A coalition of more than 40 business and employer groups led by the California Chamber of Commerce is continuing to raise questions and concerns about the new “business net receipts tax” being considered by a special state tax commission.

The CalChamber and coalition called on the commission to take time to undertake a thorough analysis of how the new tax will affect jobs and the economy, even after a tax rate is unveiled, before the commission votes on whether to adopt the proposal.

“We expect that the commission will provide an estimated business net receipts tax rate before its final hearing, but we are a short time away from what may be the decision day, and still do not have it,” said CalChamber President and CEO Allan Zaremberg.

“In order for commissioners to understand the impact of this tax on companies and industries, businesses must have the time to calculate how this tax will affect their often-complicated operations.”

The proposed business net receipts tax is designed to be a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms. The intent behind this new tax is to reduce revenue volatility by basing it on total receipts, rather than profits. The tax also would bring a large category of services businesses into the tax base.

More Specifics Needed
The CalChamber-led coalition presented its latest comments in a letter responding to Gerald Parsky, chairman of the Commission on the 21st Century Economy. At a commission workshop last week, Parsky invited the CalChamber and coalition to follow up testimony with their remaining ongoing issues with the business net receipts tax proposal.

The commission has scheduled a meeting on September 10 in Los Angeles to discuss its tax recommendations.

When creating the commission last fall, Governor Arnold Schwarzenegger asked the group to examine the state’s tax structure with a goal of stabilizing state revenues and reducing volatility, as well as promoting California’s economic prosperity and competitiveness.

In July, the Governor extended to September 20 the deadline for the commission to present its findings and said he will call a special session of the Legislature afterwards to consider the commission’s recommendations.

The coalition said it is requesting a detailed written proposal—including the tax rate and a full analysis of the policy, operational and transitional implications—so that California businesses and economic experts have the opportunity to respond to the commission regarding the proposal and analysis.

“As we emphasized during our workshop testimony, we believe it is crucial for the commission to take sufficient time to analyze” the proposed business net receipts tax, “rather than be driven by any arbitrary deadline, so that any vote of the commission . . . is an informed vote,” the coalition stated in its letter.

A thorough analysis and response by sectors affected also must be available for legislative review because the commission intends for its recommendation ultimately to be presented to the Legislature for consideration, the coalition said.

Key Issues
The coalition letter outlines transitional and operational questions that were not addressed in a “Preliminary Overview” released by the commission on August 21 or the commission’s August 26 and August 28 workshops on the proposed business net receipts tax:

How did the commission arrive at the proposed tax rate? Will the commission model the rate over the past several economic cycles (about 10 years) to determine the ability of the business net receipts tax to generate revenue and stem volatility? What is the risk that revenues will substantially deviate from the commission’s projected estimates?
Which came first, the rate or the base? In other words, was the rate developed as a result of the commission’s judgment as to what best comprises the base of a business net receipts tax as a matter of tax policy, or did the commission determine the most appropriate rate for the economy, and engineer the base to accomplish that rate?

The coalition expressed appreciation for the commission’s strong statements clarifying that only the Legislature, and not an administrative body, would have the authority to set and change the business net receipts tax rate, but noted that the coalition cannot provide a complete analysis of this proposal, nor can an individual company understand it, without knowing the rate and the base to which it applies.

What are the proposed deductions that will be available under the business net receipts tax? More details are needed, the coalition said.

For example, according to the “Preliminary Overview,” employers would not be able to deduct from revenues the cost of employees, an expense that is allowed under the current corporate income tax system. At the workshop, however, the commission indicated there was a possibility of a partial deduction for employee costs.

What about tax fairness? Although the commission’s intent is to develop a less volatile tax system, it should also give due consideration to tax fairness. California’s current tax system is based either on profits, such as the personal and corporate income taxes, or is passed through as a tax on consumption, like the sales tax. The business net receipts tax is imposed upon companies even when they are in a loss position, and it cannot be passed on as a transactions tax.

The coalition noted that it is not aware of any substantial discussion of why the business net receipts tax is a preferable tax policy to the current taxes that are based on profits or consumption. It pointed out that the only other major tax similar to this proposal is the property tax, the subject of the Proposition 13 tax revolt 30 years ago when it became unaffordable for major parts of California society.

Taxpayers and policymakers deserve more discussion and analysis on this issue, the coalition said.

Which economic sectors will be winners and which losers under a business net receipts tax? Adoption of this recommendation must await analysis of its impact on specific economic sectors, the coalition said.  For example, businesses with low profit margins and high employee expenses presumably would be especially hard-hit, as would companies in a loss position.

In addition, based on the limited information so far available, it appears the business net receipts tax may shift more of the tax burden onto small businesses, since many pay under the personal income tax system, and would not benefit from elimination of the corporate income tax.

What impact will the proposal have on California jobs and the economy? Adoption of the recommendation must also await analysis of this impact, the coalition stated. If the business net receipts tax amounts to a tax on employees (because it appears employers will not be able to deduct the cost of employees as they do now), will it motivate companies to outsource jobs to other states and nations? Will it further constrain California’s ability to compete for future investments if business loses important incentives such as the research and development or enterprise zone credits? What will become of California’s ability to compete with other states and countries if the cost of exported California goods becomes substantially higher than goods offered by other states and countries? Additionally, will the cost of doing business increase for Californians, due to higher prices for advertising and other business purchases?

Staff Contact: Kyla Christoffersen