California's 20th Century Tax Plan

Meredith Turney
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Posted: Oct 08, 2009 10:03 PM

It’s not often that both the Right and the Left agree on tax policies, but they have found common ground in opposing a new tax system proposed in California. Last week the Commission on the 21st Century Economy released its findings on how to revamp California’s tax procedures in order to prevent tax revenue decreases in the future.

Created by Governor Arnold Schwarzenegger through executive order last year, the Commission on the 21st Century Economy consisted of fourteen commissioners charged with the responsibility of creating a tax system that is “more stable and reflective of the state economy.” Faced with a $42 billion budget deficit caused by their overspending, voracious Sacramento politicians want to ensure they can maintain the current unsustainable rate of government growth.

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Over the course of nine months, Commission members met throughout the state, holding public hearings and gathering information from tax experts. The Governor even extended his executive order when the Commission failed to submit their report by the original April 15th deadline. Consistent with most government-subsidized projects, the Commission ran six months over its deadline.

The first part of the Commission plan is actually a solid proposal: reduce the maximum personal income tax from 9.3 percent to 6.5 percent and eliminate the corporate and sales taxes. With the fourth highest top individual tax rate in the country, California taxpayers could certainly use some relief. The current 8.84 percent corporate tax rate is the highest in the West according to the Tax Foundation—which also ranks California forty-eighth in its evaluation of state business tax climates. California’s 8.25 percent sales tax is now the highest in the country—which doesn’t include various local sales taxes also levied on citizens.

Reducing or eliminating these burdensome taxes is a step in the right direction for reviving California’s declining economy. But the promising news of tax cuts is negated by the alarming proposal of a business net receipts tax (BNRT). Under consideration in Washington, D.C. as well, the BNRT taxes the “value” a business adds to a product or service. It is calculated by deducting a business’ purchases from its gross receipts, then taxing its net receipts. The Commission recommends a 4 percent BNRT in order to achieve “revenue neutrality”—a euphemistic term for ensuring the government still gets the same amount of tax revenue it currently receives.

California business owners were quick to pan the proposed four percent tax on their companies. Home to one of the worst business climates in the country, California cannot afford to impose a four percent tax on its dwindling industrial base. The BNRT would automatically make it four percent more expensive to companies to conduct business within California’s borders.

With such an aspirational name, citizens would think the Commission on the 21st Century Economy sought a revolutionary tax system to reflect a 21st Century economy fluctuating with every new technology and its potential profitability. In reality, the plan offered by the Commission would increase taxes on the very businesses driving the new Information Age revolution.

The Commission’s proposed tax system is anything but innovative. In fact, the tax scheme is a recycled relic from the 20th Century. The BNRT, also known as a value added tax, has been used in Europe and other socialist nations for years. But the BNRT is relatively untested here in America.

Michigan imposed a value added tax, the Single Business Tax, in 1975, which was repealed by voters and the legislature in 2006 after businesses and taxpayers realized its damaging impact on their economy. Even the California Commission admitted that “the BNRT’s far-reaching ramifications have not all been fully addressed and should be carefully analyzed and considered by the Governor and the Legislature.”

Aside from the steep tax increase on businesses, the real danger of the BNRT is that it is a hidden tax. A sale tax is at least transparent enough to appear on a receipt, and income tax on a pay stub. However, when the cost of services or production are concealed from consumers, they have no way to knowing how much they are truly paying the government.

The BNRT is also being sold as a way to “allow the state to reduce its dependence on other more volatile taxes –specifically, the personal income tax and the corporate income tax.” But perhaps tax revenue should be volatile—tied to the economic realities faced by constituents instead of insulating politicians and government from sharing economic hardship.

Both conservative taxpayer advocacy groups and liberal labor unions have panned the Commission’s proposals; the former for imposing a radical hidden tax, the latter for cutting taxes at all. The Wall Street Journal, usually a pro-business and lower-taxes champion, actually gave the Commission proposal a thumbs-up. But their analysis failed to take into account the long-term impact of the BNRT. And perhaps that is the slight-of-hand tactic intended by the Commission: distract conservatives with the elimination or reduction of certain existing taxes, then implement the untested and potentially disastrous BNRT.

Governor Schwarzenegger established his Commission to “suggest changes to California's out-of-date revenue laws.” While California’s tax system is certainly out-of-date—doesn’t history prove that lower taxes promote prosperity?—the spending habits of California’s politicians are even more antiquated. Unfortunately, the Commission’s plan fails to address the greatest hindrance to reviving the state’s economy: cutting massive government overspending and waste. No tax system or revenue scheme can ever keep up with government’s profligate spending.

Sacramento, it’s time to take the advice of your most accomplished alumnus, Ronald Reagan: “Governments don’t reduce deficits by raising taxes on the people; governments reduce deficits by controlling spending and stimulating new wealth.” Controlling spending and stimulating new wealth? That’s a truly 21st Century plan.