Bipartisan Tax Advice? You’ve Got It

Thursday, January 14, 2010

As members of the Commission on the 21st-Century Economy, we spent nine months diligently addressing problems created by California’s outdated and deeply flawed tax system.

Agreement on reforms is monumentally difficult. Indeed, the two of us have decidedly different political views. Although we are both former appointees to the White House Office of Management and Budget, one of us was appointed by President Ronald Reagan and the other by President Bill Clinton. Although we are both academicians, one is a self-proclaimed bedrock fiscal and economic conservative and the other an unreconstructed tax-and-spend paleo-liberal. Our views and values diverge on many issues. We knew this would not be easy.

Our state’s leaders, however, asked us for pragmatic advice and principled compromise. After countless hours of analysis, research, and debate, we are confident that the commission’s tax package sets out on the best achievable path forward for California. For each of us, it protects the core values we hold dear. The legislature, with its extensive staff, has the obligation and capacity to fine-tune the political judgments and refine the analytics. The commission has given the legislature a valuable starting point.

Our plan substantially reduces revenue swings that promote boom-bust budgeting and also speaks to economic circumstances of this new century. We recommend a sweeping reduction in personal income taxes across all income groups, repeal of the 5 percent state general-fund sales tax, and elimination of the corporate income tax. The resulting lost revenues would be replaced by a new business net receipts tax (BNRT).

The BNRT would apply to all net receipts of almost all entities doing business in California, except small businesses. It is designed to tax, at a relatively low 4 percent rate, the “value” a business adds to the inputs from its suppliers in producing products and services sold in California. It is important that this new form of tax is seen as part of our entire package of proposed reforms.

Our state’s leaders wanted pragmatic advice and principled compromise on the tax system. We knew this would not be easy.

The five-year phase-in, beginning in 2012, is designed to avoid unnecessary burdens on any sector of the economy. Despite the claims made by some, we are convinced by the available data that the overall progressivity of the tax system would change little, if at all. In addition, compared with current law, the plan would actually reduce the state and federal tax burdens borne by Californians; firms will be able to deduct their BNRT liability from federal taxes. As an additional safeguard, we have recommended creating a technical-review panel, together with a method for continuously evaluating the transition.

We firmly intend that this new system would maintain revenue neutrality and be fair and equitable for each sector of the economy and every segment of the population. Neither of us believes that a pragmatic, revenue-neutral tax proposal can be a vehicle for significant changes in broader social or economic policy we might otherwise prefer—from the left or the right.

During the past months we have analyzed the data, questioned tax experts and economists, modeled countless scenarios, and engaged in lively debate. A change of this magnitude, however, obviously requires careful analysis and debate by the legislature, governor, and public. We believe that the commission’s product is sufficiently promising that our lawmakers ought to fully evaluate the package as a whole, make needed adjustments, and then bring the matter to a vote.

Neither of us believes that a pragmatic, revenue-neutral tax proposal can be a vehicle for significant changes in broader social or economic policy we might otherwise prefer—from the left or the right.

Although both of us have extensive public policy backgrounds, neither of us is a Sacramento insider. We are, however, familiar with the Capitol’s tendency toward the status quo; when partisanship combines with uncertainty and high stakes, moving forward is nearly impossible. But now is the time for true change, which necessarily entails uncertainties. This plan has safety valves and safeguards to mitigate many of those uncertainties. For the good of the state, its economy, and its people, it is our hope that this time will be different and that the lawmakers will put partisanship and ideologies aside to give this plan the full review it deserves and the careful consideration the state’s challenges demand.