The flat-taxers at the Wall Street Journal and Grover Norquist’s Americans for Tax Reform are lavish with praise. Republican Governor Arnold Schwarzenegger says if it were legislation, he’d sign it “immediately.” The California Labor Federation, the California Chamber of Commerce and the California Budget Project are appalled. And Democratic leaders of the state legislature are gamely thanking the members of the commission for their hard work and promising a thorough legislative review.
The object of all this attention is a report released last week by the blandly-named Commission on the 21st Century Economy, brought into being early this year by the governor at the initiative of legislative leaders seeking ways to even out the state’s historically up-and-down tax revenues while improving its economy and ability to compete for business.
Among the body’s recommendations:
• cutting the state’s six income tax brackets to two – 2.75 percent for individuals earning up to $28,000 a year ($56,000 for joint filers), and 6.5 percent for higher incomes.
• eliminating the corporate tax and phasing out the state’s part of the sales tax.
• instituting a new “business net receipts tax” capped at 4 percent. Food, child care, medicines and other formerly exempt goods and services would now be taxed.
• growing the state’s “rainy day” fund from 5 percent of the general fund to 12.5 percent, and barring governors from using the funds unless revenue fails to cover spending at the previous year’s level, adjusted for population and inflation.
Responses to the recommendations made for some interesting bedfellows.
Calling them “a profound disappointment,” California Labor Federation head Art Pulaski said in a statement that the personal income tax proposal “would create a massive tax giveaway for the very rich at the expense of the vast majority of California taxpayers” and “would intensify the downward economic spiral our state’s families are already feeling.” Instead, he proposed closing corporate loopholes, and instituting “common-sense” taxes including on oil extraction and Internet commerce. “Every day that we give wealthy corporations a pass on paying their fair share, California communities become less safe, less clean and less stable,” he added.
Allan Zaremberg, head of the state Chamber of Commerce, called the proposals “fatally flawed,” and warned that “impacts and potential unintended consequences” of the new business tax have not been adequately studied. He also said business representatives from a number of different industries testified the new tax could drive jobs out of the state.
Jean Ross and Richard Pomp of the California Budget Project – the latter a commission member – said the body’s recommendations would place the burden of financing public services on low and middle income residents and lead to wider budget gaps. They called the new business tax “risky” and “untested” and said it would create incentives to businesses to outsource jobs overseas and to independent contractors.
Calling $7.6 billion in yearly tax relief to the top 3 percent of the state’s income tax payers “disproportionate,” Lenny Goldberg, executive director of the California Tax Reform Association observed, “The reason the tax system relies so heavily on the wealthy is because they have a historically unprecedented share of the income.” He also warned of “huge legal and economic problems” with the new business tax, including its heavy burden on those who rent their homes. “Ultimately,” Goldberg said, “the report suggests that California take a complete shot in the dark, basing our tax system on something unknown and untried in order to provide massive tax relief to the wealthy and large corporations.”
Assembly Budget Committee chair Noreen Evans summed it all up: “By flattening our tax policy, these recommendations coddle CEOs and billionaires while kicking California families to the curb. No wonder the Commission shut the public out of the process to complete its work in secret,” she added.
Meanwhile, the Wall Street Journal called the report “very good news” and “a huge improvement over the current tax code.” And Americans for Tax Reform said it was “a step in the right direction,” especially if accompanied by a spending cap.
The 14-member commission, to which the governor and legislative leaders each named seven appointees, was chaired by Republican Party leader Gerald Parsky, who heads a southern California investment firm. Only nine appointees approved the report, with four commissioners appointed by the legislature and one gubernatorial appointee refusing to sign on.
Gov. Schwarzenegger has said he will call a special legislative session to consider the recommendations.
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