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.
Thursday, October 15, 2009
Tuesday, October 13, 2009
The Volatility Monster—Be Afraid, Be Very Afraid
As Californians suffer through the worst recession in decades, the Commission on the 21st Century Economy and the governor are seeking massive tax cuts for the super rich. How can such an outrageous proposal be sold to unemployed, underemployed, and underpaid Californians? By calling this giveaway a “reform” to our budget crisis.
The Commission and governor suggest that the source of our budget woes is a sinister monster called--(cue scary music)--“revenue volatility.” As their story goes, if we slay the revenue volatility monster all our budget problems will disappear. So we have no choice but to give very rich people jaw-dropping tax cuts.
Their rationale is that Sacramento cannot responsibly manage a one-time spike in revenues because the revenue volatility monster tricks the Legislature into committing to long-term spending of money the state does not have, thereby condemning California to years of budget stalemates, and tough choices between higher taxes and painful spending cuts. The inference is that these tough choices can be avoided if the state changes its tax structure to eliminate the volatility monster.
Here is the real volatility problem. Very rich people pay a lot of income taxes when they make lots of money in good economic years. Their income taxes go down in recessions because they earn less money. Equity markets, stock options, bonuses, and capital gains depend upon the health of the economy, and with the economy, are volatile. Volatility is not limited to the State of California; we have seen the same volatility across the nation as the richest of the rich have begun to accumulate wealth and income at proportions not seen since the 1920. As a result of accumulation of income in a few hands, the state collects more in income taxes because our personal income tax (PIT) is progressive.
About half of California's General Fund revenues come from the PIT, a progressive tax which increases as amount of taxable income grows. Although the PIT revenues have gone up and down throughout the years, since 1989 it has increased by an average annual rate of 6.7 percent. This outpaces the growth of other taxes, such as the sales tax. Most economists support a progressive tax system – even Adam Smith praised its merits in The Wealth of Nations. And, almost all tax systems in the world contain progressive elements.
The Commission’s report proposes reducing volatility by reducing the tax burden on the wealthy. The Commission proposes flattening the PIT tax structure by reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. Under this proposal, a person struggling to eke out a living on $28,001 will pay the same rate (6.5 percent) as someone earning $2,800,001. If we just don’t tax upper incomes much, voila—we slay the volatility monster.
The benefits to the wealthy don't stop there—the higher income earners still get the benefits of mortgage deductions, property tax deductions and charitable contribution deductions. On the flip side, the Commission’s report recommends we eliminate child care deductions and dependent credits which benefits low-income taxpayers. For some families this leads to a tax increase—a family of four making $65,000 per year with $15,000 of itemized deductions and special credits worth $500 for child care would see their PIT liability increase by a whopping 437.7 percent
This is classic supply-side, “trickle down” economics. The Commission’s report assumes that the super wealthy and corporations which benefit directly from their proposed tax cuts will translate the cuts into lower prices and more investment. In fact, some have argued that lowering the tax rate is going to spur so much investment that overall tax revenue is going to increase. But we’ve heard that tired sales pitch before when the Reagan and Bush federal tax cuts didn’t result in tax revenue increases.
“Trickle down” economics has been thoroughly discredited. The true response to solving the volatility problem is to make sure Californians are fully employed and decently paid.
The Commission proposes reducing PIT revenues under the fig leaf of stabilizing revenues. Using this logic, if California just stopped collecting taxes, the problem of volatility would be solved forever.
The Commission and governor suggest that the source of our budget woes is a sinister monster called--(cue scary music)--“revenue volatility.” As their story goes, if we slay the revenue volatility monster all our budget problems will disappear. So we have no choice but to give very rich people jaw-dropping tax cuts.
Their rationale is that Sacramento cannot responsibly manage a one-time spike in revenues because the revenue volatility monster tricks the Legislature into committing to long-term spending of money the state does not have, thereby condemning California to years of budget stalemates, and tough choices between higher taxes and painful spending cuts. The inference is that these tough choices can be avoided if the state changes its tax structure to eliminate the volatility monster.
Here is the real volatility problem. Very rich people pay a lot of income taxes when they make lots of money in good economic years. Their income taxes go down in recessions because they earn less money. Equity markets, stock options, bonuses, and capital gains depend upon the health of the economy, and with the economy, are volatile. Volatility is not limited to the State of California; we have seen the same volatility across the nation as the richest of the rich have begun to accumulate wealth and income at proportions not seen since the 1920. As a result of accumulation of income in a few hands, the state collects more in income taxes because our personal income tax (PIT) is progressive.
About half of California's General Fund revenues come from the PIT, a progressive tax which increases as amount of taxable income grows. Although the PIT revenues have gone up and down throughout the years, since 1989 it has increased by an average annual rate of 6.7 percent. This outpaces the growth of other taxes, such as the sales tax. Most economists support a progressive tax system – even Adam Smith praised its merits in The Wealth of Nations. And, almost all tax systems in the world contain progressive elements.
The Commission’s report proposes reducing volatility by reducing the tax burden on the wealthy. The Commission proposes flattening the PIT tax structure by reducing the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. Under this proposal, a person struggling to eke out a living on $28,001 will pay the same rate (6.5 percent) as someone earning $2,800,001. If we just don’t tax upper incomes much, voila—we slay the volatility monster.
The benefits to the wealthy don't stop there—the higher income earners still get the benefits of mortgage deductions, property tax deductions and charitable contribution deductions. On the flip side, the Commission’s report recommends we eliminate child care deductions and dependent credits which benefits low-income taxpayers. For some families this leads to a tax increase—a family of four making $65,000 per year with $15,000 of itemized deductions and special credits worth $500 for child care would see their PIT liability increase by a whopping 437.7 percent
This is classic supply-side, “trickle down” economics. The Commission’s report assumes that the super wealthy and corporations which benefit directly from their proposed tax cuts will translate the cuts into lower prices and more investment. In fact, some have argued that lowering the tax rate is going to spur so much investment that overall tax revenue is going to increase. But we’ve heard that tired sales pitch before when the Reagan and Bush federal tax cuts didn’t result in tax revenue increases.
“Trickle down” economics has been thoroughly discredited. The true response to solving the volatility problem is to make sure Californians are fully employed and decently paid.
The Commission proposes reducing PIT revenues under the fig leaf of stabilizing revenues. Using this logic, if California just stopped collecting taxes, the problem of volatility would be solved forever.
Wednesday, October 7, 2009
VOTE YES--OR ELSE
During the last session, the Legislature worked diligently on big issues, including renewable energy, balancing the budget, and water. Unfortunately, the governor has done little to move the ball forward on these issues, other than to issue demands and now, to tell the Legislature, “vote yes--or else.”
Now, he has taken 700 bills hostage in an attempt to force a deal on a water bond benefiting some Californians, but paid for by all Californians. Something is very wrong with this picture.
The Legislature is keenly aware of the urgency of the crisis faced by agriculture, fisheries, and communities dependent on the Delta for their drinking water. During the final days of session, the Legislature came very close to passing 2 bills on water, both of which it continues to work on. One bill would set substantive policy for the Delta; the second bill would put a water bond on the ballot for voters to consider.
As complicated as the substantive policy is, the funding is just as problematic. The proposed general obligation bond for dams and conveyances burdens the state’s already over-stretched General Fund by $780 million annually. In a year when we cut billions of dollars from the state’s General Fund, decimated state services, nearly closed state parks, furloughed state employees and backed away from the state’s long-standing commitment to higher education, adding another $780 million annually to finance bond costs is fiscally irresponsible. We need the governor’s help to identify better ways to pay for this.
On October 5, the governor suggested to the Senate President Pro Tem that the Legislature withdraw nearly 700 bills now on his desk awaiting signature. The clear inference is that if they are not withdrawn, the governor will make good his threat to veto them because he has not yet gotten his way on water.
The veto power overrides the work of the Legislature which represents the will of the people. It is an extraordinary power and should not be exercised capriciously or casually. This governor, however, has repeatedly abused his veto power and threatens to do it again.
Last year, the Governor vetoed over 400 bills, 136 of them with a generic veto message, because he was unhappy after protracted budget negotiations.
Soon after, the state saw an unprecedented drop in General Fund revenues and we were forced to make billions of dollars in painful cuts to services. Public hearings were held, the Big Five met, an agreement was reached with the governor, and was passed by the Legislature. The governor promptly vetoed funding for several programs, including domestic violence shelters and HIV/AIDS prevention. A lawsuit is pending to challenge the legality of these vetoes. Legal or not, these vetoes violated the agreement between the governor and the Legislature, put the safety of many Californians at risk, and jeopardized the public's trust in the governor.
In September, the governor gave Californians another taste of how far he would go. He asked the Legislature to withdraw all bills pending on his desk so that he could evaluate what had or had not passed before deciding whether to sign or veto bills. The Legislature did not withdraw Assemblymember Cook’s AB 264, a unanimously passed bill to honor Vietnam veterans. He then vetoed the bill out of spite.
This brings us to the governor’s most recent threat to veto the bills currently on his desk. Like last year, many of the bills threatened by the governor save the state money during this dire recession. Some correct flaws in existing law or make life easier for Californians. All of them deserve serious consideration. Yet he threatens to veto them without regard to their merits because he hasn’t yet gotten exactly what he wants on water right now. Vote “yes” on the water bill—or else.
Assembly Majority Leader Alberto Torrico has announced that he's writing to the Attorney General, urging him to investigate the governor's use of intimidation to influence legislation as a form of extortion. Whether the governor’s clumsy attempt at hostage-taking is illegal remains to be seen. It may constitute misconduct and, at minimum, is an abuse of his executive powers at the expense of all Californians.
Instead of bullying, now is the time California needs its governor to step up to the plate and work cooperatively with the Legislature to find ways to solve our water problems without mortgaging our future.
Now, he has taken 700 bills hostage in an attempt to force a deal on a water bond benefiting some Californians, but paid for by all Californians. Something is very wrong with this picture.
The Legislature is keenly aware of the urgency of the crisis faced by agriculture, fisheries, and communities dependent on the Delta for their drinking water. During the final days of session, the Legislature came very close to passing 2 bills on water, both of which it continues to work on. One bill would set substantive policy for the Delta; the second bill would put a water bond on the ballot for voters to consider.
As complicated as the substantive policy is, the funding is just as problematic. The proposed general obligation bond for dams and conveyances burdens the state’s already over-stretched General Fund by $780 million annually. In a year when we cut billions of dollars from the state’s General Fund, decimated state services, nearly closed state parks, furloughed state employees and backed away from the state’s long-standing commitment to higher education, adding another $780 million annually to finance bond costs is fiscally irresponsible. We need the governor’s help to identify better ways to pay for this.
On October 5, the governor suggested to the Senate President Pro Tem that the Legislature withdraw nearly 700 bills now on his desk awaiting signature. The clear inference is that if they are not withdrawn, the governor will make good his threat to veto them because he has not yet gotten his way on water.
The veto power overrides the work of the Legislature which represents the will of the people. It is an extraordinary power and should not be exercised capriciously or casually. This governor, however, has repeatedly abused his veto power and threatens to do it again.
Last year, the Governor vetoed over 400 bills, 136 of them with a generic veto message, because he was unhappy after protracted budget negotiations.
Soon after, the state saw an unprecedented drop in General Fund revenues and we were forced to make billions of dollars in painful cuts to services. Public hearings were held, the Big Five met, an agreement was reached with the governor, and was passed by the Legislature. The governor promptly vetoed funding for several programs, including domestic violence shelters and HIV/AIDS prevention. A lawsuit is pending to challenge the legality of these vetoes. Legal or not, these vetoes violated the agreement between the governor and the Legislature, put the safety of many Californians at risk, and jeopardized the public's trust in the governor.
In September, the governor gave Californians another taste of how far he would go. He asked the Legislature to withdraw all bills pending on his desk so that he could evaluate what had or had not passed before deciding whether to sign or veto bills. The Legislature did not withdraw Assemblymember Cook’s AB 264, a unanimously passed bill to honor Vietnam veterans. He then vetoed the bill out of spite.
This brings us to the governor’s most recent threat to veto the bills currently on his desk. Like last year, many of the bills threatened by the governor save the state money during this dire recession. Some correct flaws in existing law or make life easier for Californians. All of them deserve serious consideration. Yet he threatens to veto them without regard to their merits because he hasn’t yet gotten exactly what he wants on water right now. Vote “yes” on the water bill—or else.
Assembly Majority Leader Alberto Torrico has announced that he's writing to the Attorney General, urging him to investigate the governor's use of intimidation to influence legislation as a form of extortion. Whether the governor’s clumsy attempt at hostage-taking is illegal remains to be seen. It may constitute misconduct and, at minimum, is an abuse of his executive powers at the expense of all Californians.
Instead of bullying, now is the time California needs its governor to step up to the plate and work cooperatively with the Legislature to find ways to solve our water problems without mortgaging our future.
Subscribe to:
Posts (Atom)