries to pay for tax cuts for millionaires, and would tax child care so that oil companies no longer have to pay corporate income tax. Proposed changes would encourage relocation of California jobs to firms outside California, beyond the reach of California’s tax collectors. Interestingly,

the commission’s own estimates predict that revenues raised by the new tax system would grow more slowly over time than those raised by the state’s current tax system. Thus, the commission’s recommendations would lead to larger, not smaller, budget shortfalls in the future.

Over the five-year period covered by commission estimates, the difference in revenue growth would be substantial – the increased deficit under the proposed tax code would be approximately equal to what the state spends for today for the University of California and California State University systems combined.

Finally, Ross points out that more straightforward reforms that would increase revenues, such as aggressively pursuing collection of sales taxes from out-of-state retailers (out-of-state businesses pay no taxes, giving them an unfair competitive advantage against California companies) or extending the state’s existing sales tax to a broader array of services while lowering the overall sales tax rate, were ignored by the commission. "Similarly, the commission could have used tax policy as a tool to mitigate, rather than exacerbate, the widening gaps between the top and middle- and top and lower-income households." The governor's commission may have been "bipartisan" (the commission has 14 members, seven appointed by the governor, seven by the legislature), but how well the interests of middle-class and working-class citizens were represented is open to question.

Go. Read. What’s Wrong with the Parsky Panel Tax “Reforms” by Jean Ross (Calbuzz 2009-09-14) and The California Budget Project’s analysis of the Commission’s proposals (pdf)
Also, California State Commission of the 21st Century Economy: Staff Presentation: Proposed Tax Structure (pdf 2009-09-14)
California tax panel set to recommend sweeping, controversial changes (Sacramento Bee 2009-09-15)
California tax overhaul plan almost ready (LA Times 2009-09-15)
Our View: Tax fix would do more harm than good (Marysville CA Appeal-Democrat 2009-09-15)
State tax reform panel blew its opportunity by Michael Hiltzik (Los Angeles Times 2009-10-05)

Thanks for the tip on this story from California State Senate candidate Cindy Varela Henderson.