California Tax Overhaul on the Way?

November 12, 2009          
            Taking note of the obvious, Ahnold took the bold step late in 2008 to create The Commission on the 21st Century Economy, whose mission was to study and evaluate California’s tax system. Comprised of 14 bipartisan appointees, the Commission commenced its work early in 2009 and recently issued its report.
            The Commission focused its study on California’s three most significant taxes: the personal income tax (PIT), the sales and use tax (SUT) and the corporation tax (CT). These three revenue sources account for about 90% of the state’s general fund deposits each year.
            “California’s tax system, in the more than 70 years since it was established, has generally provided revenue drawn from a broad base of income, wealth, and consumption. The system has grown with the economy over the long run. In recent years, however, the tax system’s performance has been both increasingly volatile and less diverse in terms of its sources…..Economic shifts have not been matched with associated changes in the tax system and, as a result, the state is in an increasingly precarious fiscal position, both in the short and long run.” A few words from the preamble of the report, and striking in the similarity to what Nevada politicos have been heard to utter in recent years….but we digress.
            The Commission’s recommendations–suggested to be implemented by 2012–are striking in that they urge significant changes to the PIT, including a reduction in PIT rates, elimination of the 8.84% CT and the state general purpose portion of the SUT. A business net receipts tax (BNRT) would serve to replace these revenues.
            The proposed BNRT would tax a broad range of economic activities at a relatively low rate. The BNRT would give the state a “comparatively stable, reliable revenue stream that will grow with the economy in much the way that an income-related tax base would grow. It will allow the state to reduce its dependence on other more volatile taxes–specifically, the personal income tax and the corporate income tax.”
            Another recommendation of significance: establish a new “Rainy Day Reserve Fund.”
            The BNRT would be the signature change, however–it would apply to all net receipts of almost all entities doing business in California. “The BNRT is designed to tax the value a business adds in its production of products and services in California at a relatively low rate.” Early calculations suggest the BNRT would achieve revenue neutrality at a rate of about 4%.
            Sounds kind of like a “fair tax,” doesn’t it? We’ll see where this goes. Like the “fair tax,” it sounds good, but implementation issues and questions abound. And don’t hold your breath for a 2012 start date.
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
            Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He is also a contributor to the twelfth edition of Tax Savvy for Small Business, published by Nolo. He can be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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