California Tax Reform Association

Statement on the Tax Commission (COTCE) final report

September 29, 2009

The California Tax Reform Association, which participated in many discussions of
the Commission on the Twenty-First Century Economy, criticized the report as “a
failure to provide a fair, long-term solution to California’s revenue and tax
problems.”  Executive Director Lenny Goldberg said, among its many failings, “it
does not even address the distinct issues of the 21st century economy”, which is
its supposed charge.

CTRA’s summary of opposition to the report is as follows:

*It provides disproportionate tax relief–$7.6 billion yearly– to the top 3%
of income tax payers—those least burdened by state taxes.  “The reason that the
tax system relies so heavily on the wealthy is because they have an historically
unprecedented share of the income”, said Goldberg.  A chart demonstrating
disproportionate relief is here:

*It relies entirely for its reforms on a completely unknown and untried tax,
the business net receipts tax (BNRT).  There are huge legal and economic
problems with this tax, including:  burdening companies disproportionately which
have  higher labor costs; burdening companies, including start-ups, with tax
which otherwise would have losses;  taxing rental housing, childcare, food and
other necessities of low income people; assuming the ability to tax interstate
commerce which is highly questionable; possibly disadvantaging California-based
companies;  encouraging the contracting out of labor services, rather than hiring

Many critiques of the BNRT have been put forward from virtually every
perspective.   Perhaps the clearest critique comes from Commissioner Richard
Pomp, at
Pomp notes in particular
that the only effort at a similar tax, in Michigan, is at a very low 1% level, and is
integrated with a corporation tax.  The proposed California tax would be 4%.
One unnoticed part of the BNRT is that it would fall heavily on rental housing, so
that, in a world where homeowners receive major tax benefits, renters would be
expected to pay.  “With homeowners doing so well in the tax system, it would be a
travesty of good tax policy to now burden renters, but that’s what this proposal
would do,” said Goldberg.  The whole distributional impact of the BNRT has not
been analyzed, with regard to the extent that it would burden California
consumers or fall on domestic businesses.

*Elimination of the corporation tax would disproportionately benefit out-of-
state shareholders and the federal government.  Corporations doing business in
California put demands on California services.  The profits generated from
business in California would be untaxed in this proposal, increasing the return to
shareholders, many or most of which may be out-of-state beneficiaries of the tax
break.  And, since these taxes are deductible from federal taxes at a 35% rate, the
outflow of revenue to the federal government from eliminating this tax will be
several billion dollars in addition.
As Commissioner Pomp has noted, the corporation tax exists in 47 states, and
has served California consistently for many years.  From our perspective, the issue
which needs addressing the corporation tax is the erosion of its base, particularly
from the new loopholes put in place in the recent budgets, not its elimination.

*The Commission failed to examine one of the dominant changes in the 21st
century economy:  the growth of internet usage, electronic commerce, digital
downloads, internet taxation, and interstate nexus issues which arise from
growing electronic commerce.  “It is a stunning failure of the Commission that it
barely examined the many new issues of the new economy which surround the
internet”, said Goldberg.

*The Commission failed to adequately examine alternatives, such as failures
in the commercial property tax, the lack of an oil severance tax, and the option for
a carbon tax.  CTRA presented twice with regard to the proposal for a split roll,
which we have called “the single largest hole in the tax system”, but the
Commission did no independent analysis, nor did it consider this seriously.
Similarly, it never really considered Commissioner Fred Keeley’s proposal for a
fuel tax or other approaches to taxing carbon, again a major issue of the 21st
century economy.  The split roll presentations are here:

“Ultimately, 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,” said Goldberg.
CTRA also presented alternative approaches to the Commission, including
broadening the sales tax base, addressing commercial property, and addressing
tax expenditures, here:

Leave a Reply

You must be logged in to post a comment.