Business net receipts tax being considered

Governor Schwarzenegger's Executive Order S-15-09 mandated the bipartisan Commission on the 21st Century Economy to “re-examine and modernize California's out-of-date revenue laws that contribute to feast-or-famine state budget cycles.” The commission is comprised of 14 members: seven appointed by the Governor, and seven appointed by the legislature.

The commission has held public meetings throughout the state and is charged with applying the principles outlined in Schwarzenegger's executive order and will suggest changes to state and local revenues that will result in a revenue stream that is more stable and reflective of the California economy. The commission wrapped up its public workshops this week in San Francisco and Los Angeles and will report its findings to the Governor and legislature on or before Sept. 20.

While the commission has considered a menu of options for restructuring California’s tax system, it appears that they are looking at things conceptually, as opposed to having or providing great detail of how these proposals would be implemented or, more importantly, how they would impact the employer community and job retention/creation.

For instance, a Business Net Receipts Tax taken in isolation would certainly have a negative impact on the small business climate in California. To date, it appears that the BNRT proposal would involve: modification of the personal income tax to two brackets with an overall goal being to reduce the rate; elimination of the corporate tax; and elimination of much of the state portion of the sales and use tax.

A business net receipts tax is a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms. In-house labor costs cannot be deducted. By not allowing a deduction or offset for in-house labor, the state would tax large employers to a greater extent, whether they are actually profitable or not. A system like this would have the very real potential of actually discouraging job creation. Only Michigan, Texas and Ohio have impended versions of a BNRT.

With the commission reviewing a very wide range of ideas, including removing Proposition 13 property tax protections for businesses, and not necessarily having or providing critical details to date, there is little specificity to react to. Due to this, the CRA is suggesting how the varying proposals would likely affect the restaurant industry, its suppliers, its employees and its revenue to the state - with specific focus on the impact of a the elimination of property tax protections and the BNRT proposal.

The next points of action are:

  • By Sept. 20, the commission will present its recommendations to the Governor and the legislature.
  • The Governor has said he will call a special session of the legislature to consider the eventual proposals provided by the Commission.
  • At that point, the legislature will likely have public hearings on the varying issues contained in the reform package.