SACRAMENTO — A special panel's tax reform package could end up where most blue ribbon panel papers land: on a shelf with a thud, eventually collecting dust.
Though it is unlikely to forge a consensus on a new way to bring in tax revenues, the Commission for a 21st Century Economy will issue its recommendation Sunday. However, political observers are not giving it much chance to survive in the Legislature, despite the fanfare and urgency with which the panel was created less than a year ago.
"Once it gets to the Legislature, every company or individual or special interest that will be hurt will spend a great deal of money to keep this from happening," said Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. "Tax reform is a zero-sum game. There's no way for someone to benefit from it without someone else getting hurt."
The commission will propose to eliminate the top income bracket of 9.5 percent for the wealthy, eliminate corporation taxes and the portion of sales taxes going to the general fund. It would also create a new, wholly untested tax on business transactions that a group of California economists warned would have vast, unintended consequences.
At least one commissioner, Fred Keeley, a former assemblyman from Santa Cruz, is expected to write a dissenting opinion to the recommendation — a signal of the fate it awaits among Democrats.
"Fundamental tax reform is just very hard to do," said Jack Pitney, political science professor at Claremont McKenna College. "In a complex economy, it's very difficult to have a simple tax code and reform is inevitably going to be complicated."
Gov. Arnold Schwarzenegger and legislative leaders created the commission late last year with the idea of reducing the state's dependence on personal income for revenue. Schwarzenegger has complained that wild swings in revenue — based largely on the ups and downs of wealthy taxpayers' stock portfolios — has had a whiplash effect on budgets in recent years. He originally wanted an up-or-down vote by the Legislature, but the 14-member commission hinted that it may urge lawmakers to take as long as two years to deliberate over details.
Schwarzenegger is still planning to call a special session on tax reform, spokesman Aaron McLear said.
State Sen. Lois Wolk, D-Vacaville, chairwoman of the Senate Revenue & Taxation Committee, said she does not intend to act hastily, though she agrees that the state's tax code is in need of an overhaul.
"We'll have a lot of hearings," she said. "This is a tax code that dates back a century.
"A new tax code should reflect a new and changing economy, but I'm not sure if there's a magic bullet. We have to take time and do it right. It's important to be cautious."
Lower taxes for wealthy
The commission recommended wiping out the top income bracket of 9.5 percent for the wealthiest taxpayers, which would reduce the state's share of revenue based on personal income from 44 percent to 31 percent.
Married filers making up to $56,000 would pay a 2.6 percent income tax, while all others would pay a flat 6.5 percent income tax.
The proposal would provide about $7 billion in tax relief for the top 3 percent making more than $200,000, and $12.5 billion to the top 20 percent, according to Lenny Goldberg, president of the liberal California Tax Reform Association, which opposes the proposals. Millionaires would get a $100,000 tax break, while those making $50,000 to $75,000 would get about $179 in tax relief.
"What is clear is the upper income group will pay a lower share of income taxes," said Steve Levy, director and senior economist of the Palo Alto-based Center for Continuing Study of the California Economy. "Who picks up the difference is the question."
The problem, Schnur said, is that since the goal is to take volatility out of the revenue picture, "the only way to even out the swings is to lessen the burden on the upper income bracket."
To make up for the revenue loss, the commission is proposing a business net receipts tax, which would tax a company's gross revenues minus the cost of goods and services purchased from other firms. It is a complex formula whose impact and effectiveness is unknown, critics argue. No state has ever used such a tax.
A group of nine California economists signed a letter warning the commission that the business tax contains too many uncertainties to establish as the state's most important tax.
"In most cases, fundamental tax reform is preceded by years of study, not months," the economists wrote. "To go forward with so little information and such minimal analysis significantly increases the likelihood of negative unintended consequences."
Critics blast plan
Critics on the left call the plan a giveaway to the rich and a shifting of the burden to working and middle classes.
"The top end of the income distribution is where all the growth has been in recent years," said Jean Ross, director of the California Budget Project.
"When you've seen very little progress in the incomes of the vast majority of taxpayers, it would be inappropriate to shift a greater share of the cost of financing public services onto families already having a tough time making ends meet."
Some commissioners insisted that the package is progressive.
"People making more than $200,000 would continue to have the burden of 50 percent of the PIT (personal income tax) paid in California," said John Cogan, one of Schwarzenegger's appointees and a senior fellow at the conservative Hoover Institution.
Others said the middle class would pay indirectly through higher prices on products with the business net receipts tax.
Even conservatives are opposed to the package because of the proposed new business tax. Californians Against Higher Taxes said the proposal "would harm businesses, cut jobs and dampen a potential recovery from the devastating recession."
Reach Steven Harmon at 916-441-2101.