The proposal by the Commission on the 21st Century Economy (COTCE—rhymes with “gotcha”) to scrap the California tax system and replace it with the Business Net Receipts Tax (BNRT) is riddled with problems and full of questions without answers. It begs the question—how stupid do they think we really are?
Few people understand how the BNRT works and no one knows how it will impact California. Some compare the BNRT with the European Union's Value Added Tax (VAT). That’s like saying the Oakland Raiders and Manchester United both play football.
On the surface, both tax systems sound similar. The proposed BNRT would be imposed as a percentage of a business’ gross receipts from the sale of goods and services, minus the business’ purchases of goods and services from other businesses (which have already been taxed). A VAT is a tax on manufacturers at each stage of production on the amount of value an additional producer adds to a product. This cost is typically passed on to the consumer in the end.
A key distinction between the VAT and BNRT lies in the fact that California is a state, not a sovereign nation. So, the BNRT lacks a critical element of Europe's VAT—the border adjustment. The United States Constitution prevents California from implementing a border adjustment because that interferes with interstate commerce, which can only be regulated by the federal government.
This creates an enormous problem for California businesses. Europe’s VAT system ensures that products made in Europe are taxed at the same rate as products made abroad by placing the VAT on products entering Europe and rebating the tax for those products leaving Europe. However, under the United States Constitution, businesses without a nexus to California cannot be taxed by California. Thus, California products will be subject to the BNRT while products made elsewhere will enjoy a competitive tax advantage.
The BNRT’s problems don’t end there. Most importantly, the BNRT reduces incentives to create jobs in California.
The Commission’s proposal provides a tax deduction for payments to independent contractors, but not for employee wages. It’s almost as if the Commission was trying to find a way to punish California workers. Under this proposal, California businesses would be taxed for keeping employees on their payroll. The logical result is that California businesses will turn to out-of-state labor contractors who hire workers in California and then contract them out to California businesses. Thus, Californians will have even less stable employment and we would see fewer jobs created here.
Adopting the untested BNRT proposal requires blind faith in the Commission’s promises that it will somehow benefit California, despite all the evidence to the contrary. It’s like quitting your dull, but reliable job because a late night commercial promises you can make $100,000 working from home.
Who benefits from this proposal? California workers don’t benefit. California’s small businesses don’t benefit. California corporations don’t benefit. Any benefit to California’s taxpayers is entirely speculative. The only certain beneficiaries from this proposal are out-of-state businesses, large, multi-state or multi-national businesses, and out-of-state labor contractors. Was this really the purpose of the Commission on the 21st Century Economy?
Many economists love Europe's VAT and extol its benefits to the European economy. But don't be tricked into believing that the proposed BNRT will bring these or similar benefits to California. The greatest lessons Californians can learn from Europe regarding the BNRT are the lessons learned the hard way in the casinos of Monte Carlo.