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Posted: 8:58 am Thursday, Oct. 01, 2009

Editorial: Tax ideas trigger knee-jerk reaction

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Gerald Parsky, chairman of the bipartisan tax reform commission that delivered its recommendations to the Legislature this week, said his panel was asked to be bold, and it delivered. Rather than tinker around the edges, Parsky says, the panel decided to propose dramatic changes in California's oft- criticized tax system.

They did, and now they are experiencing the wrath of the status quo interests who rise up to fight every new idea that appears in the Capitol. The print was barely dry on the commission's report before almost every labor and business group in town had denounced its proposals.

There's good reason to question several of the commission's recommendations, but the reaction of the last 36 hours has been hasty. Parsky and his colleagues have highlighted some real shortcomings of our tax system and proposed some wide-ranging solutions. They deserve a fair hearing.

The proposal would reduce personal income taxes, eliminate the corporate income tax and eliminate most of the state portion of the sales tax. It would replace the lost revenue by creating a new business receipts tax - a levy on the difference between what a company pays for its raw materials and what it gets for its finished products.

The commission says the new system would be far less volatile than the current one. It would broaden state taxes to include services and would tap the federal government and out-of-state firms to help balance the books. Those are worthy changes, but they would come with trade-offs and many uncertainties.

Among these concerns:

• Would the package shift the tax burden in undesirable ways? The income tax and corporate tax cuts would favor the wealthy and the investor class, and those taxes would be replaced by a new business net receipts tax that has never been tried elsewhere and about which not much is known. Most importantly, no one knows how much of the tax would be absorbed by the firms paying it and how much would be passed along in higher prices or lower wages.

• Would the business net receipts tax be more regressive than the current sales tax? It would tax all businesses, including those selling food, shelter, clothing and medical care. If the tax on those necessities were passed on to consumers, it could be tougher on the poor than the sales tax it is replacing.

• Would the new tax discourage companies from hiring people and instead encourage them to use contract labor - without benefits or employment security? Even Parsky admits that's possible, but he suggests fixing the problem by taxing independent contractors, too. But would that simply make out-of-state contractors more attractive than Californians?

• Would the new business tax be transparent enough that taxpayers would know what they were paying? If not, it risks being gamed by the Legislature and the very interest groups that have mucked up our current tax system. The commission has suggested a credit for research and development because of California's reputation as a high-tech state. But that would simply open the door to a long line of requests for special treatment.

It's easy to be skeptical. But lawmakers and the governor should take some time to actually read the proposals before they reflexively slam them or embrace them.