A special commission created by Gov. Schwarzenegger and state legislative leaders to rethink California's tax system has come out with some radical proposals--proposals many state politicians and interest groups think are dead in the water.
From the Los Angeles Times's report:
The recommendations from the Commission on the 21st Century Economy, which include some revolutionary ideas such as scrapping the sales tax and imposing a broad and untested new business levy, have been met with shrugs and even a few snickers.
"It's not cooked," said state Treasurer Bill Lockyer, who was a tax lawyer for decades. "It probably needs years of work."..."This is the most significant tax policy proposal in three decades," said Assemblyman Chuck Devore (R-Irvine). "But the chances of this getting approved, as is, are zero percent."...
Schwarzenegger is expected to call a special session of the Legislature to address the commission's findings.
Details on why things have changed in the economy such that a tax system rethink seems in order for California:
The jist of the commission's proposal:The state's tax system was fashioned during the Great Depression, when small manufacturers churned out retail products subjected to a sales tax. As recently as 1950, the sales tax provided nearly 60% of the state's revenue.
But in the years since, California's economy has shifted to one dominated by service industries -- lawyers, engineers and other professionals whose sales are not taxed. Although the state has the nation's highest sales tax, it now accounts for barely a quarter of revenue.
The result has been an increasing dependence on income taxes, which grew from 11% of state revenue in 1950 to more than 53% in 2008.
Under the plan, the state's current half-dozen income tax rates would be replaced by two -- 2.75% for those making up to $56,000 a year and 6.5% for those earning more. Sales and corporate taxes would be replaced by a single new business levy that would spread the burden -- at a tax rate of about 4% -- more broadly and would include service professions.
The Sacramento Bee has more details on the report, and on Cali's current tax realities:
In 2006, according to the Franchise Tax Board, Californians making more than $500,000 a year filed just 1 percent of all state income tax returns - and paid 47.2 percent of the taxes.
That works out fine for the state treasury when the economy is humming along, since wealthy taxpayers derive much of their income from capital gains and investments. But when stock markets sag, so do the incomes of many wealthy taxpayers - and that has a major impact on state income tax revenues.
The Commission on the 21st Century Economy's own website.
The image associated with this post was taken by Flickr user Steve Rhodes. It was used under user Creative Commons license.
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Hm. Gives new definition to the term "consumption tax". I wonder if this is what Mike Huckabee was talking about when he was pitching his whole for an end to the federal income tax and replacing it with a federal consumption tax. I also wonder how many other states are engaged and not in the practice of taxing service professionals.