CA tax changes? Business net receipts tax proposal on table.

• Author: Allen, Bruce C.
• Position: CapitolBeat

The Commission on the 21st Century Economy met and delivered its recommendations at an informational hearing in early December, with the goal of aiding the Legislature as it focuses on solving California's economic crises.

The commission, created by Gov Schwarzenegger, was charged with:

* Developing recommendations that would establish a 21st Century tax structure that fits with the state's economy;

* Stabilizing state revenues and reducing volatility;

* Promoting the long-term economic prosperity of the state and its citizens;

* Improving California's ability to compete with other states and nations for jobs and investments; and

* Reflecting principles of sound tax policy. including simplicity, competitiveness, efficiency; predictability, stability and ease of compliance and administration, and ensuring the tax structure is equitable. During the hearing, commission chair

Gerald Parsky said the recommendations should be taken as a whole to create less revenue volatility and a more competitive business environment in California.

Business Net Receipts Tax

Most of the hearing was devoted to the commission's recommendation to establish a Business Net Receipts Tax. The tax would be calculated by taking gross receipts and deducting purchases from other firms to get to net receipts, and then multiplying the net receipts by the business net receipts tax rate, which is estimated to be 4 percent to achieve revenue neutrality. There would be some exemptions for small businesses as well as a research and development credit.

Most Capitol pundits believe the recommendation is unlikely to be adopted, mainly because labor costs arc not deducted from revenue subject to tax, which could lead to more outsourcing and elimination of employees. Additionally, businesses that do not make a profit could be subject to substantial taxes.

Others at the informational hearing indicated it would be easy to circumvent the Business Net Receipts Tax by using out-of-state vendors for transactions in California, and that California's attempt to apply the tax to out-of-state businesses would be met with legal and constitutional challenges.

Parsky said the commission proposed the tax as an alternative to an expansion of sales and use tax or creation of a value-added tax. He added that the tax would be deductible at the federal level, and, with the changes proposed in other parts of the commission's report, the tax could make California more competitive.

The commission did not...