The Orange County Taxpayers Association released their public critique of the California Tax Commission in the form of a letter from its President, Reed Royalty, to Commission Member Curt Pringle. I thought it was quite good….
September 28, 2009
The Honorable Curt Pringle
Member, California Commission on the 21st Century Economy
State of California Department of Finance
915 L Street, 8th Floor
Sacramento CA 95814
Dear Commissioner Pringle,
Thank you for your thorough presentation to the Orange County Taxpayers Association (OCTax) of the Commission’s recommendations for overhauling the state’s tax structure. Here are OCTax’s reactions.
What’s Good
- Two personal income tax (PIT) rates: 2.75% up to $28,000 single/$56,000 joint, 6.5% above that.
- Standard personal income tax deduction: $22,500 single/$45,000 joint.
- Itemized deductions for mortgage interest, property tax, and charity.
- Eliminate corporation tax and minimum tax.
- Eliminate state general purpose sales tax.
- Decrease the state’s reliance on the overly-progressive and volatile personal income tax.
- No new taxes on offshore oil severance, carbon, fuels and pollution.
- No apparent threat to Proposition 13.
What’s Not So Good
- The business net receipts tax (BNRT) would be levied on all businesses, including hitherto-untaxed services. The Commission’s strategy seems to be to levy the new sales-like tax en masse on the growing services sector of the economy without confronting individual service providers directly. The Commission begs the question, “Why shouldn’t sales of services (legal, accounting, child care, entertainment, hospitals, etc.) be taxed just like sales of tangible goods?” With or without a good answer to that question, the lobbying assault by services industries against the BNRT will be monumental. As the safari leader in the funny radio commercial whispers to his troupe, “We’re approaching a herd of lawyers. When disturbed or threatened, they’re known to litigate all over you. Be cautious.”
- The Commission promises to institute a “rainy day” reserve fund for the state budget. But will it work? Governors and Legislatures have defeated past incarnations of this nice idea by declaring or creating budget crises to justify cutting off contributions to rainy day funds. They always want to spend the money now. How will this effort be different?
What’s Bad
- OCTax thinks taxes should be “fair, understandable, cost effective, and good for the economy.” The BNRT fails the “fair” and “understandable” tests by making the cost of government less transparent. Under existing law, when we buy a tangible product, the amount of the sales tax is printed right on the receipt. But the BNRT on goods and services would be buried in the cost of a product or service at various points in production, not clearly evident to customers at the point of sale. It would be a hidden tax. We hope that isn’t the Commission’s intent.
- There is no assurance that the Commission’s recommendations would be revenue-neutral. In fact, it seems to be the Commission’s intent to seize $8 billion or so in new tax revenue from services industries. OCTax would oppose any plan that would raise total taxes, or even a plan that would sustain governments’ present levels of spending. Our legislatures and governors are genetically programmed to spend $10 billion more per year than we have in the treasury, even during the present recession. We prefer not to enable them to increase the size of government even more. Hypothetically assuming that the tax on services would raise new revenue (although the Laffer Curve may suggest that it won’t), OCTax thinks a general tax decrease would be in order – and would raise revenue even more by empowering the private sector to produce more goods, services and jobs.
OCTax congratulates you and your fellow Commissioners for working conscientiously to find solutions to our roller-coaster state budget. You offer some innovative and sensible ideas.
But consider the wisdom of 17th-century financier Jean Baptiste Colbert: "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."
OCTax thinks the two “bad” scenarios above would maximize the hissing in the Legislature, media, and public opinion, resulting in fewer feathers. OCTax suggests that the Commission try to modify its recommendations to provide transparency of taxation on goods and services and to make the entire package revenue-neutral.
/S/ Reed Royalty
President, OCTax