STATE OF CALIFORNIA
COMMISSION ON THE 21 st CENTURY ECONOMY
STATE OF CALIFORNIA
REVENUE & TAXATION
FUNDAMENTAL TAX ALTERNATIVES Part Three
PUBLIC MEETING
Thursday, July 16, 2009 1:00 p.m. – 4:55 p.m.
University of California, San Francisco Mission Bay Conference Center William J. Rutter Community Center Fisher Banquet Room 1675 Owens Street San Francisco, California
Reported by: Daniel P. Feldhaus Certified Shorthand Reporter #6949 Registered Diplomate Reporter, Certified Realtime Reporter
Daniel P. Feldhaus, C.S.R., Inc. Certified Shorthand Reporters 8414 Yermo Way, Sacramento, California 95828 Telephone 916.682.9482 Fax 916.688.0723 [email protected]
1 st Commission on the 21 Century Economy – July 16, 2009
A P P E A R A N C E S
COMMISSION ON THE 21 ST CENTURY ECONOMY
Commissioners Present
GERRY PARSKY Commission Chair Aurora Capital Group
RUBEN BARRALES President/CEO San Diego Regional Chamber of Commerce
MICHAEL BOSKIN Professor Stanford University
JOHN COGAN Professor Stanford University
EDWARD DE LA ROSA Founder and President Edward J. De La Rosa & Company, Inc.
CHRISTOPHER EDLEY, JR. Dean/Professor of Law Boalt Hall School of Law
GEORGE HALVORSON Chairman/CEO Kaiser Foundation
WILLIAM HAUCK Trustee, California State University Director Blue Shield of California & Blue Shield Foundation
JENNIFER ITO Research, Training, Policy Director SCOPE
FRED KEELEY Treasurer, County of Santa Cruz Professor, San José State University
Daniel P. Feldhaus, CSR, Inc. 916.682.9482 2 st Commission on the 21 Century Economy – July 16, 2009
A P P E A R A N C E S
COMMISSION ON THE 21 ST CENTURY ECONOMY
Commissioners Present continued
MONICA LOZANO Publisher/CEO La Opinión
REBECCA MORGAN President Morgan Family Foundation
RICHARD POMP Alva P. Loiselle Professor of Law University of Connecticut
CURT PRINGLE Mayor City of Anaheim
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COTCE Staff Present
MARK IBELE Commission Staff Director Board of Equalization
ASHLEY SNEE GIOVANNETTONE
ANTONIO LOCKETT
JESSICA MAR
MICHELLE QUINN Staff Writer
PHIL SPILBERG Chief, Financial Research Department of Finance
MARGIE RAMIREZ WALKER
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 3 st Commission on the 21 Century Economy – July 16, 2009
A P P E A R A N C E S
Public Testimony
MARY BERGAN Past President California Federation of Teachers
RONALD COHEN, CPA Greenstein, Rogoff, Olsen & Co.
LENNY GOLDBERG California Tax Reform Association
DOUG HALL
JAMES HALL Senior Legislature
ANNE HENDERSON League of Women Voters of California
JEAN ROSS Executive Director California Budget Project
WILLIAM SPILLANE Americans for Fair Taxation
JAMES STEVENS Air Transport Association
KHORI WHITAKER
ELLEN WU Executive Director California Pan-Ethnic Health Network
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 4 st Commission on the 21 Century Economy – July 16, 2009
A P P E A R A N C E S Continued
Franchise Tax Board
ANDREA CHANG Multistate Taxation Bureau Legal Division Franchise Tax Board
CARL JOSEPH Director Multistate Taxation Bureau Legal Division Franchise Tax Board
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 5 st Commission on the 21 Century Economy – July 16, 2009
Table of Contents
Item Page
Welcome and Introductions
Chair Parsky ...... 8
Public Comment
James Stevens Air Transport Association ...... 9
James Hall Senior Legislature ...... 11
Ellen Wu California Pan-Ethnic Health Network ...... 12
Jean Ross Executive Director California Budget Project ...... 14 William Spillane Americans for Fair Taxation ...... 15
Khori Whittaker ...... 18
Ronald Cohen Greenstein, Rogoff, Olsen & Co...... 20
Lenny Goldberg California Tax Reform Association ...... 21
Mary Bergan Past President California Federation of Teachers ...... 25
Anne Henderson League of Women Voters of California ...... 26
Doug Hall ...... 28
Comments from Chair Parsky ...... 29
Comments from Commissioners ...... 35
Daniel P. Feldhaus, CSR, Inc. 916.682.9482 6 st Commission on the 21 Century Economy – July 16, 2009
Table of Contents
Item Page
Presentation of Tax Packages, Legal and Policy Issues, and Commission Discussion ...... 37
Mark Ibele Commission Staff Director Board of Equalization
Phil Spilberg Chief, Financial Research Department of Finance
Andrea Chang Franchise Tax Board
Carl Joseph Franchise Tax Board
Adjournment ...... 168
Reporter’s Certificate ...... 169
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 7 st Commission on the 21 Century Eco nomy – July 16, 2009
1 BE IT REMEMBERED that on Thursday, July 16,
2 2009, commencing at the hour of 1:04 p.m., at the
3 University of California, San Francisco, Mission Bay
4 Conference Center, William J. Rutter Community Center,
5 Fisher Banquet Room, 1675 Owens Street, San Francisco,
6 California, before me, DANIEL P. FELDHAUS, CSR 6949,
7 RDR, CRR, in the state of California, the following
8 proceedings were held:
9 --o0o—-
10 CHAIR PARSKY: I want to welcome everyone to a
11 meeting of the Commission on the 21 st Century Economy.
12 Not all commissioners are here yet, but I want to get us
13 started so that we can try to efficiently have this
14 meeting run until about four o’clock.
15 And so I think what we’ll do is to start the
16 public comment period for those of you in this meeting.
17 This isn’t a meeting of the Board of Regents of the
18 University of California. That was in another part.
19 They have many of their own issues, all of which I’m
20 familiar with.
21 But I think what we’ll do is, we’ll start with
22 the public comment, and then I’ll make some introductory
23 comments, and we’ll go right into our presentation and see
24 if I can help frame where we’re going to try to go with
25 respect to this meeting.
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1 And given the time constraints, we’ll welcome
2 all presentations in writing for the record. But we’ll
3 try to limit the comment period to about a minute. And as
4 I said, we will consider all the materials. But in
5 order -- we don’t have a lot of time for this meeting, and
6 so let’s see if we can’t do that.
7 COMMISSIONER PRINGLE: Is that a minute apiece,
8 or --
9 CHAIR PARSKY: We’ll try to give everyone a
10 minute.
11 First, James Stevens.
12 MR. STEVENS: Good afternoon, Chairman Parsky
13 and Members of the 21 st Century Commission on the Economy.
14 I’m Jim Stevens, representing the Air Transport
15 Association, whose members provide over 90 percent of the
16 domestic passenger and cargo air service in this nation.
17 Joining today are Melinda Yee Franklin from
18 United Airlines and José Luis Sanchez from Southwest
19 Airlines.
20 We are here today to underscore our opposition
21 to a proposal to introduce a carbon tax or a fuels tax in
22 California.
23 Last month, Jim May, ATA’s president and CEO,
24 sent a letter to Chairman Parsky and the Commission
25 stating our opposition very clearly.
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1 We believe that the tax proposals are estimated
2 to cost the air carriers in excess of an additional
3 $500 million a year, at a time when this industry can ill
4 afford it. Our members reported losses over $55 billion
5 in the last eight years, and additional losses are
6 forecast for this year.
7 Today, fuel is the airline’s largest cost
8 center. We have every incentive to reduce our fuel burn
9 and emissions; and we have done so year after year. The
10 size of our fuel bill often means the difference between
11 profitability and loss in any given year. The carbon or
12 fuel tax will divert millions from our industry that we
13 would otherwise use to continue our purchase of efficient
14 emission aircraft and engines and other engines.
15 If I may remind you, commercial aviation is
16 vital to California’s economy, supporting both tourism as
17 well as the state’s residents and businesses. We generate
18 over $186 billion annually in economic activity in this
19 state, and are ultimately responsible for 1.5 million
20 jobs.
21 The tax would jeopardize our contribution to
22 California’s economic growth. California’s sales tax this
23 year and the effects of last year’s fuel increase have
24 already forced a 16.5 percent decrease in scheduled air
25 service in this state. Imposing new taxes would not
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1 reverse this trend.
2 Finally, commercial aviation is a global
3 industry. The International Civil Aviation Organization
4 is meeting later this year to set aircraft emission
5 standards. That is the appropriate place for such
6 regulation, not the individual 50 states.
7 For those reasons, the effect of airline
8 modernization, the impact on California’s economy, and the
9 global scope of the industry, we oppose the carbon or
10 jet-fuel tax proposal and ask you to reject it.
11 Thank you very much.
12 CHAIR PARSKY: Thank you very much.
13 Next, James Hall.
14 JAMES HALL: Since we are limited to one minute,
15 in your packet is what we really are going to talk about
16 here.
17 The interaction between property taxes, capital
18 gains, and the step-up in basis are locking people into
19 their homes. There are over two million homeowners over
20 the age of 60 in the state of California, and that will
21 grow on a continuing basis.
22 Also, as a result of these restrictions, there
23 are other things that are keeping people in their homes,
24 namely, the reverse mortgages are now a new thing called
25 “equity key” where they want to take part of the
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1 appreciation of your home.
2 And I’m suggesting here to you that capital
3 gains can be modified. In 1997, the Tax Relief Act, a
4 Congressman from Ohio changed and increased the exemption
5 to $500,000. And there is a lot of research done by a
6 Federal Reserve Board member that proved that anything
7 over $500,000 in and around the Boston area was a great
8 reduction in the selling of the property.
9 [Bell chimed]
10 JAMES HALL: Is that the end of it?
11 COMMISSIONER EDLEY: Sorry.
12 CHAIR PARSKY: The Dean of the Boalt Law School
13 has been asked to keep the chimes going here.
14 JAMES HALL: Okay, thank you.
15 CHAIR PARSKY: Please submit the entire piece in
16 writing.
17 Next is Ellen Wu.
18 MS. WU: Hello, I’m the executive director of
19 the California Pan-Ethnic Health Network, and I’m here to
20 talk about the implications of the proposals on our
21 community’s health.
22 The wealth and income chasm between the rich and
23 the poor continues to grow. Over the last 25 years, the
24 income of the top earners increased 81 percent, while
25 wages for those low-end of the pay scale have stagnated.
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1 This is especially true for communities of color. The
2 median household for African-Americans, American Indians,
3 Alaska Natives, and Latinos are roughly two-thirds of the
4 median income of whites in California.
5 And the health consequences of this widening
6 rich-poor gap and rising poverty are apparent. In 1980,
7 the U.S. ranked 14 th in the world for life expectancy.
8 In 2007, we ranked 29 th . And communities of color are
9 disproportionately impacted by obesity, diabetes, and
10 asthma.
11 Income effects health at every age, from the
12 beginning of life to adulthood and old age.
13 Wealth is tied to neighborhood quality, work
14 conditions, food security, access to medical care, and
15 the availability of buffers against stress. Poor adults
16 are three times likely to have chronic disease that limits
17 their activity, twice as likely to have diabetes, and are
18 nearly 50 percent likely to die of heart disease.
19 In addition, studies have found that life
20 expectancy conforms to a pattern called “social gradient,”
21 in which the more income and wealth people have, the more
22 likely they are to live longer, while people with less
23 income and wealth can expect to live comparatively shorter
24 lives.
25 For example, people who live in West Oakland can
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1 expect to live on average ten years less than those who
2 live in Berkeley Hills.
3 The bottom line is that these proposals do not
4 make economic, moral, or practical sense. The prosperity
5 of our state and health of our children relies on a
6 progressive tax system that shrinks rather than grows
7 the inequalities between the rich and the poor.
8 Thank you.
9 CHAIR PARSKY: Thank you very much.
10 Jean Ross.
11 MS. ROSS: Hello. I’m Jean Ross, executive
12 director of the California Budget Project. And I’m
13 mindful of the one-minute limit. I’ll make several
14 points, many of which harken back to the testimony that
15 I gave to you earlier this year.
16 First, in terms of process. I think it would
17 be extremely inappropriate for the Commission to act on
18 formal recommendations today given the paucity of
19 information that’s been available to the public. And I
20 think this is somewhat of an awkward situation where we
21 are being asked to talk about proposals prior to the
22 Commission receiving a full briefing from your staff and
23 having discussion. And I think it would be appropriate
24 to have more time for the public to reflect on that.
25 Second, I think any of the proposals -- or the
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1 proposals that have been posted on the Web site as staff
2 proposals as well as some of the discussion among
3 commissioners that would reduce taxes -- personal income
4 taxes on high-income Californians while raising taxes on
5 lower-income households would only serve to widen, as
6 Ms. Wu discussed, an already very wide income gap between
7 high- and middle-income Californians.
8 I don’t think that is in the best interest of
9 the long-term future of California or California’s
10 economic future.
11 And thirdly, I think -- and I think some of the
12 modeling that was done for your last meeting is somewhat
13 misleading. I think the proposed changes would have a
14 very detrimental impact on the growth of state tax
15 revenues. And my understanding is that the Commission
16 staff used a flat percentage growth assumption across the
17 income distribution.
18 Your proposals would lower tax rates on those
19 Californians whose incomes have posted the strongest
20 growth rates consistently over the past several decades,
21 while raising taxes on those Californians who have had
22 no to little growth in their incomes. And so what you’re
23 really doing, by shifting, again, where your tax revenues
24 come, is lowering the growth rate for a revenue source
25 which is over half of California’s general fund tax
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1 revenues, which would widen our budget gaps going forward
2 through that shift. And I think, again, given
3 California’s –-
4 [Bell chimed]
5 MS. ROSS: Got the “dong” here -- chronic budget
6 problems, that would only serve to make our problems worse
7 and not better.
8 Thank you.
9 CHAIR PARSKY: Thank you very much.
10 William Spillane.
11 MR. SPILLANE: Chairman Parsky and
12 Commissioners. We are distributing a letter that you
13 have in your folders, but it’s buried in there some
14 place, and I’ll be referring to very briefly because I
15 think it answers some of your questions.
16 California, as you know, is in a race with only
17 New Jersey and New York to the bottom of the barrel as
18 far as business friendliness. We have to reverse that and
19 make it closer to Number 1.
20 So you have two challenges: You’ve got the
21 business challenge and then you’ve got the general-public
22 challenge.
23 A national sales tax or a retail sales tax is
24 the best, simplest way to do that. You may say that it’s
25 regressive. It’s not if you add a prebate.
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1 Allow me a few comments.
2 In the testimony here before you, James Hines,
3 a Michigan economist and NBER member, says -- his comment
4 is: Make the fair tax more logical. And that’s on
5 page 2.
6 Page 3, Chairman Parsky and the Governor
7 lamented the high velocity of revenue in and out. And
8 you’ll see that the personal consumption expenditure
9 versus the adjusted gross income is dramatically
10 different.
11 A consumption tax is much more stable than an
12 income by far. Quarterly changes in revenues from the
13 Rockefeller Institute shows that as well. A sales tax is
14 the way to go.
15 But not the business net-receipts tax. It’s
16 a value-added tax. The business net-receipts tax is a
17 value-added tax. The compliance costs of that are much
18 higher than a retail consumption tax. The compliance
19 costs are much higher. The NRT eliminates pyramiding
20 with the tax, but then we put the sales tax on top of it
21 at the cash register. That’s pyramiding to the taxpayer.
22 And it isn’t necessary. This is not rocket science.
23 It’s really not. And Mr. Cohen will demonstrate that in
24 a moment for you.
25 The NRT, whatever you want to call it, continues
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1 the myth that businesses pay taxes when 71 percent will
2 be passed along, 19 percent go to the employees. Not so
3 good. They’re California employees. I could go on.
4 The way to go is a sales tax with a prebate.
5 [Bell chimed]
6 MR. SPILLANE: Take a look at page 6, and
7 you’ll see that the prebate makes it progressive. And if
8 we do it on a national basis, the incline would be much
9 greater. Take a look at the prebate under our Web site,
10 FairTax.com -- or FairTax.org. Sorry.
11 Thank you very much.
12 CHAIR PARSKY: Thank you.
13 We thank all of the public comment providers for
14 cooperating in terms of time frame.
15 Kheri Whittaker.
16 MR. WHITTAKER: Thanks.
17 Khori Whitaker.
18 Chairman Parsky, ladies and gentlemen, I was
19 born in Jamaica but grew up here in Southern California in
20 Riverside. And every January, February, March, April, I
21 had an uncle who was a CPA, and he was a mess during these
22 months. And my mother as well was a mess. And I didn’t
23 understand what the issue was. All the receipts and all
24 the paperwork and all the documents each and every
25 year-round this time.
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1 In fact, my mother -- we didn’t have that much
2 money growing up, and she actually didn’t want to earn
3 more. And she would tell me, if I earn more, they’re
4 going to take more. And I didn’t understand that.
5 Instead, she took those overtime hours as vacation to
6 spend with us instead of earning more money. And it’s
7 because the taxes -- and we have both federal and state --
8 it’s not simple; it’s too complex. It creates an
9 uncompetitive business environment. And then also as
10 we’re realizing now with the issues in California, with
11 our revenues, it’s not stable.
12 I urge you all on the Commission to be radical.
13 And by “radical,” I mean, get to the root of the issue.
14 And the root of the issue is the stability, the
15 competitive nature of the tax -- any tax program that you
16 may recommend.
17 If you look over the course of the last
18 20 years, the income that the state has been getting from
19 sales taxes have been relatively even over the course of
20 time, whereas income tax, lots of highs and lots of lows.
21 California does well in the booms and the busts. It seems
22 like -- in the booms, rather, not the busts. But in the
23 boom times, we’re doing well. It’s like we are depending
24 on bubbles here in California for revenue. We can’t do
25 that.
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1 So by implementing a sales tax, a fair tax, you
2 are able to get stable consumption over the course of
3 time. And California is going to be able to get the
4 revenues that we need for our programs.
5 Thank you very much for your time.
6 CHAIR PARSKY: Thank you very much.
7 Ronald Cohen.
8 MR. COHEN: Hello. I’m Ron Cohen. I’m a tax
9 partner with the CPA firm of Greenstein, Rogoff, Olsen &
10 Company here in the Bay Area. We represent about
11 2,500 clients, several of them well-named billionaires
12 in the area.
13 I’m here, you may think a little bit oddly, on
14 behalf of the Fair Tax. I sort of consider this my
15 get-out-of-hell card because I spend my career dealing
16 with the complexity and controversy of the tax system.
17 And so I’m here to talk in this one minute -- it’s hard to
18 talk about anything in taxes in one minute -- but I’ll
19 tell you that the system is -- on the income tax side is
20 built on laws that are hard to pass, hard to write the
21 laws, and the written word is confusing. The taxpayers
22 suffer. Hardly anyone can produce a tax return without
23 software, which I think is egregious and contrary to what
24 the Founding Fathers of the country would ever want.
25 And then you get into situations with auditors
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1 where the Franchise Tax Board is understaffed,
2 underskilled in some of the areas. And the results that
3 come out of the audits are often arbitrary. So it creates
4 an environment -- and I talk to many business people who
5 said, “Can’t I move my company to Singapore and just get
6 out of this,” between the IRS and the FTB and the rules
7 and regulations that go on and on, creating an
8 uncompetitive environment where they have to become best
9 friends with people like me, their tax CPA and their
10 lawyer, to just function, as opposed to functioning and
11 dealing with what they wanted to do, is build good
12 products, create jobs, and build great companies.
13 So I thank you very much.
14 CHAIR PARSKY: Thank you.
15 Lenny Goldberg.
16 Welcome, Lenny.
17 MR. GOLDBERG: My name is Lenny Goldberg,
18 California Tax Reform Association.
19 CHAIR PARSKY: Welcome back.
20 MR. GOLDBERG: The third time is a charm, I
21 suppose.
22 Very quickly, on the proposals that are on the
23 table. On the income tax, the most instructive thing we
24 saw was Phil Spilberg’s chart in the March hearing, which
25 demonstrated that the top 1 percent has almost doubled --
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1 you know -- actually did double through the early 1990s
2 to 2000, almost doubled in their share of the income that
3 they have. That will always be so volatile. Volatility
4 has to be seen, and I urge you to see it this way, as a
5 budget issue, not as a tax issue. As long as income is
6 so maldistributed at the very top end, the income tax will
7 be volatile. There is nothing valuable about lowering
8 that rate. It’s really about the distribution of income.
9 We should be taxing economic rents as a matter
10 of first principle. That would be oil in the state of
11 California, that would be investment property in the
12 state of California, which we undertax and have discussed,
13 and appreciate that you had such an extensive discussion
14 on that.
15 Finally, I think the corporation tax, the
16 elective single sales and the loss carrybacks are both
17 destabilizing of the corporation tax. And in some ways,
18 in terms of their policies, they’re an embarrassment to
19 the state of California. And I think those are the kinds
20 of things, along with other tax expenditures, that you can
21 put on the table.
22 In a positive sense, it is possible to have a
23 series of discrete recommendations. Example: Broaden
24 the sales tax base, lower the rate if you’re looking for
25 revenue neutrality.
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1 There are ways -- eliminate those new loopholes
2 in the corporation tax, perhaps look at business property,
3 sales tax on depreciable manufacturing equipment as a
4 trade-off. There are some discrete trade-offs you can
5 make. You should not trade off the progressivity of the
6 system.
7 COMMISSIONER BOSKIN: May I ask Mr. Goldberg a
8 question?
9 MR. GOLDBERG: Pardon me?
10 COMMISSIONER BOSKIN: May I ask Mr. Goldberg a
11 question?
12 CHAIR PARSKY: Yes.
13 COMMISSIONER BOSKIN: So you’d be strongly in
14 favor of the state, so long as it got the appropriate
15 revenue from it, getting the maximum it can out of oil and
16 gas in California?
17 MR. GOLDBERG: The fact that we don’t have an
18 oil severance tax is also an embarrassment.
19 COMMISSIONER BOSKIN: What about if we don’t
20 develop it, and we’ll never develop it?
21 MR. GOLDBERG: Excuse me.
22 COMMISSIONER BOSKIN: That’s got to be even
23 worse than a traditional land tax if we never, ever
24 develop oil and gas in the state.
25 MR. GOLDBERG: The way all severance taxes are
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1 structured and the way -- let me just cite Rand. Rand
2 said no effect on production, no effect on price with
3 regard to a severance tax in California.
4 COMMISSIONER BOSKIN: Well, there has to be an
5 effect on production if you disallow use. You never use
6 it.
7 MR. GOLDBERG: The actual -- you’re not
8 disallowing use. You’re getting --
9 COMMISSIONER BOSKIN: But we refuse, for
10 example, to develop our offshore oil.
11 MR. GOLDBERG: With regard to in-state oil
12 development --
13 COMMISSIONER BOSKIN: How is California ever
14 going to benefit from that fixed resource if we never
15 develop --
16 MR. GOLDBERG: Actually, with regard to
17 offshore, we will get a ton of revenues for that. We do
18 get --
19 COMMISSIONER BOSKIN: Exactly.
20 MR. GOLDBERG: We get a ton of revenues on our
21 state lands. What we don’t get is any revenue, to speak
22 of, from our private land, and that’s where that oil
23 severance would come in. So we do get it from state
24 lands, absolutely.
25 CHAIR PARSKY: I think this is a very
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1 interesting dialogue back and forth. Maybe it would
2 be --
3 COMMISSIONER BOSKIN: I strongly endorse this.
4 CHAIR PARSKY: We’ll get to the endorsements.
5 Thank you very much, Lenny.
6 Third time, not quite a charm, but close.
7 That’s okay.
8 COMMISSIONER KEELEY: Charming.
9 CHAIR PARSKY: Yes, as Fred said “charming.”
10 That’s good.
11 Mary Bergan is our last public-comment speaker.
12 MS. BERGAN: Hello, I’m Mary Bergan. I’m past
13 president of the California Federation of Teachers,
14 perhaps one of the few in the room with enough
15 institutional memory to remember a 1976 tax commission
16 that gave us a majority vote on every tax in the state.
17 With that, we still have their wisdom.
18 I would like to just -- I’m reacting to reports
19 of the Commission’s work in the paper. And one point that
20 struck me was that you want to come out with a proposal,
21 however it may end up, that is revenue-neutral.
22 That is a fool’s errand. We are currently
23 disinvesting in education, in all of the things that
24 are going to lead to prosperity.
25 There is nothing in your charge that says you
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1 want to be revenue-neutral. In fact, if you want to deal
2 with the 21 st century economy, you need to come up with a
3 progressive proposal that puts more revenue into the state
4 of California. We will never return to a robust public
5 sector unless we have more revenue through fair taxes.
6 Thank you.
7 CHAIR PARSKY: Thank you very much.
8 Thank all -- oh, I’m sorry, I didn’t have your
9 name.
10 MS. HENDERSON: Anne Henderson. I signed the
11 list outside, and apparently I didn’t fill out a card.
12 CHAIR PARSKY: Well, why don’t you go ahead?
13 It’s okay.
14 MS. HENDERSON: Anne Henderson --
15 CHAIR PARSKY: As long as you live with the
16 Dean of the Boalt Law School’s clink, it’s okay.
17 MS. HENDERSON: Well, I live in Berkeley. I
18 don’t know if that helps.
19 CHAIR PARSKY: That helps a lot.
20 MS. HENDERSON: I’m the legislative -- the state
21 and local finance director of the League of Women Voters
22 of California. And we have submitted a letter with some
23 detail. But I would just like to say, we’ve been studying
24 state and local finance since 1969, and we’ve been through
25 a number of these exercises before.
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1 We have a position that calls for revenues to
2 be both flexible and sufficient to meet changing needs,
3 and to emphasize equity and fair sharing, including
4 ability to pay. And we’re very concerned about the
5 direction we’re taking. We don’t think stability is in
6 that list of concerns. And we’d like to see the tax base
7 broadened, for instance, with sales taxes and other
8 things.
9 We’re concerned about a number of issues I know
10 you have discussed, such as the property tax, getting the
11 commercial -- the nonresidential, commercial off of --
12 out of Prop. 13. That doesn’t make any sense, even as
13 to competition between California businesses.
14 And we’re also particularly concerned about
15 having -- asking you to look at the question of tax
16 expenditures.
17 I think the Legislative Analyst in a recent
18 report pointed out that they’re not -- they’re given out
19 without a real clear estimate of what they’re going to
20 produce. Then there are not reports that are put together
21 so you can really value it, whether you’re getting what
22 you wanted for the state. You’re giving away state money.
23 And we don’t give -- we think that really needs to be
24 looked at.
25 And then the basic idea that you can lower them
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1 with a majority vote, but you only have to have two-thirds
2 to raise them.
3 [Bell chimed]
4 MS. HENDERSON: We don’t see how that makes that
5 tax policy.
6 Thank you.
7 CHAIR PARSKY: Thank you very much.
8 Do we have another?
9 DOUG HALL: Yes, Chairman Parsky, I’m here with
10 my father, James Hall. We were under the assumption there
11 was three minutes. So I just wanted to read real quickly
12 our final recommendation.
13 CHAIR PARSKY: Okay.
14 DOUG HALL: It’s very simple. Remove –-
15 THE REPORTER: Can you state your name, please?
16 DOUG HALL: Yes, Doug Hall, and the blog is
17 JamesHall.WordPress.com.
18 Remove or drastically reduce capital gains for
19 seniors, age 65, when selling their homes, and allow them
20 to move anywhere in California without raising their
21 property taxes.
22 This legislation would greatly modify the
23 effects of Prop. 13 without a direct initiative to change
24 Prop. 13. The Tax Relief Act of 1997 increased the
25 capital gain exemption to $250,000, up from $125,000 per
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1 person when selling a home.
2 That’s 12 years ago. It needs to be changed to
3 serve as a property tax stimulus here in California and
4 other locations in the U.S.
5 Currently, a surviving spouse can get a step-up
6 in basis. And then when she’s deceased, they both get
7 quite a huge exemption. So many people are basically
8 allowed to get a huge capital gains break. We’re asking
9 that couples, senior couples are allowed to get that same
10 break.
11 Thank you.
12 CHAIR PARSKY: Thank you very much.
13 I think we have now been responsive to all
14 members of the public that wish to make comment.
15 Before we move into our discussion for today,
16 I’d just like to make a few general comments.
17 One of the public speakers said that she was
18 hearing about the Commission from the newspapers. With
19 all due respect to the media, I’m not quite sure that
20 that’s the most accurate source for where the Commission
21 is or where the Commission would like to go.
22 So I think we, as a commission, are sitting at
23 a unique point in history for California. I think we
24 have an opportunity to demonstrate to the public that it
25 is possible for Californians, all of whom have a sincere
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1 interest in the future of California, with varying
2 ideological or varying points of view, generally, to come
3 together, and to put forward in the tax area
4 recommendations that demonstrate that you can come
5 together.
6 We were not formed to try to solve the current
7 budget issue. We also didn’t come together as an elected
8 body -- people in an elected body. We came together with
9 a focus on the system of taxation in California that
10 hasn’t been reformed or brought of age for a number of
11 years.
12 And I would just say from my own perspective,
13 everyone on this commission -- every single member on
14 this commission -- has dedicated himself or herself to
15 the common goal of trying to come together, for which I’m
16 very grateful. And there still remains a lot of work to
17 be done. But I remain quite optimistic because of the
18 intelligence level and the commitment on the part of each
19 member of this commission.
20 And it was important when we formed the
21 Commission that we had people with different points of
22 view, points of view that reflected the difference in
23 California. So that’s not something that we should shy
24 away from.
25 But if we can send a message to the elected
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1 politicians in Sacramento that people as diverse as are
2 around here can come together on one of the most
3 complicated and difficult subjects to deal with, but can
4 come together hopefully unanimously, it will set an
5 example.
6 And I hope all the commissioners and the public
7 recognize that the Governor and the legislative leaders
8 have assured us that our recommendations will be voted on
9 by the Legislature, up or down as a package. That’s a
10 unique commitment if we can come together with a set of
11 recommendations unanimously. We may not. That’s not to
12 say that it’s a foregone conclusion; but it’s something
13 that I know everyone on this commission is working toward.
14 With that introduction, I’d also like to remind
15 everyone -- and I’ve done this at every hearing -- of the
16 goals that were set out for us as we were looking at
17 making changes. In no particular order and with no goal
18 having any more weight than the other, but they included:
19 Helping to establish a 21 st century tax
20 structure that fits within the state’s 21 st century
21 economy.
22 Second, helping to stabilize state revenues and
23 reduce volatility.
24 Third, helping promote the long-term economic
25 prosperity of the state and its citizens.
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1 Fourth, helping improve the ability to
2 successfully compete with other states for jobs and
3 investments.
4 Fifth, reflecting principles of sound tax
5 policy, including -- not limited to, but including --
6 simplicity, competitiveness, efficiency, predictability,
7 stability, and ease of compliance and administration.
8 And finally -- and as I said, not any one
9 more important than the other -- but finally, ensure that
10 the tax structure that you’re recommending is fair and
11 equitable.
12 Now, those are, I think, very worthy goals.
13 We’re going to try, as we proceed forward, to look at
14 recommendations, to make sure that we continually remind
15 ourselves, and that we’re able to come up and say that
16 we have attempted to pass all of the recommendations
17 through the prism of those goals.
18 Now, before we get into today’s discussion,
19 and with that kind of background, I’d like to ask the
20 commissioners to consider a structure for recommendations.
21 I have provided the commissioners, and it will be made
22 available to the public, so that we begin to refine the
23 approach that we may take without any foregone conclusion
24 as to what the recommendations would be.
25 I’m sorry, one other thing I would say. There
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1 have been a number of suggestions made in all good faith
2 by a number of commissioners about specific
3 recommendations that could be made. Each and every one
4 of those recommendations is contained in the binders that
5 are distributed here, have been posted on the Web site,
6 and available to the public. And I would urge everyone
7 to read those because they reflect, for those that sought
8 to propose specific things, legitimate work individually
9 done, or it could have been collectively. But they’re all
10 a matter of record and they’re all in these binders and
11 on our Web site.
12 Now, with that background, let me say that my
13 suggestion -- and I’d like the commissioners to think
14 about this during the course of the discussion, and then
15 we’ll come back and see if the commissioners would agree
16 to this structure.
17 We would divide our recommendations into two
18 sections but with kind of one overriding principle.
19 Section 1 would be recommendations of statutory
20 tax-law changes, revenue-related, that can be acted on
21 by the State Legislature immediately, and hopefully --
22 that’s my word -- but hopefully endorsed unanimously by
23 the commissioners. That would be Section 1.
24 Section 2 would be recommendations of tax-law
25 changes, revenue-related, that can be enacted by changes
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1 in the State Constitution or by the state initiative
2 process, and hopefully are endorsed unanimously by the
3 commissioners.
4 Two guiding principles in both: That they are
5 revenue-related, and my hope that they will be unanimous.
6 I would hate to put the Commission into a situation where
7 one commissioner could basically stop recommendations from
8 proceeding. So I’d like to operate, if we would, under
9 the assumption that we’re going to try our best to be
10 unanimous.
11 In addition, the Commission -- hopefully
12 unanimously -- can identify or will identify areas of
13 reform, non-revenue-related, that need to be considered
14 by others outside the context of the Commission, to
15 achieve comprehensive fiscal reform. It’s a recognition
16 that the work of this commission, albeit revenue-oriented,
17 doesn’t solve all of the needs for reform. And there are
18 other organizations -- legitimate organizations hard at
19 work at addressing other elements of reform.
20 Without necessarily taking a position on those
21 efforts, we have every ability -- and I would urge that
22 we consider identifying the areas of such reform that
23 ought to be considered, evaluated, staffed, analyzed by
24 others.
25 So that’s the framework that I hope the
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1 commissioners will consider during the course of this
2 meeting. And then we’ll come back to it at the end and
3 see if we have the concurrence of everyone to proceed on
4 that basis and over what time frame.
5 COMMISSIONER POMP: A point of clarification.
6 This defective mike, I assume –- you have to hold it this
7 time? Oh, my goodness.
8 CHAIR PARSKY: If your finger gets tired, that’s
9 the idea to stop.
10 COMMISSIONER POMP: That, or if Chris tones me
11 first.
12 By the nontax, I just want to make it clear, tax
13 administration I would include within good tax policy.
14 So you’re thinking of spending limits and things
15 like that?
16 CHAIR PARSKY: I am.
17 COMMISSIONER POMP: Okay, I think that’s
18 sensible.
19 Thank you.
20 CHAIR PARSKY: Thank you.
21 Okay, we’ll stop on “sensible.” That’s a good
22 way to stop.
23 Let’s proceed ahead.
24 Any other comments of any kind any commissioner
25 would like to make?
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1 (No response)
2 CHAIR PARSKY: Okay, then I’ll call on the staff
3 now.
4 We have identified at the last meeting, and
5 they’ve been posted on the Web site, two possible
6 packages, packages of reform, that this commission
7 could -- or wanted to consider further. And I will just
8 say by way of introduction that one of the two packages
9 contains a new form of tax: the business net-receipts
10 tax. And so we’ve had quite a lot of discussion in the
11 past about it.
12 As the staff reviews Package 1, the staff has
13 done an extensive amount of additional work on a possible
14 business net-receipts tax. We have posted on the Web
15 site a summary of additional description of this tax. I
16 think all of us recognize the risks involved in putting
17 forward any new piece of legislation, let alone a new tax.
18 And so a number of commissioners have indicated concern
19 about how we will go about doing it, how we can get
20 further input.
21 And I’ll have some comments about that if we,
22 as a commission, decide to proceed with analysis of that
23 possible avenue.
24 But I’ll let the staff now walk everyone through
25 each of the two packages. We’ll open up for comments,
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1 questions, whatever. We’ll spend, as I said, quite a bit
2 of time on the business net-receipts tax, then we’ll come
3 back around and see if, at the end of this session, there
4 is a meeting of the minds as to how we might proceed.
5 Thank you.
6 MR. IBELE: Thank you, Mr. Chair.
7 We’re going to split this into two sections.
8 I’ll do the first section with describing the two packages
9 that staff was asked to analyze; and my colleague, Phil
10 Spilberg, will take primary responsibility for the
11 discussion of the business net-receipts tax, with some
12 assistance from the Franchise Tax Board.
13 We’ve been asked to evaluate a couple of
14 different packages, as the Chair indicated, that are
15 posted on the Web site. Before we do that, I wanted to
16 revisit a couple of issues that we’ve discussed in the
17 past. But I thought we should refresh ourselves and keep
18 these in mind as we move forward.
19 This is a chart you’ve seen before. It’s a
20 familiar slide. But it’s important for several reasons.
21 A couple that I want to mention is that we’ve obviously
22 moved dramatically in the structure of the tax system in
23 the last half a century from about 60 percent reliance on
24 the sales and use tax, in the 1950s, to almost 55 percent
25 reliance on the personal income tax. That is, we have
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1 moved from a tax which is largely regressive in the minds
2 of most economists, to one which is progressive across
3 much of the income spectrum. This has had significant
4 impacts on distribution, as the Commission has discussed,
5 as well as the change in the volatility of the state’s tax
6 system.
7 Also a familiar chart -- this is from Phil’s
8 presentation at the first meeting in San Diego, indicating
9 how the State’s tax portfolio of volatility has increased
10 dramatically. This is somewhat due to the high rates in
11 the personal income tax; but more importantly, it’s a
12 reflection of how much more we rely on a personal income
13 tax, as well as the types of income that we now experience
14 in our economy and which are subject to the personal
15 income tax. And that’s really what’s driving the
16 volatility up, going from the statistic we’re using most
17 frequently as the coefficient of variation, which is 0.7
18 in the 1969 to 1978 period, to almost 1.66 during the
19 1999-2008 period. A dramatic increase.
20 Before -- I need another hand here. Really, I’d
21 like to have a third.
22 Before we go through the tax packages, I thought
23 it would be wise to go through the criteria of evaluation
24 that we’ve been using. And this is not meant to be
25 exhaustive. It’s ideas that we’ve sort of picked up on
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1 from the Commission’s discussion, those that we think are
2 worthy of discussion and probably the most important.
3 The first being economic growth, the potential
4 for a tax program, a tax structure to encourage jobs and
5 investment. And in this area, we look at tax rates, we
6 look at the taxation of business inputs and their respect
7 to whether those are taxed or not.
8 Moving from an income to a consumption base
9 and also treating businesses equivalently. Service
10 businesses, goods businesses, and so forth. That’s the
11 first on our list.
12 Revenue volatility: We have a very
13 straightforward metric that we’ve been using for this,
14 and we have estimated this for the different two packages
15 that we’re going to be discussing today.
16 Fairness: You know, we obviously defer to the
17 Commission’s wisdom in what is a fair tax. Distribution
18 of the tax burden is certainly one of those
19 considerations. Another one that’s not listed, but we’ve
20 discussed before, is how many people, how many residents
21 of the state contribute to the tax system. That’s also an
22 issue of that fairness for many people.
23 Lastly, at least on this -- again, this is not
24 meant to be complete, but some of those that we thought
25 were most important -- simplicity. To the extent that the
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1 new system is more easy to comply with and more easy to
2 administer, that would obviously be a plus for that
3 particular type of structure.
4 At the Commission’s last meeting, we were asked
5 to examine not only those taxes which we were considering
6 changing, which the Commission was looking at changing --
7 the personal income tax, the sales and use tax, the
8 corporation tax -- but also incorporate all the state
9 revenues in our analysis. So we have included, when we
10 do our distributional and revenue analysis, we have
11 included the personal income tax, sales and use taxes --
12 at the state level, not just general fund but also special
13 fund -- the corporation tax, motor-vehicle taxes, fuels
14 taxes, insurance taxes, other excise taxes.
15 And one thing that I should have put on here
16 and neglected to was, as part of the analysis, obviously,
17 any new proposed or contemplated business net-receipts
18 tax. So those would all be included in the analysis.
19 These are the -- this is the period of time over
20 which we did our analysis --
21 COMMISSIONER KEELEY: Mr. Chairman, if I could
22 ask a quick question?
23 CHAIR PARSKY: Sure.
24 COMMISSIONER KEELEY: Thank you.
25 Mr. Ibele, quickly, on your previous slide about
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1 the major state revenues, the property tax is not on there
2 because?
3 MR. IBELE: The property tax we considered a
4 local tax, the property tax is raised and it’s distributed
5 to the county. And we were given instructions to include
6 state taxes. So property tax is not included, nor is the
7 local portion of sales tax.
8 COMMISSIONER KEELEY: Sales tax?
9 MR. IBELE: Bradley-Burns special district
10 taxes, et cetera, et cetera.
11 COMMISSIONER KEELEY: And out of an interest in
12 characterizing taxes -- you know, when I was in the State
13 Legislature, the property tax, of course, we said, “Well,
14 that’s a -- that is a state tax -- rather, a local tax,
15 because it’s collected and tax bills are sent out at the
16 local level.”
17 I think you might get -- now that I’m back in
18 local government as an elected county treasurer, I have a
19 different view, of course, and that is, where you stand
20 depends on where you sit. Where I sit now, it sure has
21 the look and feel of something that the locals, in fact,
22 collect, and the state makes the decisions with regard to
23 the allocation.
24 So I think there is a -- and it may be a
25 definitional issue here that’s worthy of some examination,
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1 even though it’s not, strictly speaking, a state revenue
2 in the same way the PIT is or the state share of the sales
3 tax. I think there’s a reasonable argument that the
4 property tax is, at best, a “tweener” that could be on
5 that list, for that reason, because of the State’s
6 tremendous involvement in the property tax following
7 Prop. 13 and the allocation thereof.
8 Thank you very much.
9 MR. IBELE: I think that is a reasonable
10 interpretation. I’ve made that argument myself on
11 occasion. But we haven’t included --
12 CHAIR PARSKY: I asked you not to deal with
13 “tweeners.” But that’s okay, don’t worry about that.
14 MR. IBELE: And the distinction is, it’s not
15 an absolute right or wrong. I think on some of the
16 local sales taxes, the Bradley-Burns, which used to be
17 1.25 percent and is now 1.0 percent, is universal across
18 the state, it’s statewide. However, counties do have the
19 option not to participate in that. So we did not include
20 the Bradley-Burns. But you could make an argument on the
21 property tax. But, in any event, it’s not included.
22 These are the revenues from those taxes over our
23 five-year study period. The five-year total for those
24 total revenues is at the bottom, $604 billion.
25 As we noted in our last meeting, they raised
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1 the same amount of revenue but, obviously, the pattern is
2 somewhat different. So we did our distributional
3 analysis, and our volatility -- I’m sorry, not our
4 volatility but some of our other analyses using that 2014
5 period, and adjust it for the slight difference in
6 revenues for that one year.
7 COMMISSIONER MORGAN: Mr. Chairman?
8 CHAIR PARSKY: Yes, go ahead, Becky.
9 COMMISSIONER MORGAN: What was the basis for
10 doing these projections?
11 COMMISSIONER COGAN: Assumptions.
12 COMMISSIONER MORGAN: The assumptions involved.
13 Is this a straight line, or is there some opinion involved
14 with this? How do you get to these future revenue
15 figures? That’s number one.
16 And number two, Mr. Chairman, people even today
17 talked about revenue-neutrality, and that’s not in our
18 order. And I’m wondering if that keeps coming up partly
19 because, to get passed by the Legislature by majority
20 vote, we can’t be raising taxes with a majority vote.
21 So those are two questions.
22 CHAIR PARSKY: Well, let’s deal with the
23 assumptions first.
24 MR. IBELE: Yes, the assumptions are based in
25 2012 off the Department of Finance’s economic projections.
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1 And using those, we built in assumptions regarding the
2 different income components -- the sales-tax base and
3 consumer purchases, as well as the other components. So
4 it was grounded in the economic forecast; and then the tax
5 forecast themselves were based on that for different
6 components, using different assumptions.
7 COMMISSIONER MORGAN: Do you have any
8 information you could share with commissioners about the
9 history of projections by the Department of Finance?
10 MR. IBELE: We could certainly share that, and
11 we can share the assumptions which we went through this
12 to some degree in our last meeting with the Commission
13 as well.
14 COMMISSIONER HAUCK: Mr. Chairman?
15 CHAIR PARSKY: Yes, Bill?
16 COMMISSIONER HAUCK: Mark --
17 CHAIR PARSKY: Unfortunately, you’ve got to keep
18 your finger on there.
19 COMMISSIONER HAUCK: Yes.
20 Do these numbers include the business
21 net-receipts tax?
22 MR. IBELE: These numbers would include -- I
23 should have been more clear. The current law is our basic
24 system now.
25 COMMISSIONER HAUCK: This is current law? These
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1 numbers are off of current law?
2 MR. IBELE: The heading, the second column over,
3 that says “Current,” is current law.
4 COMMISSIONER HAUCK: Okay, and then --
5 MR. IBELE: And then “Package 1” is a different
6 type of tax structure, which includes the business
7 net-receipts tax. And Package 2 --
8 COMMISSIONER HAUCK: How -- okay, we’ll stop
9 there.
10 In light of the fact that the definition of the
11 business net-receipts tax was posted a couple of days ago
12 on our Web site, how were you able to project income from
13 a tax that doesn’t exist today and hadn’t been defined
14 until, at least for us, until two days ago?
15 MR. IBELE: I’m going to defer to Phil on this
16 one.
17 MR. SPILBERG: Sir, let me try.
18 The way that the estimates were done is to
19 first -- with respect to the business net-receipts tax,
20 is consider that what it is, it’s a value-added tax. And
21 the way that it’s calculated is for in-state firms, that
22 is basically value-added within California. And for
23 multistate firms is basically they’re national
24 value-added, which is apportioned to California.
25 We had provided to Ernst & Young our economic
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1 forecast -- which, by the way, was put together by the
2 State Economist -- and assumed -- let me just sort of
3 backtrack a little bit to the economic forecast.
4 The economic forecast that we used is -- first
5 of all, it’s a common forecast for all estimates, and it
6 sort of assumes that we’re starting off at a very low
7 level of the economy in 2012. And then by the time we
8 reach 2016, we are close to full employment. So
9 basically, what we wanted to do was look over an economic
10 cycle and establish revenue-neutrality over that cycle.
11 So having that economic forecast and then making
12 those general assumptions that what we’re going to be
13 taxing is, in essence, value-added, Ernst & Young provided
14 to us with the estimates of the amount of revenue that
15 would be coming from the business net-receipts tax.
16 COMMISSIONER HAUCK: Can I --
17 CHAIR PARSKY: Yes, go ahead, Bill.
18 COMMISSIONER HAUCK: They built -- this is a
19 question -- they built a set of assumptions in order for
20 them to make those projections?
21 MR. SPILBERG: With respect to the model that
22 they used, we have a representative of Ernst & Young over
23 here, so he can speak more directly to your question.
24 But it wasn’t a model that they specifically built for
25 this purpose. They had already a model that they had
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1 previously developed. And they calibrated that model to
2 the California economy. And, again, along with our
3 economic growth assumptions, they made the calculations.
4 COMMISSIONER HAUCK: Mr. Chairman, I would
5 suggest that if we are going to pursue this possibility,
6 that the Commission ought to have every piece of
7 information we possibly can have about that model so that
8 it can be subjected to other scrutiny, and let other
9 folks react to it to determine whether the forecasted
10 revenue and the impacts of it are as they apparently are
11 in this model that is more generic.
12 CHAIR PARSKY: I should have probably elaborated
13 a little bit on my initial commentary.
14 If it’s the will of this Commission at the end
15 of this meeting to continue to explore this new tax, we
16 have not had enough of a process for anyone to be
17 comfortable that we could propose or recommend this tax.
18 And so I’d like to come back to that once we have at least
19 had concurrence that it’s worth continuing to pursue. If
20 it is, then I have some suggestions about how we might do
21 it to be responsive to your point.
22 John?
23 COMMISSIONER COGAN: Just to clarify, Phil. In
24 constructing these estimates, you had to make a lot of
25 detailed, kind of policy choices to construct the
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1 net-receipts tax, how to treat outside-of-state sales, how
2 to deal with transition issues, and so forth.
3 So maybe when you get to describing the
4 net-receipts tax later on in your presentation, you could
5 walk us through what big decisions you -- or big -- yes,
6 I guess we’ll call them “decisions” for now that you all
7 made, just to construct a number. But I think what’s got
8 Bill a little bit concerned and probably some other
9 commissioners is, we’ve got numbers and we don’t have a
10 policy; but, more importantly, it’s the Commission that
11 will decide the policy down the road.
12 MR. IBELE: Commissioner --
13 COMMISSIONER COGAN: And we want to make sure we
14 understand what policy generated the budget-neutral
15 numbers that you got.
16 MR. IBELE: Commissioner Cogan, that’s a very
17 good point. We did make some, we’ll call them tentative
18 choices, in terms of coming up with the revenue analysis
19 that we’ve done so far. And those would all be obviously
20 in the Commission’s purview, to make the decision. And
21 we’d highlight those for you as we go through.
22 COMMISSIONER EDLEY: That’s what you posted just
23 the other day; wasn’t it?
24 MR. IBELE: Yes, that’s correct. That’s
25 correct.
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1 MR. SPILBERG: Let me just also add to that,
2 as far as the revenue estimates that you’re seeing in
3 front of you, they do not -- they’re somewhat generic in
4 the sense. They did not specifically take into account
5 transition issues, they do not specifically take into
6 account the kind of behavioral changes that one would
7 build into a proposal that goes into effect on a
8 particular year and would be scored by, for example,
9 the Franchise Tax Board.
10 This is -- this point is our estimates, which do
11 not include any of that -- any of these considerations.
12 They are totally static.
13 COMMISSIONER MORGAN: May I have my second
14 question answered, please, relative to why the issue of
15 revenue-neutrality keeps coming up and how we’re going to
16 deal with that? And if we look out to 2016, I don’t see
17 this taking into account population growth, inflation
18 growth, and full employment, which was just mentioned.
19 How do you come -- why do we come up with the
20 same amount over a five-year period? Is that a net
21 present value or how are we supposed to interpret this?
22 Because certainly, with more population, inflation,
23 et cetera, there will be growth and the need for more
24 revenues.
25 MR. SPILBERG: The estimates you see in the
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1 table are actually cash-flow estimates. They do take
2 into account population growth, they do take into account
3 inflation. They’re basically the consequence of an
4 economic forecast that we received from the State
5 Economist that take into account the economic growth that
6 you would expect through 2012, and then economic growth
7 that would lead you toward full employment by 2016.
8 CHAIR PARSKY: Okay, Mark?
9 COMMISSIONER POMP: Mr. Chair, I have a quick
10 question.
11 What rate was used in making the projection?
12 MR. SPILBERG: For the net business receipts
13 tax?
14 COMMISSIONER POMP: Yes.
15 MR. IBELE: For Package 1, the rate is about
16 3.3 percent.
17 COMMISSIONER POMP: Mr. Chair, let me just
18 endorse your earlier comments. I mean, having done some
19 revenue estimation in an earlier lifetime, you put two
20 of us in a room, you get three different estimates. And
21 they can differ widely. And I would encourage us, if we
22 go down that path, that these numbers be carefully vetted
23 once we have decided on policy decisions, rates,
24 et cetera.
25 COMMISSIONER EDLEY: It doesn’t matter how many
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1 people you put in the room; the issue is, how many of them
2 do you let out.
3 CHAIR PARSKY: Well, at this stage, we have 14.
4 And I’m not sure the room is quite big enough for
5 everyone. So we’re working on the size of the room.
6 No, again, let me make sure it’s understood.
7 The staff, with a lot of outside help, has taken on a
8 rather enormous task, because it was the will, if you
9 would, of the Commission to explore the possibility of
10 broadening the tax base in California through a business
11 net-receipts tax.
12 That may not be the ultimate decision of this
13 Commission; but in the spirit of really trying to look at
14 major tax reform, I think it’s a worthwhile exercise. But
15 the exercise, in one sense, has just begun. Before we
16 would be in a position to concretely recommend the exact
17 nature of such a tax, we would need more time. And we
18 would need a much more detailed process. And there may
19 be differences of opinion in terms of estimating; but the
20 public needs to be aware, fully, of the possibilities,
21 experts need to be engaged; the business community and
22 labor need to be involved. But I do think that in terms
23 of significant reform, it’s a worthwhile exercise for this
24 body.
25 Now, as I said, we will come back at the end of
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1 this session and see if we want to continue this process,
2 which would incorporate significantly more work.
3 Yes, Curt?
4 COMMISSIONER PRINGLE: If I could.
5 I mean, it’s interesting to question what the
6 projections are. We certainly need to know some of the
7 assumptions. But in terms of modeling, we are, in this
8 sense, being comparative of various systems. And the
9 assumptions are the same in each of those comparisons.
10 If our job is to figure out if we can find any
11 entity that can be precise, and hit it right on the head
12 in terms of what those assumptions are, the answer is no,
13 we’re not going to be precise.
14 For example, I believe Finance’s estimate for
15 the personal income tax, when the budget was signed for
16 the 2008-09 budget, was 19 percent off as to what the
17 personal income tax actually raised in that year.
18 Is that because Finance was wrong in their
19 assumptions? Yes. But, in fact, it was because the
20 economy changed and circumstances affected it.
21 But if we were comparing package to package at
22 that time, we’d be using the same assumptions. So, you
23 know, yes, the unknown here is the business net receipts;
24 but everything else is based upon a comparative analysis
25 between the two packages, not between -- are we going to
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1 hit it dead-on in terms of what will each package raise.
2 I mean, I think part of our charge, and under --
3 I believe it is part of our charge because both -- all of
4 the entities that selected the members of this commission
5 talked about revenue-neutrality being a part of this
6 discussion, people can raise revenues or lower revenues
7 by adjusting the rates through a legislative process.
8 But our job wasn’t to focus on how to get a package that
9 raised a lot more money or a lot less money; but ours was
10 at least to present a package that is somewhat equal, and
11 then let the legislative branch, through the negotiations
12 with the executive, determine if they want to raise more
13 money or not. So I’m not afraid of the concept of
14 revenue-neutrality. But in this context, this is a
15 comparative model between the packages, and that’s what
16 I’d like to see.
17 So I can understand that, and I can see how
18 the business net-receipts tax and the other modifications
19 in each package will play. And even though I’m a bit
20 concerned about seeing a chart that talks about revenue
21 volatility, and that is one of the expressed charges
22 within the Executive Order and, in fact, it seems to me
23 that we haven’t diminished much of the revenue volatility,
24 or as much as we probably could because each package is
25 still very reliant upon the personal income tax.
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1 But those are my thoughts, Mr. Chairman.
2 CHAIR PARSKY: Thank you.
3 Why don’t you proceed ahead, Mark?
4 MR. IBELE: Okay.
5 Speaking of revenue volatility, let me give
6 away part of the story here. This is an analysis of the
7 three -- the two packages and current law. The period of
8 time that we analyzed current law is slightly different
9 than in the earlier chart. It has a coefficient of
10 variation of 1.48.
11 Package 1, large reduction in volatility.
12 Commissioner Pringle is correct. I should mention that
13 each of the -- under current law, Package 1 and Package 2,
14 they all raise approximately the same amount from the
15 personal income tax, around $55 billion to $56 billion.
16 The reason for the big drop in volatility in
17 Package 1 is because of the business net-receipts tax.
18 And I’ll describe the various packages. But in this
19 particular package, you’re replacing a sales and use tax,
20 a large component of it, and the corporation income tax.
21 And the business net-receipts tax is a very stable source
22 of income.
23 And in Package 2 --
24 COMMISSIONER BOSKIN: So -- one second. What
25 is not just the economic assumptions, what is the
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1 assumption about the distribution of income and the
2 distribution -- the functional and size distribution of
3 income going forward? Because, clearly, that’s been a
4 big part of why the state’s revenue has become so much
5 more volatile from your earlier materials, right, that
6 we rely on. We’ve had a much more concentrated -- income
7 tax has become a much larger fraction of what’s going on,
8 and it relies on volatile income sources. So aside from
9 we’re going to still be in a slack economy in 2012 and
10 we’ll get to full employment in 2016, what assumptions
11 went on about what happened to the distribution of income,
12 what happened to the functional distribution income, how
13 much is still coming from variable pay, what are capital
14 gains? Where’s all that? So how can you compare the
15 packages without that?
16 MR. SPILBERG: So let’s talk about the economic
17 forecast again and how a depressed economy -- how it’s
18 reflected in incomes relative to a robust economy.
19 Basically, in a depressed economy, non-wage sources of
20 income are depressed, much more so than wages. So in
21 2012, where we’re starting off, we have a distribution of
22 income which is less concentrated than certainly it was
23 in 2008, when we had the peak, basically, of our boom and
24 capital gains were very high.
25 So two thousand- -- we don’t have the precise
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1 matrix, but those can be provided. But in 2012, you have
2 a relatively -- well, you still have a concentrated system
3 because wealth has become more concentrated over time,
4 as has income. But it’s substantially less so than it
5 was in 2008.
6 We have the growth in the economy toward 2016.
7 By 2016, we reach close to full employment. However,
8 we’re assuming that capital gains do not reach the same
9 peak that they did in 2008. Again, I don’t have the
10 precise numbers, but they are lower. As far as other
11 non-wage income sources, they do go back up to serve a
12 traditional percentage, as they are during a peak period.
13 COMMISSIONER BOSKIN: Okay, thanks, Phil.
14 That’s helpful. But I think it would be even more
15 helpful, in addition to that description, to go back and
16 redo this analysis here and the revenue analysis for an
17 historical period over the last X years. So we see in the
18 boom of the late nineties and the collapse of the early
19 2000s the fairly neutral years, business cycle, the middle
20 years of 2003, forward, et cetera. And then during the
21 housing bubble of 2005, ‘06, ‘07, ‘08, what’s going on,
22 and we could take a look at that, and we can get some --
23 I think that would be very helpful for all of us.
24 MR. SPILBERG: This certainly can be done. Just
25 keep in mind that there is a cyclical trend, and there is
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1 also a systemic trend over time. So those will affect the
2 numbers.
3 COMMISSIONER BOSKIN: Yes, I think we’re all
4 aware of that. But at least those are based off of -- and
5 had we had a different tax system, we would have had a
6 somewhat different economy, but that’s a whole ‘nother
7 story. But at least those are off of facts rather than
8 double projections.
9 CHAIR PARSKY: I think at one point we did say
10 that although, in analyzing the issue of the impact on
11 revenue-neutrality, or not -- that is looking forward,
12 looking forward and would need to be analyzed for one
13 year, and then potentially for over a three-year period,
14 that would go on as if we are going to propose
15 legislation, in any event.
16 We also said that we wanted to be in a position
17 to look backwards -- back X number of years to be able to
18 compare the analysis, so I think --
19 MR. IBELE: We can do that.
20 CHAIR PARSKY: I think that would be very
21 helpful.
22 COMMISSIONER POMP: I have one comment I’d like
23 to see, too.
24 When you project growth in wages, capital gains,
25 do you use the same growth rate for across the board and
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1 not by bands of income?
2 MR. IBELE: Well, we used different growth rates
3 for different components of income.
4 COMMISSIONER POMP: But having said that, it’s
5 across the board?
6 MR. IBELE: Yes.
7 COMMISSIONER POMP: So that wages will grow at
8 the same rate for everyone?
9 MR. IBELE: For each of the -- yes, so the only
10 differentiation would be the types of income, the
11 different income groups received.
12 COMMISSIONER POMP: Right, which maybe is the
13 best you can do, but unrealistic. Unless you think the
14 upper-income folks are having the same increase in their
15 wages that low-income people are, which is belied by the
16 data, so…
17 MR. IBELE: Well, it was an assumption. It
18 doesn’t reflect what happened in the past. But it seemed
19 reasonable to do working forward. When we go back and
20 look at history and do this sort of backcasting, we would
21 obviously take those different growth rates into account.
22 MR. SPILBERG: And we’d be happy to share
23 historical trends in per-return growth rates in wages and
24 other sources of income. We do have that information.
25 CHAIR PARSKY: One more thing, Mark, before we
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1 turn to Package 1. One more time on an explanation of
2 this chart to non-economists. Just explain what this
3 chart means to non-economists.
4 MR. IBELE: This basically --
5 COMMISSIONER EDLEY: The one on the left is
6 taller.
7 CHAIR PARSKY: No, that’s to a lawyer. I didn’t
8 say a “lawyer.”
9 MR. IBELE: It’s basically an indication of the
10 relationship of the growth in taxes with respect to its
11 variability. And what’s a --
12 CHAIR PARSKY: We’ll let you think about that
13 for a while.
14 MR. IBELE: I’m looking for a good metaphor, and
15 I’m not coming up with one right now.
16 CHAIR PARSKY: We’ll let you come back to that.
17 MR. IBELE: Okay.
18 CHAIR PARSKY: I do think -- look, there have
19 been a number of discussions and --
20 COMMISSIONER BOSKIN: Oversimplification,
21 Mr. Chairman? An oversimplification is something about
22 what happens to tax revenue when income fluctuates -- the
23 economy fluctuates rather than when it’s stable. To get
24 beyond that, you’re talking about statistical terminology.
25 COMMISSIONER PRINGLE: Got it.
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1 CHAIR PARSKY: Okay. The mayor says he got it.
2 It’s enough. Okay.
3 Let’s go on to Package 1. We’re going to come
4 back to the subject of volatility.
5 MR. IBELE: I’ll be prepared.
6 CHAIR PARSKY: Okay, go ahead.
7 MR. IBELE: Okay, Package 1, this is what was
8 posted on the Web site.
9 The structure of this is a personal income tax
10 with a uniform tax rate of 6 percent. There are a
11 standard deduction of $15,000 for single taxpayers,
12 $30,000 for joint filers. There are itemized deductions
13 for mortgage interest, property taxes, and charitable
14 contributions which are phased out as you reach a certain
15 income level.
16 This eliminates the corporate income tax. It
17 eliminates the state sales tax, which is this 5 percent
18 rate. And it imposes the net-receipts tax at the rate
19 that I mentioned before of about 3.3 percent.
20 We looked at this, and in terms of some of the
21 goals of the Commission. In terms of economic growth,
22 you’re eliminating the corporation tax, reducing personal
23 income tax rate, which would tend to encourage investment,
24 improve efficiency in the overall tax system. This would
25 be broadening the base through putting in place business
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1 net-receipts tax. This would improve efficiency of the
2 system whether or not it’s replacing the corporation tax
3 or the sales and use tax because of the low rate; and it
4 would treat businesses neutrally: service businesses,
5 goods-based businesses, and so forth.
6 And another item would be eliminating the sales
7 tax -- the state portion of the sales tax on business --
8 I’m sorry, reducing -- eliminating the state sales tax
9 would reduce the taxes on business inputs. There would
10 still be the local sales tax.
11 In terms of volatility, substantial reduction,
12 as we noted on the previous page, primarily due to the new
13 tax and the drop in the tax rate on the personal income
14 tax side.
15 In terms of fairness, you can evaluate these.
16 It does reduce the progressivity of the tax system. On
17 the other hand, it increases the number of taxpayers that
18 pay under the personal income tax.
19 Simplicity: Certainly reducing the number of
20 personal income tax rates is a simplifying component of
21 this. On the other hand -- well, in addition, it
22 eliminates the corporation tax, one of the more complex
23 taxes to comply and administer. On the other hand, it
24 does add a new tax which would, at least in the
25 short-term, add to the complexity of the tax system.
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1 COMMISSIONER BOSKIN: Can I just make one quick
2 comment about the number of taxpayers?
3 That’s under the income tax. But this package
4 also eliminates the sales tax.
5 MR. IBELE: It would --
6 COMMISSIONER BOSKIN: So a lot of people are
7 paying sales taxes, including lower-income people who pay
8 no income taxes because they’re under the current
9 deductions, et cetera, would have their state sales taxes
10 eliminated.
11 MR. IBELE: That’s right.
12 CHAIR PARSKY: Chris?
13 COMMISSIONER EDLEY: I’m not quite sure how you
14 want to organize the discussion, Gerry, but I wanted to
15 ask about the local sales tax and ask about a different
16 way of handling that.
17 Do you want to hold that until they presented
18 both packages and then open it up for that sort of --
19 CHAIR PARSKY: Yes, I think if we let them get
20 through both packages -- we do have a little bit more
21 extensive discussion that’s needed on the business
22 net-receipts tax just so everyone understands where things
23 are, and some of the preliminary thoughts provided by the
24 staff on that subject. But then we have to come back
25 around and open it up for all, questions including those.
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1 Okay?
2 COMMISSIONER MORGAN: So clarification on the
3 two packages can wait until both have been presented?
4 CHAIR PARSKY: Right.
5 Go ahead, Mark.
6 MR. IBELE: Okay, the next chart, this is just
7 a very simple pie chart, comparing the current law, where
8 the taxes would come from, and under Package 1.
9 As I indicated, they raise approximately the
10 same amount on the personal income tax side -- we haven’t
11 lessened our reliance on that -- and basically, replacing
12 the corporation tax and a good portion of the sales tax
13 with the new business net-receipts tax.
14 This is the analysis that we did. And this is
15 for the entire package with the standard deduction. This
16 indicates –- and you can look at either the shares or the
17 effective tax rate for the -- the effective tax rate, the
18 current is in the green, which at the very lowest is
19 higher. And Package 1 is in the purple.
20 CHAIR PARSKY: What colors are you looking at?
21 I forgot, blue and gold --
22 MR. IBELE: That’s for the bars, yes, yes.
23 So the lower-income group, primarily because
24 of the large exemptions -- standard deductions, rather,
25 that we have, active benefits from this package, the
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1 effective rate is somewhat higher for the middle-income
2 groups, between $20,000 to $100,000. And there’s a
3 crossover at that point. And then there are lower
4 effective tax rates at the top of the -- from $100,000-
5 plus.
6 In terms of the distributions, staff did our
7 internal work on the personal income tax and the household
8 portion of the sales tax. We relied on Ernst & Young and
9 an incidence model that they have for the business taxes,
10 where they basically attribute the taxes themselves to
11 the different factors -- labor, capital, and consumption.
12 And then take into account the amount of those, a
13 proportion of those taxes that are actually exported to
14 other states -- or outside of California, I should say.
15 Then we use California tax return information and
16 consumption expenditures to develop the estimates on the
17 distribution.
18 COMMISSIONER HALVORSON: Could I ask a quick
19 question?
20 Zero to 20 right now pays what? How do we read
21 this chart? Zero to 20 pays what in taxes, and which
22 taxes are they?
23 MR. IBELE: This particular chart includes all
24 those taxes that are listed -- they’re listed right here.
25 It includes these taxes, plus the business net-receipts
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1 tax. So the zero to 20 group, that would be their share
2 of those tax components.
3 COMMISSIONER HALVORSON: So to the extent that
4 they paid, they wouldn’t pay an income tax, but they would
5 pay a sales tax --
6 MR. IBELE: They would pay a sales tax --
7 COMMISSIONER HALVORSON: This would be the
8 equivalent percentage of their income that they would pay
9 because of the sales tax?
10 MR. IBELE: Sales tax, their portion of the
11 corporation tax, motor-vehicle taxes, fuels taxes,
12 insurance taxes, and other excise taxes. All those
13 components -- all those particular taxes, either
14 through --
15 COMMISSIONER HALVORSON: So this would be direct
16 and indirect taxes paid by people in that population?
17 MR. IBELE: That’s right. Not just personal
18 income taxes, not just the household portion of the sales
19 tax, but all their share of the taxes that we have put
20 into this particular model.
21 COMMISSIONER HALVORSON: So if it’s all of the
22 share -- if the sales tax goes away, that piece goes away.
23 There’s an indirect tax that’s embedded in somebody else’s
24 pricing mechanism, that piece does not automatically go
25 away?
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1 If it’s an indirect tax --
2 MR. IBELE: Yes, yes, yes.
3 COMMISSIONER HALVORSON: If it’s an indirect
4 tax, there’s no direct mechanism then for removing that.
5 If you eliminate a sales tax, it’s gone; right? But if
6 you eliminate an indirect tax through somebody else’s
7 property tax that’s being passed on to someone or
8 whatever, that’s an indirect tax, and we don’t know for
9 a fact what will happen to that cash flow.
10 MR. IBELE: Well, the theory here is that if
11 it’s an indirect tax -- if it’s a tax on business,
12 business either -- that tax is either borne by owners of
13 the business or it’s passed on, on higher prices, or it’s
14 shifted back in terms of lower wages. So somebody ends
15 up -- some group of taxpayers ends up bearing the burden
16 of that tax. And that’s --
17 COMMISSIONER HALVORSON: Yes, ultimately,
18 whoever buys a good, in the end, pays the tax. So when --
19 the tax always flows through so whoever is the final
20 purchaser pays the accumulated taxes that are in that
21 production route, just because that’s the nature --
22 because it has to come from somewhere, the money has to
23 come from somewhere, and that money includes that. And
24 so I get that.
25 But what I’m curious about is if there is an
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1 embedded business tax in there, and the businesses have
2 worked that into their pricing, and that tax goes away for
3 the businesses, we don’t know for a fact whether or not
4 the businesses will remove that from their pricing at a
5 level that would affect the customers from zero to 20.
6 MR. IBELE: Well, the ability of business to
7 either pass it on in higher prices or shift it back in
8 terms of labor costs and/or -- to the extent that it’s
9 borne by capital depends upon the markets and the type
10 of business, there are different industries that would
11 operate. And it depends upon whether you’re operating in
12 national markets or in California markets.
13 In something like a sales tax on businesses --
14 that is, businesses go in and they buy a piece of
15 equipment, they pay sales tax on it, there is a -- and
16 this is part of our consultant’s model -- there’s an
17 incidence approach whereby they may be able to pass some
18 of that on in higher prices, they may be able to shift
19 some of it back in terms of lower wages. Some of it may
20 be borne by the owners of the business.
21 If you remove a tax, the same thing would work
22 in reverse. And they would be subject to the competitive
23 pressures that any other business would be, which would
24 affect their ability to either shift back or pass forward
25 any kind of tax like that.
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1 COMMISSIONER HALVORSON: Thank you.
2 COMMISSIONER POMP: Can I have a point of
3 clarification, Mark?
4 If you put up “Tax Package 1, Tax Change by AGI
5 Class” -- the next one, if you will.
6 So this is the entire package?
7 MR. IBELE: This is the entire package.
8 COMMISSIONER POMP: And so see if I’m reading
9 this right. So we’re talking approximately a $7 billion
10 increase on people making between $20,000 and $200,000,
11 and $4.4 billion decrease on people making over -- what?
12 $200,000 --
13 MR. IBELE: Over 200.
14 COMMISSIONER POMP: -- up.
15 Is that the right way to read this?
16 MR. IBELE: Yes.
17 CHAIR PARSKY: Yes, that’s the right way to read
18 it.
19 COMMISSIONER EDLEY: Which is why we’re going to
20 suggest it.
21 CHAIR PARSKY: In his usual tradition, Chris is
22 kind of a little ahead of us all, but that’s okay.
23 COMMISSIONER EDLEY: In the fullness of time.
24 CHAIR PARSKY: In the fullness of time.
25 Proceed ahead.
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1 I think Richard has covered that chart well.
2 MR. IBELE: Okay, this is Package 2. This has
3 the personal income tax rates of 3.75, up to $25,000 for
4 single, up to $50,000 joint, and 7 percent at incomes
5 higher than that.
6 The same standard deduction: $15,000 and
7 $30,000.
8 Again, itemized deductions for mortgage
9 interest, property taxes, charitable contributions, again,
10 phased out at higher-income levels. And as I’ll point out
11 later, the phase-out has some effect but not a great deal
12 effect on the overall distributions. It reduces the
13 corporation tax rate to 7 percent, which is equivalent
14 to the top rate in this particular package, under the
15 personal income tax. And it also imposes a new fuels tax.
16 This is -- the effect on -- or as we evaluated
17 these based on a criteria, somewhat similar reduction
18 in tax rates for personal and corporate income would
19 encourage investment, tend to encourage investment. A
20 new tax on fuels would raise business costs.
21 A moderate reduction in the volatility,
22 primarily due to the rate drops in the corporate income
23 tax and the personal income tax.
24 Again, on the fairness, very similar to
25 Package 1. It reduces progressivity somewhat. Increases
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1 the number of taxpayers bringing them on the tax rolls
2 with respect to the personal income tax.
3 Simplicity: Again, a reduction in the personal
4 income tax rates, a number of personal income tax rates.
5 And the new fuels tax would add some complexity,
6 although it’s very similar -- or could be very similar in
7 its design to our existing gasoline and diesel tax.
8 COMMISSIONER PRINGLE: Mr. Chairman, if I could,
9 real quick.
10 CHAIR PARSKY: Yes.
11 COMMISSIONER PRINGLE: On this one then, the new
12 fuels tax is the plug number; right? That is what makes
13 up the reduction in the other areas?
14 CHAIR PARSKY: Maybe translate that into
15 specifically, what is the new fuel --
16 COMMISSIONER PRINGLE: That was the second
17 question.
18 CHAIR PARSKY: Yes. Describe the new fuels tax,
19 and then how much revenue is assumed it would raise.
20 COMMISSIONER EDLEY: And is it hedged with
21 severance tax or is it just --
22 COMMISSIONER PRINGLE: Yes, what is the fuels
23 tax and where is it applied and what is the rate that you
24 used in your assumptions?
25 Thank you for allowing me to be clear.
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1 MR. IBELE: The fuels tax is equivalent to $20
2 per ton of carbon for transportation fuels, which
3 translates into 18¢ a gallon for gasoline, diesel, and
4 aircraft fuel.
5 CHAIR PARSKY: And that results in about
6 $3 billion?
7 MR. IBELE: I’ll have to find my sheet. It’s
8 about $3.3 billion in 2014.
9 CHAIR PARSKY: Right.
10 And so, again, just so that it’s clear, the
11 magnitude of the increase people would feel when they
12 pulled up to fill their gasoline tank would be what?
13 MR. IBELE: 18¢ a gallon, which is the same as
14 our current gas tax, excise tax on fuels.
15 COMMISSIONER PRINGLE: And then, Mr. Chairman,
16 if I could continue.
17 Presently, are those the only three areas where
18 a fuels tax are presently applied in California?
19 MR. IBELE: I’ll have to check.
20 COMMISSIONER PRINGLE: Do we impose a bunker
21 fuels tax in California?
22 MR. IBELE: We’ve gone back and forth on bunker
23 fuels. But I believe at this time we don’t tax bunker
24 fuel.
25 COMMISSIONER PRINGLE: And the policy decision
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1 that was made, why that would not be included here is what
2 policy decision?
3 MR. IBELE: We didn’t make a policy decision.
4 This was based on Commission direction.
5 COMMISSIONER PRINGLE: So the Commission
6 directed that it would apply to gas, diesel, and airplane
7 fuels; is that correct?
8 CHAIR PARSKY: That was the proposal that the
9 staff was asked to include and evaluate by commissioners.
10 COMMISSIONER COGAN: What’s a “bunker fuel”?
11 MR. IBELE: A bunker fuel, it’s really the stuff
12 that’s left over after all the refining is done. And it’s
13 used in ships. It’s used in ships, transportation ships,
14 oceangoing ships.
15 COMMISSIONER PRINGLE: In that, for example,
16 one would somehow characterize a fuels tax as a carbon
17 tax. Bunker fuels, does it have the highest degree of
18 greenhouse-gas emissions?
19 MR. IBELE: I don’t know precisely. I know that
20 it’s pretty dirty stuff.
21 COMMISSIONER HALVORSON: I think that’s true.
22 I think that’s the worst polluters, are the seagoing
23 ships.
24 COMMISSIONER PRINGLE: Yes, thank you. I
25 actually -- I did want to bring this up. Of course, I’m
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1 not an advocate for bunker fuels or airline fuels or any
2 of those. But I did want to hear where a decision was
3 made and how that decision was made as it applied to the
4 overall fuels tax, just to understand what the basis is
5 for the discussion, is all.
6 CHAIR PARSKY: Well, what we have tried to do
7 throughout the process is to incorporate, as much as we
8 could, requests coming from commissioners as to tax policy
9 or taxes that ought to be considered. I don’t think there
10 was any alternative suggested under this heading.
11 COMMISSIONER BOSKIN: I have suggested an
12 alternative.
13 CHAIR PARSKY: I’m sorry, I don’t think there
14 was an alternative of fuels tax. I know you have an
15 alternative that’s coming, I am waiting. But let’s give
16 it the right audience.
17 Proceed.
18 MR. IBELE: Yes, on this particular tax -- on
19 this particular package, I should say -- the carbon tax
20 was not the plug. We used –- we initially started out
21 with the 4 percent and the 7 percent rates on this
22 particular package. And to make it revenue-neutral, we
23 reduced the lower rate for the personal income tax to
24 lower the amount of money that was raised in this
25 particular package.
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1 COMMISSIONER POMP: Mr. Chair, a question.
2 When I look at the total -- I think it’s the
3 subsequent slide, Mark -- the tax change by AGI --
4 continue, if you will -- the next one.
5 And -- the next one, please.
6 And that is for the entire package?
7 MR. IBELE: That’s the entire --
8 COMMISSIONER POMP: That’s what?
9 MR. IBELE: Yes.
10 COMMISSIONER POMP: Should it add up to zero,
11 the pluses and the minuses, or not?
12 MR. IBELE: No, because this is a comparison
13 with current law. And the total of the –-
14 MR. SPILBERG: 2014.
15 MR. IBELE: 2014, yes.
16 Maybe I can come back to that. And let me --
17 COMMISSIONER POMP: The second question may be
18 easier.
19 Who made the decision that we should leave
20 charitable contributions in but not the medical?
21 CHAIR PARSKY: No one made a decision
22 individually. But coming out of the last meeting, these
23 were the two packages that I summarized as I thought was
24 a consensus of the Commission to go into this analysis.
25 Any commissioner can seek to propose his or her
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1 individual view and see if we’ve got consensus around
2 including it in further analysis.
3 COMMISSIONER POMP: Let me just raise --
4 COMMISSIONER HAUCK: Which page are you on?
5 COMMISSIONER POMP: In both packages -- in both
6 packages, there were itemized deductions for mortgage
7 property and charitable. I didn’t see medical there.
8 Now, maybe that was an oversight, maybe it is there,
9 but -- it’s not?
10 Okay, so I would just raise the logic of giving
11 an itemized for a charitable, which might not have
12 anything to do with California, versus denying someone a
13 medical. I’m not sure I would draw that line.
14 COMMISSIONER BOSKIN: I think we have the
15 following numerical conundrum. If we go to revenues for
16 major taxes -- these are all done for year 2014; right,
17 Phil?
18 MR. SPILBERG: Yes.
19 COMMISSIONER BOSKIN: So you get $1 billion more
20 in 2014 -- not quite a full employment year in Package 1
21 and 2 than you do in current law, and these are changes
22 relative to current law. So when you add up the
23 distribution of the tax burden, it should add up to
24 $1 billion more; right? The change -- some of the changes
25 should be $1 billion more than the current law. But they
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1 shouldn’t be zero because you’re collecting a little bit
2 more. But they shouldn’t differ by considerably more than
3 a billion dollars.
4 MR. IBELE: Well, the difference -- and we can
5 do the calculation. But the distributions were just done
6 on California residents and didn’t include the exported
7 portion of the business taxes, which would be the
8 discrepancy between the distribution --
9 COMMISSIONER BOSKIN: Aha, okay. Fine.
10 COMMISSIONER EDLEY: Nice save.
11 MR. IBELE: I knew I was right. I just wasn’t
12 quite sure why.
13 CHAIR PARSKY: Both these fellows are brilliant.
14 As the clock was ticking, we didn’t run out of time.
15 You’re okay.
16 MR. IBELE: I know I’ve still got the volatility
17 thing hanging out there, but…
18 CHAIR PARSKY: Okay, proceed ahead.
19 MR. IBELE: I think we went through this, our
20 sort of take, on the criteria that we’ve used. I don’t
21 know if we flip through that fairly quickly, just a
22 description of the different taxes. Again, you know,
23 we’re raising about the same amount from the personal
24 income tax.
25 The distribution is not dramatically different.
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1 A little bit -- because of the change in the rate, the
2 lower-income group doesn’t benefit as they did under
3 Package 1.
4 The crossover point between the effective tax
5 rates for the two is a little bit lower in Package 2.
6 One of the things that we looked at in this
7 particular package was -- and I know this was of some
8 interest to some of the commissioners -- was the issue of
9 phase-outs, which we, unlike in current law, we phase out
10 many deductions beginning at about $310,000, and phase
11 them down to a 20 percent residual.
12 We phased these out under this particular plan
13 totally, so that by half a million, you lost all the
14 deductions. So at that point, people reverted to, or
15 could revert to a standard deduction.
16 The distribution -- and this shows the Package 2
17 with the phase-out, the difference is about $400 million
18 more with this particular package.
19 Without the phase-out, we lose a little bit of
20 revenue, because higher-income individuals, taxpayers,
21 would continue to benefit from the deductions.
22 The distribution, however, is very similar. It
23 looks very much like this, although there’s a little bit
24 of -- a little lower effective tax rate at the upper end.
25 And these distributions here -- and, again, this
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1 is for personal income tax only -- indicate that -- you
2 know, that the phase-out issue only affects the top income
3 groups there.
4 And I think that’s what we have in terms of
5 slides.
6 CHAIR PARSKY: Well, before we turn to a
7 discussion of where we are with each of these packages,
8 I just want to be sure -- and, again, we won’t use this
9 session for too detailed of discussion of the business
10 net-receipts tax, but I do want you to go through for the
11 Commission exactly the work that you have done to date on
12 that subject and, for illustrative purposes only, what you
13 included in doing your calculations, so that any questions
14 can be raised about that. We’ll talk a little bit about
15 how we operate going forward.
16 COMMISSIONER MORGAN: May we ask a couple of
17 questions on these two packages before we get into
18 business?
19 CHAIR PARSKY: Well, the only reason I was
20 hesitating is Package 1 does include this business
21 net-receipts tax. So I just want to make sure -- again,
22 this is not meant to be an open discussion of, you know,
23 “This should be in,” “That should not be in.” I just want
24 to make sure --
25 COMMISSIONER MORGAN: No, it’s not an opinion,
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1 it’s a question.
2 The Package 2 that I took home from our last
3 meeting also had the business net-receipts tax in it as
4 it was presented at our last meeting and on which I made
5 notes. So that was a question.
6 And reducing the sales and use tax by 1 percent
7 was also on the chart for our last meeting. And I see
8 that that has been omitted on this one. And is this just
9 for balancing purposes or --
10 CHAIR PARSKY: No, no. I think these packages
11 were at least what we took away from the last meeting and
12 posted on the Web site.
13 I think if you look at the Web site, you’ll see
14 that these packages -- the business net-receipts tax was
15 clearly not part of Package 2. That, I’m quite confident
16 of.
17 COMMISSIONER MORGAN: That’s true. That’s what
18 came to me by e-mail this last week. It did not include
19 that. But at the meeting that I attended last month, the
20 sales-tax issue and the business net receipts under
21 Package 2 were included. And I don’t remember discussions
22 about the fact that they were going to be removed. That’s
23 my only point.
24 CHAIR PARSKY: I think, Becky, if you look back
25 to June 23 rd , or something even a little earlier, you will
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1 see a communication that describes what came out of the
2 meeting. And I’m happy to share it with you at the break.
3 COMMISSIONER MORGAN: I know we don’t approve or
4 disapprove minutes at this meeting, but okay.
5 CHAIR PARSKY: Okay, just a little bit of time
6 on just describing the work that you have done, who you’ve
7 involved to date on the business net-receipts tax, and
8 the preliminary assumptions that you have put in, which
9 are described on the Web site presentation, just so the
10 Commission can understand how much has been done; and then
11 we’ll get into how much more needs to be done.
12 MR. IBELE: Okay. On the business net-receipts
13 tax, that was part of our arrangement with Ernst & Young
14 to do a modeling of that for the state of California.
15 They’ve been involved in the tax in both Michigan, and a
16 type of receipts tax, business receipts tax, gross
17 receipts tax in Ohio.
18 And on that, following that sort of more
19 economic-based exercise, we’ve been engaged both with
20 Leg. Counsel and the Franchise Tax Board in discussing
21 what some of the parameters of this tax would be.
22 We’ve had discussions with the Department of --
23 what they refer to as the Department of the Treasury in
24 Michigan, which is their Department of Revenue,
25 discussions with two attorneys in Michigan that are
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1 familiar with their tax, which in some ways is similar
2 to what the Commission has discussed for California; in
3 some ways, very dissimilar. But they’ve gone through many
4 of the same -- gone through many of the same issues that
5 we’re going through here. They have chosen to go in a
6 different direction, maybe, in terms of the design of the
7 tax, but some of the policy questions that they had and
8 some of the administrative questions are similar. And I
9 believe the Franchise Tax Board has had additional
10 discussions with their Department of Revenue and the two
11 attorneys that I mentioned in Michigan as well.
12 In the part of this process, we developed, with
13 the assistance of the Franchise Tax Board -- and I would
14 ask them to come up to the table, if they can, to provide
15 some backup legal questions if we need it.
16 COMMISSIONER EDLEY: Mark, is that -- the thing
17 that you posted, do we have that in our books?
18 MR. IBELE: It should be under Tab 9.
19 MR. SPILBERG: Yes, the document that you’re
20 looking for, it’s in Tab 9. And the easiest way to find
21 it is if you actually turn to Tab 10, and then go two
22 tabs back from that.
23 MR. IBELE: It’s an integrative process.
24 MR. SPILBERG: Yes, go to Tab 10 and then go
25 two back.
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1 MR. IBELE: Did everybody find it?
2 So that’s --
3 COMMISSIONER PRINGLE: Can you state the
4 question again, please?
5 MR. SPILBERG: Do you really want me to?
6 Yes, you go to Tab 10, and then within each tab,
7 they’re the subtabs. So go within that, just go two back,
8 and that’s going to be sort of the beginning of that
9 document.
10 MR. IBELE: So that’s what we’ve done to date.
11 And, again, I want to emphasize that in our discussions
12 with the people in Michigan, as well as our own tax
13 experts here, we have made -- or given tentative direction
14 in terms of what we thought at the time might be good
15 choices to make. But there are obviously a lot of policy
16 decisions and policy calls that the Commission needs to
17 be aware of.
18 So we’re going to -- probably the best way to
19 proceed is to go through the information sheet that we had
20 posted and is out there in the public. And Phil is going
21 to do that.
22 MR. SPILBERG: Thank you.
23 And let me just go through this information
24 sheet. And I hope -- does everyone have that information
25 sheet in front of them right now? Good.
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1 So what I’m going to do is just briefly describe
2 what staff has put together, the description of the
3 business net-receipts tax that we have put together.
4 And let me start off by saying that while
5 income taxes are obviously taxes on income, the business
6 net-receipts tax is a tax on consumption. It’s sort of
7 similar like a sales tax -- just a little bit similar to
8 that. It’s a sales tax, if it’s assumed to exclude
9 business purchases -- in other words, there’s an exclusion
10 on business purchases, would be a tax on consumption.
11 Instead of an exclusion on business purchases, the
12 business net-receipts tax allows a deduction for business
13 purchases. So it ends up with basically a very similar
14 base to that of a sales tax, but it’s a value-added tax.
15 A sales tax collects all the tax at the very end. A
16 value-added tax collects the tax over the course of the
17 production process. So that’s sort of the similarities
18 and differences of a sales tax and a business net-receipts
19 tax.
20 You’re looking at an information sheet. And
21 the information sheets include the work of staff that has
22 been performed over the last few weeks. We have received
23 excellent technical support from the Franchise Tax Board,
24 and Andrea Chang and Carl Joseph are here with me, and
25 they will answer maybe some of the more technical
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1 questions that you have after I’m finished with this
2 description.
3 We’ve had a lot of discussions. Mark alluded
4 to some of those. The Franchise Tax Board has had
5 internal discussions. We have had discussions with
6 academics and staff from outside of the state.
7 What I’m going to do is actually read through
8 this information sheet. But I’m hoping that you would let
9 me go through this information sheet before questions,
10 because otherwise, I think we could get very much -- we
11 could get bogged down.
12 CHAIR PARSKY: And then I’ll come back, Phil,
13 and we’ll talk a little bit about process. Because in the
14 span of just this afternoon, it’s going to be difficult,
15 if not impossible, for commissioners to understand all the
16 implications of this.
17 COMMISSIONER KEELEY: Mr. Chair?
18 CHAIR PARSKY: Yes?
19 COMMISSIONER KEELEY: Might I just suggest an
20 alternative?
21 This is the one document that has been up for a
22 while on the Web site. And can we assume that everyone
23 has read it, rather than the staff reading it to us, and
24 move some place beyond having somebody read something to
25 us that we’ve already all read?
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1 Phil, this isn’t -- I’m not unhappy with what
2 you’re suggesting, I just think it’s –-
3 COMMISSIONER PRINGLE: Or your reading ability.
4 COMMISSIONER KEELEY: Or your reading ability.
5 Yes, thank you, Mr. Mayor.
6 It’s just in the interest of time.
7 CHAIR PARSKY: John?
8 COMMISSIONER COGAN: You might be able to just
9 highlight the most important decisions that a commission
10 like this would have to confront in thinking about a
11 sales tax.
12 MR. SPILBERG: Sure, I could do that. Okay.
13 Okay, I will try to highlight some of the
14 decisions that were reached over here. But certainly to
15 the extent that I missed some of those that the
16 commissioners are interested in, we can cover those
17 afterwards through answers to questions.
18 The first decision is that we excluded from
19 the business net-receipts tax banks and financials and
20 insurance companies. And the reason that we did that,
21 is that the taxation of financial products and financial
22 companies under a value-added tax is very complicated.
23 And, indeed, in most places where a value-added tax is
24 administered, there are separate rules and separate
25 treatment for financial companies and financial products.
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1 So we have basically followed that practice over here.
2 We would continue to tax insurance companies
3 under the gross premiums tax; and we would continue, in
4 this proposal, to tax banks and financials under the
5 corporate franchise tax as it exists right now.
6 We have to deal with special entities, such as
7 regulated investment companies, RICs -- those are mutual
8 funds -- and also regulated mortgage investment conduits,
9 RMICs, which, in essence, package mortgages into financial
10 instruments. And there’s a new type of special entity
11 called a FASIT, financial asset securitization investment
12 trust, which also packages short-term financial paper,
13 basically.
14 We decided -- staff decided that those special
15 entities are basically packaging financial products and,
16 therefore, should be excluded from the business
17 net-receipts tax. However, we have included REITs, real
18 estate investment trusts, within the tax. And the reason
19 for that is that REITs basically manage property -- are
20 permitted to manage properties. And in so doing, they do
21 far more than just sell financial instruments.
22 COMMISSIONER EDLEY: Phil, You’re not concerned
23 that in it –- I’m sorry, you’re not concerned -- should I
24 wait?
25 I’ll wait. I’ll wait.
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1 CHAIR PARSKY: Identify the broad issues.
2 MR. SPILBERG: Okay, we’ve elected to -- first
3 of all, to combine entities, commonly owned entities into
4 unitary groups as they are for the corporate franchise
5 tax, income tax.
6 However, the combination for the business
7 net-receipts tax is far broader than it is for corporation
8 income tax. And the reason is that we have basically the
9 same tax that’s going to be paid by a broader group of
10 businesses. So we’ve included within the unitary groups:
11 corporations, partnerships, limited liability companies,
12 and sole proprietorships. Basically, all businesses that
13 are commonly owned would need to combine their activities
14 within this business net-receipts tax entity, and file one
15 return, one tax return that basically would calculate the
16 combined tax.
17 Apportionment: We have chosen, for multistate
18 corporations, to attribute tax or income -- I’m sorry,
19 revenues to California using apportionment. We have
20 explored other mechanisms for doing this attribution
21 across states, but we come back to the one that has been
22 used for the income tax, that will continue to be used
23 for income tax, and that’s apportionment.
24 We would be using sales as the apportionment
25 mechanism. So it’s referred to by many as “single sales
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1 factor apportionment.”
2 The numerator of that apportionment would be
3 sales in California. The denominator would be U.S. sales.
4 So the corporation would attribute their sales, their
5 revenues to California, by taking their U.S. revenues,
6 and then using that formula to apportion or attribute
7 revenues to California.
8 We determined that -- we determined that if
9 there was an embedded, basically, incentive that is a
10 consequence of using apportionment as a way of attributing
11 tax across jurisdictions to incentivize investments
12 outside of California, purchases outside of California --
13 and I can sort of demonstrate that with a simple example.
14 And just keep in mind that it’s a simple example. It’s
15 very -- it’s somewhat abstract.
16 If we have, let’s say, a firm, a California
17 firm, that has a million dollars of revenues in
18 California, that company potentially could zero out its
19 California revenues by purchasing an asset from outside
20 of California. The way that the base for the tax is
21 calculated is, you take your revenues and subtract out
22 your purchases. So we have a California company that
23 basically has a million dollars of revenues in California,
24 and does a purchase from outside of California, so it
25 basically fully offsets its revenue from California, and
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1 would report in that year zero business net receipts tax.
2 Let’s say in Year 2 that firm sells that asset
3 from outside of California. The way that apportionment
4 works is that it would -- first of all, the base of the
5 tax would be its overall sales, which in this case would
6 be $1 million of its sales -- ongoing sales in California,
7 and another million from the sale of this property from
8 outside of California, but then this would be multiplied
9 by the apportionment ratio, which in this case we have the
10 $1 million of sales in California divided by $2 million
11 of sales U.S.-wide.
12 So you have $2 million of revenue times the
13 apportionment, which is one-half; and you end up back at
14 $1 million of the revenues that was actually earned in
15 California. So you have sort of this embedded incentive
16 for doing purchases from outside of California. And it’s
17 a problem for assets.
18 Now, for a business net-receipts tax, a
19 consumption-based tax, the treatment that you would want
20 is to expense basically asset purchases in the year of
21 purchase. But in order to deal with this incentive, to
22 mitigate that incentive, we decided that it was necessary
23 to expense this property over several years. And we have
24 decided -- we basically decided that one way of doing
25 that would be, in essence, to rely, at least for
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1 depreciable property, on federal depreciation lives for
2 depreciable assets. The Internal Revenue Code, the IRC,
3 uses the modified accelerated cost recovery system, MACRS.
4 It is already a sort of an accelerated method relative to
5 economic depreciation.
6 What we have decided -- what has been provided
7 to you in this document is expensing over half of the
8 maker’s life.
9 So, for example, for a three-year property,
10 under MACRS, the property for this business net-receipts
11 tax would be expensed in one and a half years.
12 The same goes for depletable property and for
13 amortizable property. In all these instances -- in all
14 these cases, instead of the expensing occurring in the
15 year of purchase, it would be expensed over half of the
16 life that is currently permitted for the IRC.
17 I think those are the most important elements
18 Well, Mark put down a couple more things.
19 The question is, what is the breadth of the
20 group, the business group, that we’d want to include.
21 For income tax purposes, for -- while California
22 allows actually a worldwide unitary group and allows a
23 water’s-edge election that is for corporations, for the
24 purpose of this, for administration purposes, we’ve chosen
25 just a water’s-edge group.
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1 COMMISSIONER HALVORSON: Could I make a comment?
2 I’ve owned a couple of small businesses in my
3 day, and it strikes me that this is getting complicated
4 enough that it would be really hard to both monitor and
5 do if you run a small business. The minute you get
6 multiple rules in multiple years and keeping track of
7 acquisition, doesn’t it seem like it would be more --
8 both kind of complicated and kind of easy to game?
9 MR. SPILBERG: Well, if you own multiple
10 businesses, you would have to file one tax return for --
11 COMMISSIONER HALVORSON: No, no, I just said in
12 the past I have, so I’ve had some experience with
13 accounting with small businesses. Right now, I don’t own
14 any small businesses.
15 But having owned some small businesses, you want
16 the simplest possible tax situation, administrative
17 situation you can come up with. And you don’t want to
18 spend much of your time -- and you can’t spend much of
19 your time -- doing a lot of different kinds of
20 bookkeeping. And when you add layers of recordkeeping and
21 different values for different things, and a year and a
22 half for this, at first blush, it seems complicated.
23 MR. SPILBERG: Well, that’s certainly something
24 we’d want to explore. We would want to go through,
25 basically, the real-world experiences of people like you,
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1 and see how that would apply to your situation.
2 COMMISSIONER BOSKIN: Mr. Chair?
3 CHAIR PARSKY: Phil, any other –- and again,
4 we’ll come back a little bit in terms of how complicated
5 this is and what we need to do about it.
6 COMMISSIONER BOSKIN: I do have a couple
7 questions.
8 CHAIR PARSKY: Let’s just step back a minute,
9 and let’s ask some questions on a general level. Then
10 we’ll come back around. I’m sorry, the only other thing
11 I wanted to mention is that the staff, Franchise Tax
12 Board, a number of helpers have not only been going
13 through this extensively, and we did seek advice from --
14 several people have been very involved at Michigan, in
15 the Michigan net-receipts tax. They also have started a
16 process of attempting to draft what legislation might
17 look like in connection with such a tax, but it’s still
18 quite preliminary.
19 Okay, and again, I don’t think we should try to
20 get too deep into the weeds, but I think general questions
21 about this or -- as deep as you want, but general
22 questions about the kinds of decisions, any comments
23 commissioners might make about process, please go ahead.
24 Michael?
25 COMMISSIONER BOSKIN: I just want to ask –-
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1 that’s right, I’ve got to hold it down.
2 I just want to ask a couple of questions.
3 First of all, what do we know about the
4 deductibility of these taxes against federal taxes,
5 particularly given that we’re going to be applying them to
6 a wide range of entities that are not subject to -- that
7 may be taxed under the personal tax at the federal level
8 and so on and so forth. So what do we know about
9 deductibility? That’s the first question.
10 MR. SPILBERG: Well, this would be a business
11 tax. So it would be deducted against business income
12 for federal income tax purposes, whatever federal entity
13 you happen to be. All these kind of -- all taxes such as
14 these are deductible for federal purposes.
15 COMMISSIONER BOSKIN: Okay, what’s going on with
16 global sales? What’s going on with global sales? We’ve
17 got an apportionment factor which has to do with American
18 sales and California sales.
19 So if we had two firms that were identical in
20 their gross receipts --
21 CHAIR PARSKY: Go ahead, speak up.
22 COMMISSIONER BOSKIN: We’ve got two firms that
23 are identical in their gross receipts and identical in
24 their sales in California, but one of them happened to
25 sell all of its outside stuff to Japan and the other
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1 happened to sell all of its outside stuff to Florida,
2 okay, they’d be taxed quite differently.
3 MR. JOSEPH: I’m Carl Joseph. I’m in the
4 Franchise Tax Board Legal Department.
5 I don’t think that’s what Phil envisions. I
6 think he envisions a system similar to what we have now,
7 where you would have -- the distinction is whether or not
8 the corporation or the entity is itself a U.S. entity that
9 makes the sale. The fact that they sell to Florida or
10 Japan or anywhere else, it will all end up --
11 COMMISSIONER BOSKIN: Well, he described it as
12 a relationship of your sales in California to your sales
13 in the rest of the United States.
14 MR. JOSEPH: Yes, and that’s not quite
15 technically correct. It’s all of the sales everywhere
16 by an entity that’s formed in the United States.
17 COMMISSIONER BOSKIN: I’m glad to hear that.
18 CHAIR PARSKY: If Michael is less worried,
19 that’s a very good thing.
20 COMMISSIONER BOSKIN: And lastly, have you done
21 any analysis of what different apportionment factors would
22 mean for the tax? So if you would mean by who ultimately
23 paid it and what the incentive effects would be, because
24 one of the people who testified to us in San Diego has
25 pretty strong opinions about that and believes that this
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1 really wouldn’t wind up being a tax on consumption, but
2 being a tax on employment in California, and it would be
3 better to have a payroll factor.
4 I know that the business community has wanted
5 a sole sales factor for all sorts of reasons. And I’m
6 not going to take a position on that. But it seems to me
7 before we just kind of go ahead and do this, we need to
8 get a lot of analysis about the apportionment factors.
9 MR. SPILBERG: Yes, we have not done this
10 analysis yet, but that’s certainly something that we would
11 like to do.
12 COMMISSIONER BOSKIN: I think that’s probably
13 high on the list if we continue down this road.
14 COMMISSIONER POMP: Mr. Chair?
15 CHAIR PARSKY: Yes, Richard?
16 COMMISSIONER POMP: First, I want to commend
17 Carl and Angie on this enormous amount of work. The last
18 time I saw Angie, I think she was either cross-examining
19 me or taking my deposition.
20 So this is a much better way to see you.
21 CHAIR PARSKY: Would you like to switch seats
22 with her? She’ll go ahead and --
23 COMMISSIONER POMP: She’s a charming person, so
24 I’m happy to sit next to her.
25 Let me ask you a question, first of all. What
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1 are the general differences between what we have here and
2 what Michigan does?
3 MS. CHANG: I think one of the main things is,
4 if you turn to page 2 of the outline of the proposed
5 business net-receipts tax -- before I start, I would like
6 to clarify that the role of FTB in this matter was very
7 limited. We were tasked with identifying the potential
8 issues and to bring them to their attention, and to
9 describe the pros and cons of possible decisions that
10 would have to be made.
11 So, anyway, going back to the differences --
12 CHAIR PARSKY: I can assure you, we’ll get you
13 much more involved if we take another step. So that’s
14 perfectly okay.
15 MS. CHANG: Okay. So going back to the
16 differences, the main differences between Michigan and
17 this proposal, as I see them, are the fact that in
18 Michigan, they allow the -- they do not have a system to
19 expense a certain purchase over several years. It has
20 to be expensed in the year of purchase. However, in
21 Michigan, they do not allow any carryovers of the excess
22 amount of the purchase over the sales amount. So, for
23 example, in the example that Phil gave before, if you have
24 gross receipts of a million dollars and you have purchases
25 of a million and a half, Michigan would say, “Well, you
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1 can take the entire purchase in the year you made it, but
2 you’re limited to $1 million. You can’t carry over the
3 other half million to the following year.” And that’s how
4 they mitigate some of the potential manipulation that you
5 might have.
6 And another difference is that they, too, use a
7 single sales factor apportionment formula, but they define
8 “gross receipts” differently for purposes of the tax base
9 versus sales for purposes of the sales factor.
10 So, for example, in the situation that Phil
11 described, where you could wipe out your California
12 net-receipts tax base of $1 million by purchasing a
13 million dollars, and it happened to be a building in a
14 different state, the way that Michigan would deal with
15 that would be to say that does not go into your sales
16 factor because it was a big, occasional sale that doesn’t
17 reflect what you’re really in the business of doing.
18 MR. JOSEPH: Another difference is the extent
19 of purchases from other businesses. Our explanation to
20 us as to what Phil was looking at, was to get rid of as
21 much business input as possible. And this particular
22 system that you see here has much larger purchases from
23 other business deductions than the system in Michigan
24 does. The biggest one being services acquired from other
25 firms. That’s not a deduction in Michigan.
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1 So I think from an economic perspective, you
2 know, perhaps it does get rid of that problem of
3 pyramiding inputs a little better, but it is different
4 than what they did in Michigan.
5 MR. SPILBERG: Yes, let me also say one more
6 thing. The Michigan system doesn’t pretend to be a
7 net-receipts tax or a value-added tax. It is, in fact,
8 a gross receipts tax, with allowance for some purchases.
9 And, for example, within their revenue base, they include
10 interest income, which is something that simply does not
11 belong in a value-added tax.
12 COMMISSIONER BOSKIN: And if you don’t expense,
13 it really isn’t a value-added tax.
14 MR. SPILBERG: It doesn’t -- it’s not precisely
15 a value-added tax, but it’s somewhere in between a
16 value-added tax and an income tax, much closer to a
17 consumption base than it is to an income base.
18 MS. CHANG: And I also wanted to remind the
19 Commission that Michigan had different concerns from what
20 we might have here because they still have a corporate
21 income tax, as well as a sales tax.
22 COMMISSIONER POMP: And, Carl, just following
23 up on your response to Michael’s questions. If you
24 receive two different corporations identical in every
25 respect in what they’re doing in California, are you
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1 saying that the foreign corporation will be treated
2 differently from the U.S. corporation?
3 MR. JOSEPH: Yes. Well, what Phil’s
4 determination of utilizing a water’s-edge return would
5 do, it would -- if there were unitary affiliates of one of
6 those entities that was, in fact, based outside the U.S.,
7 not a U.S. corporation, yes, it would not be in that
8 return. Whereas the corporation where it was all U.S.
9 corporations would have everybody in the return. That’s
10 true.
11 COMMISSIONER POMP: Okay, but there’s really no
12 reason to track what we do in the income tax, necessarily.
13 This is not an income tax.
14 MR. JOSEPH: That’s true, absolutely. And
15 it’s -- California is certainly in the minority, as you’re
16 well aware, of states that will do worldwide combined
17 reporting.
18 COMMISSIONER POMP: Michigan’s rate is
19 1 percent, if I remember. And I think the revenue
20 estimates that we’ve been doing were about three times as
21 high -- or more, 3.4 percent.
22 Is that right, Phil, when I asked before --
23 Mark?
24 MR. IBELE: About 3.3.
25 COMMISSIONER POMP: So 3.3 versus 1 percent.
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1 Let’s take royalties. Royalties are part of our
2 base; is that right, Phil?
3 MR. SPILBERG: Yes, it is.
4 COMMISSIONER POMP: Okay, I get a royalty check.
5 I would be subject to this tax. And to apportion it,
6 however, I would have to know information I now don’t have
7 and I’m not sure the publisher would give me, and that is
8 my California sales.
9 So what do I do?
10 MR. JOSEPH: Well, inherent in your assumption
11 is that you’re getting that royalty through a business,
12 because I don’t think that we’re talking about just an
13 individual taxpayer --
14 COMMISSIONER POMP: Well, I’m in the business
15 of publishing a case book.
16 MR. JOSEPH: Right. Well, what I think Phil’s
17 intention here is -- and stop me if I’m wrong -- is they
18 want to pick up the sales-factor rules that were passed
19 by the Legislature recently. And for royalties, that
20 rule is where the underlying intangible is utilized. And
21 so the question you’re asking, essentially, is would you
22 have to figure out where the underlying thing that you
23 are receiving the royalty for was utilized by -- perhaps
24 the end user, perhaps by a manufacturer or something like
25 that? And the question is, yes, you would, under the
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1 corporate tax system for a corporation or a partnership
2 or something like that, under the new system. And so,
3 yes, it would be the same.
4 You may well have to look for information you
5 don’t currently have. We have not fleshed out those rules
6 at this point, though.
7 COMMISSIONER EDLEY: No, I’m sorry, the
8 underlying tangible is the copyright --
9 MR. JOSEPH: Yes, that’s correct.
10 COMMISSIONER EDLEY: -- which is wherever the
11 publisher is domiciled.
12 MR. JOSEPH: It could be the publisher or it
13 could be --
14 COMMISSIONER EDLEY: Not where the sales take
15 place.
16 MR. JOSEPH: -- or it could be the market.
17 It depends on -– we haven’t had a chance to go
18 through the regulatory process on those new rules that
19 were just developed, or just put in place by the
20 Legislature.
21 But that is exactly right, that is the
22 dichotomy. You could stop at the publisher or you could
23 carry on through to find the market, so to speak, for that
24 item that’s produced utilizing the intangible that you –-
25 in this case, Mr. Pomp –- actually put in the time and
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1 effort to develop.
2 That’s harder, obviously. It may require
3 information from third parties that you may or may not
4 have the ability to get. We have not gone down that road
5 and held those interested-parties meetings. And we don’t
6 really have an opinion on that at this point. It’s all
7 very new to us. But I think in other states, there are
8 states –- and Rick would probably know –- that have, in
9 fact, stopped at the printer or the manufacturer, as
10 opposed to going all the way through to the underlying
11 customer.
12 COMMISSIONER EDLEY: That’s right. And then do
13 you force the publisher to do the apportionment rather
14 than the author?
15 COMMISSIONER POMP: Yes, but the publisher may
16 not tell me anything.
17 MR. SPILBERG: One thing that I failed to say
18 in my introduction to this, is that there is a $500,000
19 de minimis in this provision. So as long as your --
20 COMMISSIONER POMP: What are you suggesting,
21 Phil –-
22 MR. SPILBERG: As long as –-
23 COMMISSIONER POMP: -- about my book?
24 CHAIR PARSKY: Richard?
25 COMMISSIONER BARRALES: Not until you get your
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1 movie rights.
2 CHAIR PARSKY: We’re going to make it into a
3 movie, Richard, for sure.
4 MR. SPILBERG: I took as a given it was
5 successful.
6 CHAIR PARSKY: John?
7 COMMISSIONER COGAN: Thank you all for your
8 work. It’s really quite substantial.
9 I have a question to follow up on Michael’s
10 question, and it has to do with incentive effects and
11 labor taxes. So let’s suppose we have a company that’s
12 operating in Tahoe City, and it has a choice of
13 purchasing -- hiring some laborers from California to
14 work, or it can hire a firm located in Incline Village
15 to provide those services.
16 The tax treatment, if I’ve got it right, is
17 that if you hire the workers from California directly,
18 they will not be deductible from your receipts. But if
19 you hire these workers from a firm located in Incline
20 Village -- or, heck, even in California, for that
21 matter -- then the expenses would be deductible against
22 your receipts.
23 Is that right, or not?
24 MR. SPILBERG: If you are using direct labor --
25 in other words, your own employees to perform the work,
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1 then it would not be deductible.
2 COMMISSIONER COGAN: Right.
3 MR. SPILBERG: If you’re hiring, basically,
4 them as independent contractors or through a firm that
5 would otherwise be also subject to this business
6 net-receipts tax, then it would be deductible.
7 COMMISSIONER COGAN: Right, right.
8 So it seems that that creates some incentive
9 then to hire services through firms rather than to hire
10 employees directly; right?
11 MR. SPILBERG: It would only to the extent
12 that that firm was not itself subject to the business
13 net-receipts tax.
14 COMMISSIONER COGAN: That’s why I used the
15 Incline example; right? So if it’s a firm outside of
16 California, then that firm escapes any taxation, unless
17 that state has a similar tax.
18 MR. SPILBERG: That’s true. But then you
19 obviously have to look at the tax picture that that firm
20 outside of California, the total set of taxes from outside
21 of California has.
22 COMMISSIONER COGAN: Right. So the reality is,
23 in some sense, that the policy creates some incentives to
24 go outside the state to hire services that you might
25 otherwise obtain from employees within the state. And the
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1 question might be, how large is that incentive.
2 Another question I have is, is there any way
3 that you see of mitigating that incentive? Because it
4 does seem to me that this tax has aspects of an
5 employment tax, in that regard. California employment
6 tax.
7 So is there a way that anybody has thought of
8 to maybe mitigate the incentive effects of that?
9 MR. SPILBERG: Now, we have not gone through
10 that process --
11 COMMISSIONER COGAN: Right.
12 MR. SPILBERG: -- of trying to mitigate this
13 type of expense.
14 But you’re absolutely right. To the extent
15 that the price that that firm that is in California would
16 have to pay for the employees that it hires from outside
17 of the state, is the same as it would pay the employees
18 as employees within the state, then it would have an
19 incentive to hire the outside-of-state employees through
20 that firm, through that arrangement. But, of course, that
21 is the assumption, would that price be the same.
22 COMMISSIONER COGAN: Right.
23 COMMISSIONER POMP: I mean, the way to handle it
24 is to limit the deduction only if the payee is registered
25 under this tax in California. And that may raise
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1 constitutional issues, so…
2 COMMISSIONER MORGAN: Could I take that with
3 research and development also? Under this plan, would
4 it be wiser for a company to have their research and
5 development work done on a consulting basis through
6 another firm rather than have it done by employees?
7 MR. SPILBERG: Well, it goes back to, if the
8 firm that does the R & D work, if it is itself subject
9 to that business net-receipts tax, then they would have
10 to pay a tax when it provides that service to the firm
11 that is the recipient of the R & D.
12 So the answer is that if the research and
13 development would be provided by employees within that
14 firm, yes, you’d not get a deduction for that. But if
15 you basically hire a firm that provides that R & D to
16 you, that firm, itself, is going to have to pay a
17 business net-receipts tax if it is located in California.
18 COMMISSIONER MORGAN: I understand that. It’s
19 just that I see a whole restructuring of business because
20 most R & D is done now within the larger companies by
21 their employees. And under this, that’s not deductible,
22 where they could have a deduction from gross receipts if
23 they hire an outside research firm. And I just am
24 foreseeing a lot of restructuring of how companies do
25 their business.
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1 MR. SPILBERG: I don’t think that that would
2 be --
3 COMMISSIONER EDLEY: Phil, can I try to help out
4 here? I’m sorry for the interruption. But if we’re
5 talking about a tax rate of 3.3 percent, that’s a pretty
6 small incentive, it seems to me. And whoever you’d be
7 purchasing the services from, if they’re going to be
8 making more than 3 percent profit on it, it would be a
9 wash, plus the inconvenience, et cetera. I wonder, as a
10 practical matter, how serious this outsourcing incentive
11 would be.
12 COMMISSIONER MORGAN: You’re talking about money
13 to the state, in total.
14 COMMISSIONER EDLEY: No, the cost -- the cost
15 to your business of not being able to deduct the R & D,
16 the cost to you would be equal to the 3.3 percent of that
17 R & D.
18 COMMISSIONER COGAN: Right.
19 COMMISSIONER EDLEY: And if you purchased the
20 R & D as a service from outside, they’d have to be making
21 less than 3 percent profit, and otherwise have the same
22 cost structure.
23 COMMISSIONER MORGAN: And my comment was more
24 about the fact that you have engineers and researchers
25 working on the payroll now for these companies. I’m
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1 talking tax is one issue. But I think our suggestion
2 should be reflective of what we want our society to look
3 like. And you have a different type of employment if
4 this is the tax policy.
5 COMMISSIONER COGAN: And, Chris, your point is
6 well taken, that the lower the tax rate is, the less we
7 have to worry about these incentive effects of creating
8 incentives to outsource everything outside the state that
9 you can.
10 MR. SPILBERG: Yes, outside the state, that’s
11 true. But within the state, it’s not a problem in the
12 sense that to the extent that you contract out from a firm
13 to do your R & D in California, that firm is going to have
14 to, on the sales that it --
15 COMMISSIONER EDLEY: Yes, but it’s not a revenue
16 problem for the state. But Becky’s point is, it’s a
17 problem for the company, having to restructure. And just
18 the question is, can you keep the rate low enough so
19 that’s really pretty trivial compared to the diseconomies
20 of breaking yourself up and restructuring.
21 COMMISSIONER MORGAN: And the rate of 3.3 is
22 different than what we looked at last month of 2.77.
23 Why is that?
24 MR. SPILBERG: My point, just to sort of follow
25 up, the point is that the company that’s going to be
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1 selling to you that service, that R & D service, it’s
2 going to be paying at that same 3.3 percent tax. So it’s
3 actually going to be selling that R & D for more than if
4 you use employees. So it basically washes in that kind of
5 situation.
6 COMMISSIONER COGAN: Only if both are located in
7 California?
8 MR. SPILBERG: Only if they’re located in
9 California.
10 MR. JOSEPH: If the out-of-state company -- I’m
11 a California company and I hire the out-of-state company
12 to do services for me. If those services are over
13 $500,000, they’re a taxpayer in this system. Because the
14 rule says: If you have over $500,000 worth of receipts
15 assigned to California, they’d be a taxpayer, anyway.
16 COMMISSIONER POMP: Yes, and you’re saying, even
17 if they do everything in Nevada, you’re going to claim as
18 a taxpayer --
19 MR. JOSEPH: Yes.
20 COMMISSIONER POMP: -- and you know they’ll
21 raise an issue of economic nexus which has not been
22 resolved by the U.S. Supreme Court.
23 MR. JOSEPH: That’s true. The batting average
24 is pretty good though in the states that have taken it all
25 the way.
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1 COMMISSIONER POMP: We have not had the
2 Supreme Court chime in yet so…
3 COMMISSIONER EDLEY: But $500,000 --
4 COMMISSIONER POMP: But something that would be
5 as clear-cut –- you know, it’s a pretty clean line, not
6 doing anything in California, doing everything in Nevada.
7 It’s $33,000 per million tax savings. That covers an
8 hour of my time, so...
9 CHAIR PARSKY: That’s not what you told me.
10 COMMISSIONER POMP: I thought it was just Bill.
11 CHAIR PARSKY: Bill?
12 COMMISSIONER HAUCK: Mr. Chairman, I’d like to
13 suggest that if we were going to pursue this, that in
14 whatever analysis that is done, that we anticipate a range
15 of rates. Because I would expect that if we installed
16 this tax in California, there would be immediate pressure
17 to increase the rate in order to increase revenues to the
18 state. And I think the questioning reflects all of our
19 concerns about the impact of jobs and job growth in
20 California. The last thing I think we want to do is to
21 force jobs outside of California as a result of building
22 an economic incentive to do so into the tax system.
23 CHAIR PARSKY: There’s no question about that.
24 And let me -- I’ll come back in a second and see
25 if we can’t summarize where we are.
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1 I just wanted the Commission and the public to
2 understand that in the spirit of trying to see whether or
3 not we could really recommend major reform, I think there
4 was at least a desire on the part of the Commission to
5 look at two alternative ways -- maybe they blend -- but
6 two alternative ways to incorporate in our tax base an
7 element of the economy that is not part of it, namely the
8 service part of the economy.
9 And there are alternative ways to go to do this.
10 One way to go is to take the existing sales tax and extend
11 that to services. That’s been tried, and it has not yet
12 succeeded. That doesn’t mean it can’t. And I’ll talk a
13 little bit in a minute to see if we can have a consensus
14 in terms of where we might want to go.
15 This is another way to accomplish that result,
16 and to move the system more toward a consumption-oriented
17 tax than exists today.
18 It’s a policy decision. It’s very much part of
19 what a commission like this should step back and decide.
20 The details of this are quite significant. And I for one
21 am quite concerned that we not just recommend something
22 without giving enough time and enough detail to understand
23 what it is that the consequences of what we’re
24 recommending, because if we decide to recommend this, we
25 will expect the Legislature to act on it.
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1 So I’ll come back in a second. But just now
2 kind of generally, I want to make sure that we haven’t
3 cut off any commentary -- not just on this, but on either
4 of the two packages -- and, again, let’s try to make these
5 brief, but I want to make sure everyone has an opportunity
6 to comment, and then I’d like to step back and see if I
7 can’t make a suggestion of where we might want to go.
8 Yes, Edward?
9 COMMISSIONER DE LA ROSA: Yes, I’ve got one
10 question on both packages, and that has to do with the
11 phase-out of deductions. And this is a little bit
12 different than the orientation that we’ve been taking
13 during this question-and-answer session. But what is
14 the logic behind phasing out deductions at higher-income
15 levels? And in particular, charitable deductions.
16 Because I think that, in my opinion, there’s a lot of
17 charitable deductions that are given by higher-income
18 taxpayers, higher --
19 COMMISSIONER BOSKIN: Actually, half of all
20 charitable contributions come from the top two federal
21 income tax brackets.
22 COMMISSIONER DE LA ROSA: Right. So I don’t
23 think if we’re supposed to think about these kinds of
24 issues, but it concerns me that there might be some kind
25 of –- some big --
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1 CHAIR PARSKY: It’s a subject that concerns a
2 number of commissioners, I can certainly say that. And
3 you might just recite the interrelationship between that
4 phase-out concept and the use of the standard deduction.
5 MR. IBELE: Sure. I was just asking Phil if
6 he was aware of a policy reason for the phase-out, and
7 he said he didn’t know of one. I’m not sure of one,
8 either. And, in fact, we don’t phase out all of the
9 deductions currently. We have phase-outs, but we don’t
10 phase out the medical and property loss, casualty loss.
11 And California basically conformed to the feds on this
12 phase-out, although our income for current law, our income
13 starting points are much higher.
14 In the models that we presented, the interaction
15 is that when we have the phase-outs, basically we assume
16 that the taxpayer would continue to use the deductions as
17 long as they were greater than the -- if they were filing
18 jointly, greater than $30,000. And when they were below
19 that, they would flip over and use the standard deduction.
20 And that’s why in our distributions for -- well, I refer
21 to Package 2, our distributions on the effect of that,
22 was not particularly large in a revenue sense, because
23 the $30,000 is a very generous deduction. So the
24 distributional impact of phase-outs or no phase-outs was
25 not particularly apparent, except at the very upper end.
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1 COMMISSIONER POMP: I mean, if you want to know
2 the policy behind the federal phase-out, they were looking
3 to get a little better progressivity into the tax. And
4 they felt that the incentive effects weren’t going to be
5 that serious because people had the wherewithal to give
6 the charitable contribution and would probably continue
7 to do so. So it’s not a complete phase-out. You know,
8 it’s a recapturing of some of the benefit driven by
9 revenue, driven by equity considerations.
10 CHAIR PARSKY: You might ask some of your
11 colleagues at the University of Connecticut whether they
12 still feel that way in today’s environment.
13 COMMISSIONER BOSKIN: I certainly agree with
14 Richard that they were driven by revenue and equity
15 considerations, but I think there’s a very large
16 difference between charitable contributions and other
17 deductions that have to do with yourself.
18 There are many studies of the price elasticity
19 of giving to charity which is affected by the deduction,
20 because the price becomes one minus the marginal rate for
21 every dollar that you give. Martin Feldstein and I did
22 a bunch of these for the Filer Commission in the 1970s.
23 We included higher than one; we included less than one.
24 But if it’s around one, it means that every dollar that
25 you don’t deduct would have gone to charity. So it’s just
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1 a transfer from the charity to the government with the
2 person as a withholding device. That’s very different
3 from phasing out a dollar or something where you spend it
4 yourself.
5 CHAIR PARSKY: John?
6 Chris?
7 COMMISSIONER EDLEY: Two things. One is, with
8 respect to the NRT. It seems conceptually possible --
9 I guess I’m asking, is it possible as a practical matter
10 to convert the revenue associated with the local sales
11 tax in a jurisdiction into a local increment to the
12 net-receipts tax, so that one could eliminate the --
13 so that one could eliminate the local -- the sales tax
14 entirely?
15 MR. IBELE: I think, conceptually, it can be
16 done. With the local sales tax --
17 COMMISSIONER EDLEY: And, again, I want to
18 emphasize that this is in a context in which we’re going
19 to have a multiyear phase-in, in which we’re slowly
20 building up the NRT, et cetera, but…
21 MR. IBELE: I think there’s a couple issues I
22 can think of whether or not you’d give local jurisdiction
23 the option to adopt this particular tax or not. You know,
24 they certainly have the ability to sort of vote in
25 different rates on the sales tax.
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1 There’s the issue of jurisdictions. Where does
2 the sale -- where does the company operate? Where does
3 the sale take place? How would you allocate that? By
4 market or by -- what was the other alternative?
5 So, I mean, I think conceptually that it does
6 raise --
7 COMMISSIONER EDLEY: I give up. I give up.
8 CHAIR PARSKY: Yes, I’m sorry, Curt, go ahead.
9 COMMISSIONER PRINGLE: But I will add two
10 statements.
11 I think that is a great challenge. But also
12 constitutionally, it requires a two-thirds vote of that
13 local entity to have a local tax. So even if you were
14 going to have a straight-off swap of the dollar amounts
15 exactly the same, it requires a two-thirds vote of the
16 people within every city in California to be able to do
17 that because that is a local tax. And to increase or
18 modify any local taxes, this would be an increase in a new
19 tax and you would eliminate an old. But it would require
20 in every single city in the state, there would be a vote
21 of the people and require two-thirds vote.
22 Additionally, every self-help county in the
23 state that has a locally-imposed transportation tax or
24 other means, those were voted specifically as that sales
25 tax piece. And those would individually have to all be
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1 voted requiring a two-thirds vote of each of those county
2 electorates to be able to do it, so…
3 COMMISSIONER EDLEY: Requirement is different
4 from the Prop. 13 two-thirds thing in the Legislature?
5 COMMISSIONER PRINGLE: Well, that is part of
6 the two-thirds requirement and 218 requirement. Prop. 218
7 requiring a local entity to get a two-thirds vote to
8 impose a local tax.
9 COMMISSIONER EDLEY: I guess what I’m saying
10 is, if we’re swapping the NRT for some other state taxes
11 and we are assuming that this can be done by majority
12 legislation --
13 COMMISSIONER PRINGLE: That tax-neutrality
14 argument doesn’t apply –-
15 COMMISSIONER EDLEY: That’s what I was asking --
16 COMMISSIONER PRINGLE: -- to a local government
17 imposing a new tax.
18 COMMISSIONER EDLEY: -- that it’s not.
19 COMMISSIONER PRINGLE: Even if it would -- their
20 new tax would eliminate an old tax, it would basically
21 wash.
22 COMMISSIONER EDLEY: Okay.
23 COMMISSIONER PRINGLE: But that doesn’t apply to
24 those local governments.
25 COMMISSIONER EDLEY: Got it. Got it.
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1 MR. IBELE: I guess the other -- I just wanted
2 to add one more thing.
3 COMMISSIONER EDLEY: It’s dead, it’s dead. I
4 feel like an idiot. You’re going to rub it in? Don’t rub
5 it in. Please, I’m very sensitive.
6 CHAIR PARSKY: Keep going, Mark.
7 COMMISSIONER EDLEY: The second thing --
8 MR. IBELE: Were you going to gong me?
9 [Bell chimed.]
10 COMMISSIONER EDLEY: The second thing is, I have
11 to say that I remain a little uncomfortable with the
12 distributional data that we saw from both the first and
13 the second packages. And I guess what I’m wondering is
14 that, as we go forward from today -- and I hope to
15 continue down the path with the NRT, I hope –- I’d like
16 to have a little bit of discussion to hear from the other
17 commissioners about why the simplification of the rate
18 structure should be such a high public-policy priority as
19 opposed to -- because in my own view, the complexity
20 issue, which is what people keep raising, doesn’t come
21 from the number of brackets, it comes from all the
22 deductions and the credits and the exclusions and the
23 phasing in and the phasing out, et cetera. It’s not about
24 the rate structure.
25 Now, if there’s a separate argument that the
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1 marginal rates are too high for economic reasons or
2 efficiency reasons or something, okay, that’s fine, we
3 can have that discussion, and maybe there’s a way to
4 change the rate structure on that basis. But I guess
5 I really want to understand what we’re getting in
6 public-policy terms for deviating from the current
7 distribution of tax burdens reflected in the current
8 structure of the PIT.
9 Does everybody see what I’m saying? Because --
10 and let me just add that if the concern is just with the
11 marginal rates, then I think what we should think about
12 is, should we increase the NRT a little bit and have a
13 rate reduction on the PIT for everybody.
14 So I’m, frankly, at a loss to understand what
15 my colleagues are really after in this regard.
16 CHAIR PARSKY: If any colleague would like to
17 answer that, that’s okay.
18 COMMISSIONER POMP: I would, sure.
19 CHAIR PARSKY: Go right ahead, Richard.
20 COMMISSIONER POMP: And let me try to do it with
21 just a simple, little story.
22 Mr. Chair, you’re in business, and so I come
23 to you, and I’d say, “Gerry, how would you like to swap
24 your business for my business?”
25 And you say, “Okay, Rick. What do you have?”
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1 And I say, “Well, I have something, but I
2 haven’t really thought through all of what I have.”
3 And you say, “Okay, how much revenue do you
4 make?”
5 I say, “Well, I don’t really know because I
6 haven’t made any of these major decisions, and I haven’t
7 had the business through a business cycle yet. And, boy,
8 there’s a lot of unknowns. But let’s swap.”
9 And you would look at me like I was nuts.
10 And that’s exactly the way I view any proposal to take
11 something unknown and swap it for something known --
12 which you’re never going to get back in a state with a
13 two-thirds requirement. So you might as well say, “We’re
14 going to eliminate the sales tax,” which 45 other states
15 have. It’s not like this is an idiosyncratic tax in any
16 way. And for what? I mean, I’m sort of mystified by that
17 whole way of thinking.
18 And the dean’s points, I think -- I mean, how
19 would you be interviewed and defend a $7 billion increase
20 on the middle class? People who may have been recently
21 laid off, working two or three jobs. You’re going to tell
22 them what, it’s to reduce volatility? Which from day one
23 I’ve suggested is not a tax issue but a spending issue.
24 COMMISSIONER PRINGLE: Mr. Chairman?
25 CHAIR PARSKY: With all due respect, I thought
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1 you were answering his question.
2 COMMISSIONER POMP: Oh, yes. Do you agree?
3 CHAIR PARSKY: It’s perfectly okay. I mean,
4 you can have whatever frolic and detour you want, but it
5 was supposed to answer his question.
6 COMMISSIONER POMP: Well, I think I did with a
7 little story.
8 CHAIR PARSKY: No, I don’t think so.
9 Let’s keep going and then we’ll see if we can
10 come back.
11 Curt?
12 COMMISSIONER PRINGLE: Right. I don’t quite
13 think that. The point, I think, though -– my point is --
14 and this may be just the clear distinction between a
15 perspective on tax policy, but the level of progressivity
16 in the personal income tax in California to some of us
17 is so extreme that not only does it make us vulnerable
18 because of what we’ve seen in earlier charts in terms of
19 such a great percentage of the general fund in California
20 is dependent upon such a small number of people, that that
21 alone, I think, challenges us not only on some of the
22 basic premise of why we’re here, to address volatility and
23 establish a tax structure for the future, not just say,
24 “This is the way we are today and we’re concerned about
25 modifying where we are today,” and possibly looking at a
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1 different structure, which any new structure would always
2 be a new structure, without the data and the information
3 we have, and that’s why we’re trying to flesh that out.
4 I guess one of my concerns, though, is that even
5 in this new package, we have the same degree of reliance
6 upon the personal income tax as we do presently. And
7 there is no volatility in the property tax in California.
8 There’s very little volatility, even during a very
9 difficult economic time, in the sales tax in California.
10 The business net-receipts tax will be even less volatile
11 than that. But the greatest degree of volatility we have
12 in the tax structure, one of the things that is in our
13 charge is to address volatility, good or bad, how it
14 affects where those dollars may go. The volatility rests
15 on the personal income tax.
16 And my position is that it is stronger for us
17 because it doesn’t create a punitive effect on people
18 making more money through that economic cycle. That’s
19 why some of us have always supported fewer steps along
20 that process and a flatter tax system. But inherently
21 within your question, I would have a hard time that saying
22 one tax rate necessarily across the full spectrum is the
23 only way to go. Because, in fact, even in Package 1,
24 there are two tax rates: Zero and 6 percent. In
25 Package 2, there are three tax rates: Zero, 3.75, and
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1 7 percent. So in every one of those, there are multiple
2 rates.
3 And when you do have such a progressive
4 system -- some like it, some don’t like it as much --
5 what it gets to is, it makes it very hard to argue for a
6 flat rate because you will be reducing, at the very high
7 end, and that means everyone else has an increase. I get
8 that, and that’s one of the insidious aspects of having
9 a progressive system, because it’s always hard to unravel
10 from that degree of progressivity.
11 But it hasn’t gotten us security, it hasn’t
12 gotten us a strong economy, and it hasn’t gotten us the
13 ability to count on revenues from year to year.
14 So I think just for the long-term health of this
15 state and understanding where our revenues are coming
16 from, that level of progressivity is challenging to me.
17 And that’s -- be it one rate or two or three, I would
18 certainly be open to that discussion. But figuring out
19 how to adjust it and balancing it with other resources ,
20 I think adds to the security and the long-term health of
21 the state. That is where I’m coming from with the concept
22 of creating a flatter personal income tax.
23 CHAIR PARSKY: I think that appropriately frames
24 the discussion.
25 COMMISSIONER EDLEY: Yes, there’s the debate
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1 right there.
2 CHAIR PARSKY: I think that’s an appropriate way
3 to frame the discussion.
4 Now, let me see if I can make a suggestion.
5 Assuming for the moment that the commissioners would
6 support the nature of the recommendations we would make
7 as described at the beginning of this meeting, and which
8 you have a description of, as a way of proceeding forward,
9 it seems that the concerns that are expressed, on the one
10 hand, about increasing the burden on the middle class at
11 the expense of the higher-income group need to be taken
12 into account; and the desire, on the other hand, to be
13 less reliant on the personal income tax need to be taken
14 into account.
15 I’d suggest the following -- again, under the
16 umbrella of the type of recommendations that we would
17 ultimately make: That we would continue to explore
18 adjustments in the personal income tax. That could
19 include three rates or maybe even leaving all of the
20 rates, but under the condition that all brackets would
21 get a reduction. There would be no increase in any
22 bracket.
23 But I would urge that we stick with zero --
24 some number that would be lower than 3.75, I don’t know
25 the exact levels we would have to take it to, but it
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1 would be about 2.5 percent and 7, and see if we can’t,
2 under that that adjusted structure, give every tax bracket
3 a reduction.
4 COMMISSIONER EDLEY: What would the NRT have to
5 be in order to make that --
6 CHAIR PARSKY: And make it -- we start there.
7 If we are not satisfied with that, we should
8 look at, still under the personal income tax, an
9 adjustment in the capital-gains rate, suggested by one
10 or more commissioners. But that could be part of the
11 ongoing analysis of the personal income tax. That would
12 be part of a package on the PIT -- personal income tax.
13 Second, we would continue to analyze -- not be
14 afraid -- we would not be afraid of proposing a new tax
15 that had never been adopted in California just because
16 it was new.
17 Under kind of that guideline, with all due
18 respect to the University of Connecticut -- under that
19 guideline, we would never do anything new.
20 COMMISSIONER POMP: That’s a total distortion,
21 Gerry. I was talking about swapping. That was the whole
22 purpose of my story.
23 CHAIR PARSKY: Well, I haven’t finished –-
24 COMMISSIONER POMP: Swapping.
25 COMMISSIONER EDLEY: That’s a distortion, too,
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1 Richard, because you know we’re talking about a phase-in,
2 you know we’re talking about doing additional due
3 diligence before we make up our minds –-
4 CHAIR PARSKY: I’m sorry, I --
5 COMMISSIONER POMP: Package 1 talked about
6 eliminating the sales tax.
7 CHAIR PARSKY: Wait, wait, I haven’t finished.
8 I haven’t finished. I haven’t finished.
9 So we would continue to explore.
10 Now, exploration of this tax will require
11 significant additional work. We would need to invite in
12 a range of organizations, respondents who might be
13 impacted by such a tax. And the staff and individual
14 commissioners would be invited to participate, but it
15 wouldn’t be essential that every commissioner sit in on
16 every session to hear input, but everyone would be
17 invited. No session would take place without
18 commissioners being invited in order to get input on the
19 impact that such a tax would have, the legislative
20 drafting process, with the help of the Franchise Tax
21 Board, because they’ve indicated that they haven’t been as
22 engaged as they would like to be -- and we’ll try to
23 correct that -- we will go through an extensive process to
24 try to come back, answering these questions.
25 As an adjunct with that -- because we might not
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1 be successful. The Commission might decide, “I’m sorry,
2 but the business net-receipts tax was a good idea, but we
3 don’t want to move in that direction.” As an alternative,
4 the sales and use tax would continue to be on the table
5 for extension to services. That we could decide as an
6 alternative to a new business net-receipts tax, that we
7 would take on the challenge of extending it to all
8 services.
9 Next, we would have on the table the elimination
10 of the corporate income tax, to be decided, but it would
11 be part of this package.
12 Next, we would include a fuels tax -- gasoline,
13 diesel, jet fuel -- as described.
14 COMMISSIONER PRINGLE: Bunker fuel.
15 CHAIR PARSKY: I don’t know whether bunker fuel
16 is in and out. We’ll let that for a subsequent --
17 COMMISSIONER EDLEY: Anything Curt wants.
18 CHAIR PARSKY: My sense is in addition -- in
19 addition –-
20 Becky, are you taking notes here? Becky?
21 Please.
22 COMMISSIONER MORGAN: A few.
23 CHAIR PARSKY: Okay, I’m joking with you, Becky.
24 I’m going to give you the June 26 th memo. I guarantee
25 you, I’ll give it to you.
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1 Anyway, fuels tax would be included and two
2 other things: The split roll on the property tax would
3 be on the table as part of this package, suggested by
4 one or more commissioners. A severance -- permitting
5 incremental drilling for oil in California and the
6 application of a severance tax on that would be –-
7 Well, how would you describe it, Michael?
8 COMMISSIONER BOSKIN: Yes, maybe to collect
9 zero revenue from all the offshore stuff we don’t drill.
10 There is more than enough there by the federal
11 government’s estimates to basically swap what we’re doing
12 with the fuels tax. So it just seems silly. But just
13 the equivalent in revenue, does it have to be a severance
14 tax? It could be bonuses and royalties, but it’s the
15 same revenue --
16 CHAIR PARSKY: I’m trying to stay within the
17 context of taxes.
18 COMMISSIONER BOSKIN: Those are, but those are
19 widely considered taxes everywhere else in the world. And
20 in the Gulf Coast, they don’t have the title “tax,” nor
21 does the “vehicle license fee” have the phrase “tax” in
22 it.
23 CHAIR PARSKY: We’re going to –-
24 COMMISSIONER BOSKIN: So just the equivalent --
25 the equivalent revenue. We can call it a tax, if you
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1 want. Equivalent revenue.
2 CHAIR PARSKY: Okay. In addition -- and I need
3 a little bit of help here because I really want to stay
4 within the context of what we said -- there’s been
5 significant commissioner interest in the establishment of
6 a reserve fund. Some people refer to it as a rainy-day
7 fund, but a reserve fund. Because although some
8 commissioners may think that the volatility issue can be
9 addressed in the tax system, and other commissioners
10 think that the volatility issue can be addressed in the
11 rainy-day reserve concept, I think that I would just put
12 on the table that you may need both in the context of
13 addressing volatility. So I think that a clear, for wont
14 of a better expression, hard reserve, keyed to some
15 definition, or trigger, we would keep on the table as
16 something that can come forward out of this commission.
17 COMMISSIONER BOSKIN: As long as the “hard” is
18 capitalized, italicized, and in bold, not the current
19 leaky bucket in our so-called rainy-day fund.
20 CHAIR PARSKY: Michael, I knew where you were
21 coming from. “Hard” was meant there to be intentional.
22 And finally, although it doesn’t fit exactly
23 within the definition of revenues, because it has been
24 so supported by the Commission, the concept of a new,
25 adequate tax resolution dispute process -- tax courts --
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1 a resolution process would be included and would be put
2 on the table.
3 Those would either fit -- some combination of
4 that would either fit into Category 1, which would be
5 statutory law changes, revenue-related, that can be
6 enacted by the Legislature immediately; or Category 2,
7 which might need constitutional law change or
8 ballot-initiative change.
9 That’s the package that I would recommend. And
10 then I’ll come to the “in addition” clause in a second.
11 But that’s the package that I would recommend, is a
12 melding of the two and gives us, I think, an opportunity
13 to try to seek unanimity and proceed forward.
14 It can’t be done by July 31, that’s pretty
15 clear. So I would suggest -- and I don’t want to put it
16 off so that we can’t give the Legislature an opportunity
17 to act, let’s put it that way. So I’d like to be able
18 to get this done before September 15 th , when I think the
19 Legislature may decide to recess earlier or later. But
20 at least it’s on the table that they would recess
21 September 15 th for the rest of the year.
22 And I would like to at least be able to look
23 them in the eye and say, “You have some recommendations
24 for major reform from the broadest cross section of
25 people, and we expect you to act on it.”
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1 Now, that’s a big challenge, but that’s what
2 I would suggest. And, obviously, there will be some
3 refinements within this. But that’s a package.
4 In addition, we would welcome suggestions from
5 commissioners that are not revenue-related, that could be
6 included in another section of the report, that we
7 wouldn’t take a position on other than that other bodies
8 need -- or should be looking at reform in those areas as
9 part of fiscal reform.
10 I would hope that we would reach unanimity about
11 what should be included in that. It’s not a position of
12 the Commission, we wouldn’t have staffed it, but we would
13 say, “This needs to be addressed.” And hopefully, we can
14 reach unanimity on what could be included in that section.
15 COMMISSIONER KEELEY: Two things, Mr. Chairman.
16 CHAIR PARSKY: That’s my suggestion.
17 COMMISSIONER KEELEY: Mr. Chairman?
18 CHAIR PARSKY: Yes.
19 COMMISSIONER KEELEY: Thank you, Mr. Chairman.
20 Mr. Chairman, thank you very, very much. I
21 think that the proposal that you’ve made speaks to several
22 issues that commissioners have been wrestling with since
23 the inception of our task. It also reflects the evolution
24 of the thinking of commissioners and the opportunity that
25 we’ve had to evaluate the various proposals that have been
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1 put on the table to date.
2 I very much appreciate your inclusion of a
3 number of the items that were distributed publicly, to
4 the Commission and to others over the weekend for
5 consideration. So thank you very much for that.
6 I think that what you’ve outlined is a good
7 proposal. I wonder if I might suggest two or three
8 other -- not elements of the proposal, but two or three
9 other concepts with regard to how we might proceed. So
10 this is process as opposed to content.
11 First of all, I imagine that what you will be
12 doing, if the Commission is of a consensus mind to want
13 to do what you just described -- and I would certainly
14 add my voice as an “aye” vote on that or a “yes” to what
15 you’ve recommended, that you’ll be asking the Governor
16 for an extension of our term as a commission for some
17 45 or 60 days or some other number of days so that we can
18 continue to do that.
19 I know in at least the case of my appointing
20 authority, which is the President Pro Tem of the Senate,
21 the President Pro Tem of the Senate has told me personally
22 that he thinks that that is a very worthwhile request for
23 you to make and that, at least in his mind, that the
24 Commission is working diligently and in good faith to get
25 to a consensus product.
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1 Secondly, Mr. Chairman, I’m wondering if, at
2 this stage, where we’re really pivoting now, and we’re
3 going from a time where we were in the expanding-universe
4 phase and looking at all kinds of options, and now we are
5 narrowing those, we’ve got, in essence, the known universe
6 of items that we would like to consider for evaluation,
7 and how we might mix and match those into a consensus
8 product. I wonder if we might also change a bit of how
9 we work in the following regard:
10 One, that the agendas and the packets and all
11 of the material that is made now available to members --
12 or excuse me, to commissioners and the public on the day
13 of the meeting, that we could have an agreement that all
14 of that material would be available, at a minimum,
15 72 hours in advance, which the mayor advises me is the
16 Brown Act requirement.
17 Is that right, Mr. Mayor, 72 hours in advance?
18 COMMISSIONER PRINGLE: Right.
19 COMMISSIONER KEELEY: And if we might adopt
20 that as a practice so that the interested public, as well
21 as the commissioners, would have an opportunity to look at
22 things in advance. I think it also might change the
23 nature and the character of the conversation at the
24 Commission meetings in terms of the utility or the
25 utilization of our time that is available. So rather
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1 than being briefed as much and asking questions that are
2 kinds of clarifications, we might get quicker into the
3 give-and-take of deliberation about what kind of
4 package -- in essence, the public negotiation function.
5 So I’m wondering if that might work for you and might work
6 for the staff.
7 I’m not trying to -- let me tell you what I’m
8 not trying to do: I’m not trying to increase the pressure
9 on the staff to produce product earlier. However much
10 time you and the Chair decide you need to produce product,
11 that’s fine. Just don’t set the meeting until you’ve
12 got -- you know that you can do that and have the product
13 done. So I hope the staff is not taking this as a slight
14 to them at all. I have great respect for you, and you
15 know that. This is about timing of access to information.
16 I wonder if also, Mr. Chairman -- I very, very
17 much like the idea of essentially working groups. When
18 Mr. Mayor was the Speaker of the Assembly and he had the
19 task of working in Big 5 and trying to negotiate budgets
20 and so on, one of the common practices in the Legislature
21 at the Budget Committee, at the Big 5, is to establish
22 working groups all the time. It’s a, “Why don’t you, you,
23 and you go off and work on this particular issue, come
24 back in two days and have a response for us? Why don’t
25 we get the Department of Finance, and so on and so on to
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1 sit down with three people and do this and that?”
2 I think that that could be -- if I understand --
3 if that’s in the spirit of what you’re describing, I think
4 that is enormously beneficial.
5 I also know that because we’re a public body,
6 we need to do our work in public. We should examine,
7 obviously, how those notices would be made and who -- but
8 I think that’s a very, very good idea. I think there’s a
9 lot of work that can be done well in that context.
10 I do want to make sure that I understand
11 something that you said, Mr. Chairman, because you and I
12 had a very, very productive conversation yesterday for a
13 couple of hours here in San Francisco, and I appreciated
14 your time and every courtesy that you extended to me. If
15 I understand what you’re managing towards you in addition
16 to -- or what we’re managing towards in addition to
17 consensus, is a report which would be structured in such
18 a way that the Legislature could immediately pull out of
19 that: “Here are the recommendations for action by the
20 Legislature” in statutory -- written in bill language
21 essentially by Leg. Counsel once we’ve agreed on what
22 we’re trying to do here, what our final product is.
23 As you and I discussed, the Legislature doesn’t
24 have the power to enact a statute any more than they do
25 to enact a constitutional amendment. They can pass a
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1 bill and send it to the Governor and the Governor can
2 decide whether or not they sign it. So there is -- the
3 Legislature doesn’t have any independent power that way.
4 They work in concert with the executive branch to enact
5 legislation.
6 The Legislature does the same thing with regard
7 to constitutional amendments, although its partner in that
8 deal is the electorate as opposed to the Governor. So I
9 want to make sure I understand what you’re suggesting.
10 You’re suggesting that those items that the Legislature
11 can act on statutorily and the Governor can sign would be
12 in one category; then constitutional amendments, if we
13 suggest any -- or we suggest any actions which would
14 require for them to be enabled, that they would require a
15 constitutional amendment, that would be in a second, an
16 additional section.
17 Understanding -- and this is the point of
18 clarification I’d like to seek with you -- if we made such
19 recommendations, because a way to enact that is for the
20 Legislature on two-thirds vote of both houses to place
21 that on the ballot, that we would also have that in bill
22 form. So if the Legislature chose to go ahead and do
23 that, they could do that. Alternatively, folks who are
24 interested in putting those on the ballot would have
25 ready-made language and may want to go forward with it.
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1 Am I right on that, how you would see that?
2 CHAIR PARSKY: Yes.
3 COMMISSIONER KEELEY: Thank you very much.
4 The other issue I want to seek clarification,
5 because I thought I understood it yesterday and I think
6 I understand it today, based on your characterization,
7 the notion of a rainy-day fund -- rather than me put words
8 in your mouth -- your thought with regard to a rainy-day
9 fund is that it would fit where, if we got to a consensus
10 and that was part of it, where would that fit in the
11 report, in your mind?
12 COMMISSIONER EDLEY: May I comment on that
13 before you commit yourself? Because I don’t want to
14 disagree with you after you speak. I’d rather you
15 disagree with me.
16 CHAIR PARSKY: I would be honored if you would
17 go ahead. And I’m going to assign you the task of
18 calling this whatever you would like to call it.
19 COMMISSIONER KEELEY: You can assign the task of
20 writing it.
21 COMMISSIONER EDLEY: A tax revenue suspense
22 account -- no, I don’t know. I’ll figure out something.
23 Look, I think I’ve mentioned in one or two of
24 these meetings the idea, at least, at a conceptual level,
25 of income averaging, as we used to have in federal taxes
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1 some years ago. I have no idea what you folks did out
2 here in California. But it was in the federal tax code.
3 And the point of the federal –- and the point of,
4 obviously, of the income averaging is to ease the impact
5 of income volatility on the tax bill, faced by the
6 taxpayer.
7 Well, in my mind, conceptually, creating
8 something like a rainy-day fund in which a certain
9 portion of receipts above the trend line in revenue
10 are sequestered is a very similar thing. I mean, you’re
11 not benefiting the taxpayer; but in terms of what becomes
12 available to the general fund, it has the same effect.
13 So I think it’s at least a kissing cousin to a revenue
14 measure as opposed to an expenditure measure. It’s
15 certainly not dictating that funds be spent for particular
16 purposes. It’s, rather, controlling what kinds of
17 revenues are available to the state government for
18 expenditure.
19 Now, the implementation of a moving-average
20 kind of strategy for figuring out what’s volatile and
21 what’s not, I’m advised by staff, is quite complicated.
22 Because, for example, capital gains -- just figuring out
23 what the number is can lag by 18 months to two years
24 before you actually know what the number was. But if you
25 did use regression analysis of some sort and you went back
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1 long enough so you’d get over the course of a business
2 cycle, I think that would be an appropriate way to
3 identify the peaks and valleys around the trend.
4 So I would urge that we conceptualize a
5 rainy-day fund in the type font prescribed by Brother
6 Boskin; that we include that in Gerry’s Category 1 as a
7 statutory measure related to revenues. Period, paragraph.
8 I think there’s a very interesting and difficult
9 question about how to make the lock on this lock-box
10 impregnable. And I think if we could find some really
11 good and experienced lawyers to help us out on that
12 question, we should absolutely do that. It can’t just be
13 the same old thing. I think we’d have to do this in a way
14 that we could, in good faith, say really has some
15 differences to it from the way the state has handled this
16 in the past.
17 I’ll subside now.
18 COMMISSIONER BARRALES: Mr. Chair, just so
19 I better understand. We talked about a rainy-day fund
20 and now this lock-box. I would be more intrigued, if
21 I understand correctly, what we’re talking about is a
22 spending cap, I think? Is that not what we’re talking
23 about?
24 CHAIR PARSKY: No, what we’re talking about
25 is coupling the tax-law changes with a requirement that
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1 revenues would be sequestered, if you will, temporarily
2 off of a formula to be spent when the revenues dropped
3 below a certain level.
4 COMMISSIONER BOSKIN: Let me take an example to
5 make it simple. And this isn’t exactly how we do it, but
6 I’ve thought about this, and this is an oversimplification
7 of getting at where Chris wants to about making it hard
8 and fast and careful.
9 Suppose you had a ten-year average, rolling a
10 previous historical average of the ratio of revenues to
11 some -- to population, inflation or personal income or
12 something of that sort. And then whenever revenues
13 exceeded a certain percentage above that –- say, 3 percent
14 more than that or whatever -- 5 percent or whatever it
15 happens to be -– okay, it would go into the rainy-day fund
16 first and could only be used for certain purposes, one of
17 which would obviously be for years when it fell below the
18 average to make up the difference.
19 You could also use it to quickly retire
20 long-term debt to enable you to have the capacity to deal
21 with this in other years. If it got large enough, you
22 could have a tax cut or something or one-time capital
23 spending or something like that. That’s the basic
24 conception that we have in mind.
25 COMMISSIONER HAUCK: That was essentially
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1 Proposition 1A on the May 19 ballot. Separate the tax
2 implications of Prop. 1A, the premise was exactly the one
3 that Michael is suggesting.
4 And I would add, Chris, that if you try to do
5 this statutorily, I don’t care what lawyer you get to do
6 it, it will be attackable by the Legislature subsequently.
7 You could put an extraordinary vote requirement
8 there --
9 COMMISSIONER EDLEY: Yes, that’s what I had in
10 mind.
11 COMMISSIONER HAUCK: -- like the suspension of
12 Prop. 98, for example. That certainly would make it much
13 more difficult.
14 CHAIR PARSKY: If we’re staying with the
15 rainy-day fund, then Fred hasn’t quite finished yet. But
16 go ahead, John.
17 COMMISSIONER COGAN: Yes, if you want to have a
18 rainy-day fund that at least has some chance of being
19 preserved from the Legislature, you’ve got to do it
20 through the constitutional process. You can’t allow a
21 vote -- and I have to tell you this, Chris, I don’t care
22 what kind of majority rule you put in place. In an
23 economic downturn, when the money is sitting there in a
24 honeypot, and the choice is between spending it or not
25 spending it, they’ll spend it. And so my sense would be,
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1 it would be best to think about your proposal more as a
2 constitutional change, which could not be undone in any
3 way by a vote of the Legislature. Just give it some
4 thought.
5 COMMISSIONER EDLEY: I agree with that. I agree
6 with that, John. But what I actually –- I didn’t want to
7 go on for too long. But what I would prefer is that we
8 recommend both the statutory measure in Category 1, but
9 also recommend that it be codified in the Constitution
10 and put it in Category 2, so that we would actually do
11 both.
12 CHAIR PARSKY: Let’s just think a little bit
13 more about which category it fits in. The concept is the
14 one I wanted to make sure it was out there.
15 But finish, Fred.
16 COMMISSIONER KEELEY: Thank you, Mr. Chairman.
17 Mr. Chairman, still on the issue of process, I
18 wonder if what we also might be able to do is with regard
19 to the types of revenue that we’re looking at, where we’re
20 looking at capital gain and BNRT, sales, split roll,
21 carbon tax, and so on, I wonder if there might be a way
22 to develop a minimum uniformity of information and
23 presentation, understanding that all taxes are different
24 in certain regards, and so there would be a lot of unique
25 information that the staff would provide. But I wonder
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1 if there’s a half a dozen common notions that we might ask
2 for in terms of presentation on all of these issues?
3 For example -- and I don’t pretend this is the
4 right list or an exhaustive list -- for example,
5 progressivity and regressivity. Every time we look at
6 a tax, we know the answer to if it’s at that --
7 progressivity and regressivity, the rate and the base,
8 which -- am I right -- is that also called “incidence”?
9 Is the base “incidence,” is that right? Or across the
10 base, you have incidence; is that it?
11 COMMISSIONER BOSKIN: That’s ultimately where
12 that gets shifted.
13 COMMISSIONER EDLEY: Who ends up paying the
14 burden?
15 COMMISSIONER KEELEY: Who actually pays it?
16 What I’m trying to get at is four or five ways
17 that we get a presentation on any item or concept that is
18 a change in a tax, a new tax, raising or lowering the
19 rate, the base, or whatever; that we receive that
20 information in a uniform way on everything, so that what
21 we can do then, if you combine that concept with getting
22 information in advance and having working groups and so
23 on, then I think both interested commissioners and
24 interested members of the public can begin doing their
25 own dialing and saying, “Well, if that rate, instead of
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1 3.3 was 2.5, and then over here on this tax it was 1.6,
2 and then if it applied to this group instead of there,”
3 you could start putting together the kinds of things that,
4 maybe for Chris, for example, when he’s concerned about
5 the progressivity or regressivity issue, then he can start
6 building something -- a package that he can see is making
7 sense to him.
8 And I’m wondering, Mr. Chairman, if that might
9 be an additional request for that kind of uniformity might
10 be very helpful, I think, to the commissioners and the
11 interested public.
12 Let me conclude with two quick comments.
13 One is, prior to this meeting, at the direction
14 of the President Pro Tem of the Senate, I had two meetings
15 that were held in Sacramento, and asked for the
16 participation of the Board of Equalization staff, the
17 Franchise Tax Board staff, and the senior staff at the
18 Assembly and Senate Revenue and Taxation Committees, as
19 well as a number of academics. The people who
20 participated in those, were participating not with regard
21 to positions of the agencies or the committees, but as
22 resources to the Commission, to help understand things.
23 I want to thank them all very, very much for their
24 participation. And I suspect that they will do more, but
25 I want to thank them for their participation.
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1 And lastly, Mr. Chairman, I want to thank you
2 again for the way you have structured your recommendation.
3 And I hope that this -- what I’ve suggested here is
4 helpful in that regard.
5 Thank you, Mr. Chairman.
6 CHAIR PARSKY: John?
7 COMMISSIONER COGAN: Gerry, look, I think the
8 direction that you’ve outlined here is really quite good.
9 And I would only amend what Fred said in a couple of ways.
10 One is, on this tax dispute resolution issue,
11 it seems like we would want to have the same kind of
12 process that we have for the net-receipts tax. That is,
13 I think it’s a pretty complicated question when you get
14 down to it, so you might want to think about a working
15 group or something that, over the next months, would
16 flesh it out a little bit, since I think it’s a lot more
17 complicated --
18 CHAIR PARSKY: You’re saying, on the
19 net-receipts tax?
20 COMMISSIONER COGAN: No, no, no. On the dispute
21 resolution.
22 CHAIR PARSKY: Oh, on the dispute resolution?
23 COMMISSIONER COGAN: Yes, yes.
24 COMMISSIONER EDLEY: What’s the right model?
25 Richard might know.
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1 Richard, do --
2 CHAIR PARSKY: Well, I think on that one --
3 COMMISSIONER POMP: There has been a submission
4 to us from the ABA on that. So there is a model.
5 CHAIR PARSKY: Yes, right.
6 COMMISSIONER COGAN: Right, there is one model.
7 COMMISSIONER POMP: It’s from the ABA. It’s not
8 a bad model, so…
9 CHAIR PARSKY: We can make sure that that’s
10 circulated around again.
11 COMMISSIONER COGAN: Right.
12 CHAIR PARSKY: I do think this idea of working
13 groups, dealing with the components is a good idea.
14 COMMISSIONER BOSKIN: I think the thing that
15 this is pretty –- the thing that ABA submitted is fairly
16 close to sort of the typical thing done in most states
17 other than California.
18 COMMISSIONER COGAN: So then I have a question
19 on distribution. You know, when I look at these
20 distributional numbers, when we look at income tax
21 distributional changes, I have a lot of confidence that
22 we’re measuring things pretty well.
23 When we get to corporate taxes, when we get to
24 net-receipts taxes, I’m a lot less confident that what
25 we’re measuring bears any relationship to reality and
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1 whether we would know it or not. And so I’m wondering,
2 as we think about getting down to the final strokes, how
3 would commissioners feel about putting a lot of weight
4 on the personal income tax distribution in making your
5 judgments about the distributional consequences of these
6 policies, and a lot less weight on the net-receipts tax
7 distributional outcome, the corporate tax distributional
8 outcome? Not that we would throw it out, but if we could
9 have these separated, so those things that we are
10 relatively confident about, we have in one pot, and then
11 those things that we’re not so confident about, that we
12 sort of assign maybe a lower weight to them or something,
13 but keep them separate.
14 COMMISSIONER BOSKIN: You would add the sales
15 tax into the confident one; right?
16 COMMISSIONER COGAN: Yes, right, right.
17 That’s just a suggestion as we proceed down to
18 the final strokes.
19 CHAIR PARSKY: Monica?
20 COMMISSIONER LOZANO: Gerry, the only comment
21 is very similar because what I thought I heard you say in
22 your summary remarks is that you would add a review of
23 the capital gains. And I prefer -- because we’ve done so
24 much work already -- on seeing the relationship between
25 the personal income and the net-receipts tax -- I’d like
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1 to continue on with that, to see what adjusting those two
2 do independently of throwing in this third variable of
3 capital gains, which I think we should look at, but let’s
4 continue to look at this, first focused on the personal
5 income tax --
6 CHAIR PARSKY: I had only suggested that because
7 I’m hoping that adjustments that would be made in the
8 personal income tax, with the guideline of achieving a
9 reduction in tax burden, or a reduction in taxes for each
10 of the brackets, would satisfy commissioners that we could
11 proceed.
12 If that doesn’t, then I was trying to fall back
13 on something that might still attempt to address within
14 the personal income tax some elements of the volatility,
15 and there were suggestions made that the capital gains.
16 But my strong urging is that we try to get to a unanimous
17 recommendation on making changes overall, and seeing how
18 it blends in with the business net-receipts tax and the
19 corporate tax elimination.
20 COMMISSIONER BOSKIN: Could I ask for two
21 additional pieces of information that are maybe a bit more
22 quantitative than the qualitative stuff we’ve gotten thus
23 far in this regard from the staff?
24 One would be to look at the net change in the
25 number of taxpayers, including the sales tax; and
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1 secondly, the net change in the amount of federally
2 deductible California taxes.
3 So, I mean, if we switch from a partially
4 nondeductible tax, like the sales tax, to a net-receipts
5 tax, that may be -- that is deductible, that may be
6 saying, we’re shifting some of our burden to the Feds,
7 which would be a good thing for California.
8 If we are lowering the income tax and spreading
9 the sales tax to services, whatever other good it may do,
10 we may wind up increasing California’s tax burdens and
11 reducing our -- and increasing our federal tax burden,
12 which just seems to me is not a wise thing to do.
13 COMMISSIONER PRINGLE: I think that’s --
14 CHAIR PARSKY: Curt, I know that we’ve held this
15 too long, but you have a comment on that?
16 COMMISSIONER PRINGLE: Yes, and I will --
17 COMMISSIONER ITO: I have a comment and a
18 question afterwards.
19 COMMISSIONER PRINGLE: And I will apologize, as
20 I’m going to try to catch this flight at some point in
21 time.
22 But I worry, Mr. Chairman, that your one word
23 that you used may not necessarily mislead but
24 mischaracterize what our next step is in terms of looking
25 at all of these various taxes. That you talked about
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1 creating -- or that being in a package.
2 I didn’t spend as much time with you as
3 obviously you spent with Fred, but I would --
4 CHAIR PARSKY: We’ll leave it to another time.
5 COMMISSIONER PRINGLE: And that also applies to
6 his wife.
7 COMMISSIONER COGAN: ( Tapping on glass .)
8 COMMISSIONER PRINGLE: But a lot of this
9 discussion is based upon a Package 1 context. And yet
10 you have suggested other items that were not a part of
11 that, such as a fuels tax of some sort, a split-roll
12 property tax, some additional type of revenue generation
13 off of additional oil exploration and such.
14 Is that right?
15 CHAIR PARSKY: That’s correct.
16 COMMISSIONER PRINGLE: But you have not
17 suggested that they would all be a part of a package?
18 What you had suggested is, these items will be the taxes
19 that we consider, get more information on, and then when
20 we come back, have another review of how they all may or
21 may not fit, or how they all may or may not be of
22 long-term benefit as a tax structure; and then a package
23 will be put together from them. So when you suggested
24 or characterized it as a package, your intention isn’t
25 that they’re all going to be in a package? They’re all
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1 going to be presented back to us with further evaluative
2 information; is that correct?
3 CHAIR PARSKY: Yes, and with the desire to seek
4 unanimity around the package we would present.
5 So if those people that would seek to include
6 a fuels tax or a tax on oil exploration -- new oil
7 exploration or on the split roll, that the unanimity of
8 the Commission wouldn’t proceed on any or all of those;
9 they would be withdrawn from the package.
10 COMMISSIONER PRINGLE: Right. I mean, I know
11 Joel Fox quickly posted his tweet, and then --
12 CHAIR PARSKY: Who is Joel Fox? I don’t know
13 Joel Fox.
14 COMMISSIONER PRINGLE: But the question is, when
15 you said “package,” those are not a part of any package
16 that we are proposing. What you have presented is the
17 taxes we should concentrate on is just -- are just the
18 collection of taxes that we may derive a package from as
19 something we want to do the full evaluation in our final
20 meeting?
21 COMMISSIONER BARRALES: I think we want to refer
22 to it as the “Curt Pringle Tax Package.”
23 COMMISSIONER PRINGLE: That’s fine. I would be
24 happy to craft that for you, Mr. Barrales.
25 COMMISSIONER BOSKIN: I think we were leaving
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1 open those other things becoming part of a package if we
2 didn’t agree on stuff without them and they could be mixed
3 and matched in various ways, or rejected or whatever.
4 COMMISSIONER PRINGLE: Right. I just wanted to
5 make sure that it’s not characterized that that is a
6 package that we are trying to craft from --
7 COMMISSIONER COGAN: You got that, Joel? You
8 got that?
9 COMMISSIONER PRINGLE: And also, though, I’d
10 like to just suggest that I do have an aversion of a
11 creation of a commission, and then somehow decisions are
12 made in smaller groups. Therefore, I understand and
13 respect the concept of ideas coming forward; but I don’t
14 think they should come forward on the core purpose of what
15 we’re here for, and that is, to put together a package
16 that we will build consensus behind.
17 So in areas that may be on your Section 2 or 3,
18 be it the tax resolution group and those things that we
19 haven’t spent time discussing, I personally don’t have any
20 problem with crafting a proposal by one to ten members --
21 well, we can’t get over our quorum -- but, anyway,
22 something short of a quorum -- crafting something to
23 present to us, because we haven’t really heard all of that
24 yet. But on all the stuff we have been working on, I have
25 a little challenge to say that an individual, carved-out
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1 collection of subgroup should be making a recommendation
2 back to the whole. I think the purpose of a commission is
3 taking all the value of the 14-member input and having it
4 as a complete discussion.
5 So in areas of crafting a rainy-day or
6 revenue-limitation fund or whatever it is or a tax-dispute
7 group, having groups put something together like that,
8 I don’t have a burden with that -- I don’t have a problem;
9 but I do have a problem with somehow we’re crafting
10 separate tax plans that we’re going to bring forward as
11 some -- I don’t think we ever build a consensus that way,
12 that’s what I’m concerned about. And I would like to have
13 that level of discussion available for all members of the
14 Commission to participate in.
15 CHAIR PARSKY: I think that’s valid.
16 The only area that I am concerned about drawing
17 those lines, is the business net-receipts tax, because it
18 requires an extensive amount of ongoing work to present to
19 the Commission for final decision. That’s the only one.
20 I do not think it’s appropriate to have a
21 working group put packages together. That’s not the
22 appropriate job of a working group.
23 I do think in these areas like you mentioned,
24 it would be very helpful to have a working group craft
25 what a rainy-day fund would look like or what a dispute
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1 resolution recommendation would look like.
2 But the business net-receipts tax is a different
3 issue, it seems to me, because we need to involve -- we
4 need to have, in effect, hearings or discussion groups
5 from the outside.
6 COMMISSIONER PRINGLE: Sure.
7 CHAIR PARSKY: And so I’m going to offer to
8 commissioners who are willing to participate and listen
9 to those -- we won’t make any decisions other than things
10 that will be on the table. I mean, the staff didn’t make
11 decisions, in one sense; but they did make decisions in
12 putting something on the table.
13 COMMISSIONER PRINGLE: Yes, right.
14 CHAIR PARSKY: You can’t proceed with a new tax
15 without that.
16 COMMISSIONER PRINGLE: And I appreciate that
17 distinction. And I’m just but one Commission member.
18 But in that regard, I do think there’s value in having
19 public view. I mean, if we record a workshop with experts
20 and have it online and notify everybody that if they wish
21 to hear it or participate or monitor it, that’s available
22 to them, I think all of those types of things, if we are
23 hashing out the NRT, or whatever it’s called, then I think
24 we should make it at least accessible for folks to see
25 that.
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1 CHAIR PARSKY: We will do that.
2 COMMISSIONER PRINGLE: A couple -- two other
3 quick points. I do think that -- I mean, I’m going to
4 struggle with understanding how the split roll plays in
5 the context of our job. Property tax is a local tax.
6 I understand the majority of property taxes go to support
7 schools. I understand the schools are the responsibility
8 of the state. I get all that.
9 I’m just saying that does not allow for, in my
10 opinion, my legal opinion, the proper tax neutrality
11 requirements of trading one tax for another under state
12 law because it’s not a local tax. You are eliminating
13 a portion of a state tax, and you’re contemplating
14 backfilling it with a local tax that cannot be -- it
15 limits -- it is one of those types of taxes that’s going
16 to be very hard to put in any package. So if we want to
17 step back and say, “All of our package is going to be
18 subject to a vote of the people,” then that is the
19 decision we may want to collectively make.
20 I think it means that everything gets voted
21 down, because a vote of the people makes it easy for
22 anybody to take a shot at any single element of a package
23 and to pull it apart. Therefore, any split roll is going
24 to be a part of a -- be a constitutional change. And
25 everything, if it were pinned on -- hinging upon the
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1 revenue derived from it and changing the way Prop. 13
2 interacts with state government, then everything we do is
3 going to be subject to a vote of the people. And I think
4 that challenges our task here in terms of the reality of
5 what we may propose to be adopted by the Legislature.
6 And finally, I do have a concern about
7 presenting a package that the Legislature will seriously
8 consider -- not that they’re not serious. But, in fact,
9 I think we’re getting very late in our time scheduling
10 here to get something that could be seriously considered
11 by the Legislature before the end of their legislative
12 session which, in odd years, is September 15 th .
13 I would like to try, but I will just -- I should
14 probably have said this to you privately, Mr. Chairman --
15 I’d also say something very daring and probably
16 inappropriate -- maybe we should think about asking for
17 an extension of some time, even to the end of the year,
18 so that our proposal, when it is made, comes back with
19 the Legislature being able to address it and contemplate
20 it, as opposed to what I was mentioning to the Chairman
21 earlier, to drop something in the Legislature too late
22 at the end of the year, when they won’t consider it,
23 means it sits there for three months and gets beat up
24 by everybody who has some gripe with some piece. And,
25 therefore, when the Legislature does reconvene to talk
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1 about it, it’s already bloodied and bruised.
2 Maybe we could get -- if we do think we could
3 submit by the middle of September, asking the Legislature
4 to hold hearings through the fall so that they are at
5 least engaged in it as opposed to just leaving it on their
6 doorstep and saying “good-bye.”
7 So those are a few of my thoughts. And thank
8 you very much, Mr. Chairman.
9 CHAIR PARSKY: Thank you.
10 I’d like to think a little bit more about what
11 you just said. I think it’s worth thinking about.
12 COMMISSIONER ITO: I have a question.
13 CHAIR PARSKY: One more.
14 Jennifer?
15 COMMISSIONER ITO: So I have a question about --
16 I think it makes sense to kind of divide up the sections
17 of our recommendations. But I do have a question about
18 how that’s going to impact the analysis. Because if I’m
19 looking at the scenario, if the changes that we are
20 suggesting under the statutorial Section 1, if those get
21 approved, but then we have a second set of recommendations
22 that are constitutional amendments that don’t get
23 approved, what is that overall impact going to be?
24 (Commissioner Pringle exited the meeting room.)
25 COMMISSIONER ITO: Because we’re making –- you
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1 know, in our discussion today, we’re talking about
2 implementing some new taxes, to swap out others, and to
3 mix and match. So if we are moving ahead as a total
4 package, yet it’s broken up, what then -- I’m just worried
5 about then what that could mean in the long-term.
6 CHAIR PARSKY: I do think that’s a very
7 legitimate concern.
8 I think inherent in Category 2 would be a --
9 any recommendations that fit Category 2, we would ask the
10 Legislature to act on it, in a sense, of approving them
11 for the ballot.
12 As we evolve this combination of taxes, we may
13 find that there’s only -- we’ll see -- that there’s only
14 one proposal, namely the reserve fund, that requires going
15 to the ballot.
16 COMMISSIONER EDLEY: And the split roll.
17 CHAIR PARSKY: Like I say, we may find that
18 as we evolve through, the package of recommendations would
19 only include that which would be quite complementary to
20 a set of recommendations that the Legislature could act
21 on. So there have been several suggestions made,
22 including the split roll and including the severance tax
23 that we’re going to have to discuss some more.
24 If we can’t reach unanimity on those as well
25 as maybe the fuels tax, where I know there’s differences
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1 of opinion, maybe those taxes fall away, and we’re left
2 with a set of tax recommendations that can be approved
3 immediately by the Legislature, and a concept of a real,
4 hard, rainy-day fund that can be put on the ballot. But
5 we’ll see.
6 COMMISSIONER ITO: One other amendment --
7 COMMISSIONER KEELEY: Ms. Ito, if I might just
8 respond also on that point.
9 I just checked with one of the speakers, staff
10 folks who is here and does a lot of the taxes, budget
11 issues. And my recollection from serving on the
12 Legislature, there may be some drafting possibilities
13 here for dealing with your issue that may have to do
14 with -- double-joining issues, contingent enactment
15 issues. There’s some drafting strategies to try to get
16 to that issue. So I think perhaps we could work with that
17 as a concept as well.
18 Thank you.
19 COMMISSIONER ITO: And then just one other, as
20 a Commission member who is concerned about -- who likes
21 the progressivity of our tax structure. You outlined
22 two options as we continue to explore adjustments to the
23 personal income tax, the three brackets, and all brackets
24 getting a reduction and the other alternative being around
25 the adjustment in capital gains. I mean, I would like to
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1 throw out there a third, which is keeping the current
2 structure, yet a possibly overall reduction.
3 CHAIR PARSKY: Inherent in the discussion -- in
4 the comment about having all brackets was that.
5 COMMISSIONER ITO: Okay.
6 CHAIR PARSKY: That was the reason for that
7 possibility. Because I sensed that there were some
8 commissioners that wanted to take a look at that approach.
9 It would still be a more simplified personal income tax
10 because we would have reduced a number of itemized
11 deductions. So it would still be more simplified, but
12 we’re leaving on the table both possibilities.
13 COMMISSIONER EDLEY: Gerry, there’s something
14 critically important to me that we haven’t mentioned. We
15 got a -- Mark dutifully sent around a note, indicating
16 that it violates the Opening Meeting law. In the opinion
17 of the Attorney General, or somebody in the Attorney
18 General’s office, it violates the Open Meeting law for a
19 commissioner to send an e-mail to all the other
20 commissioners, even if that is posted for the public.
21 I’ve got to say, that’s the most idiotic thing
22 that I have heard of since I got to California. And the
23 competition is tough for that distinction. So it’s very
24 important for me to understand whether there is a civil
25 penalty, a fine, for violating the Open Meetings Act
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1 because if there isn’t, some judge is going to have to
2 enjoin me from sending e-mail to fellow commissioners.
3 CHAIR PARSKY: I think you will find that
4 there’s more flexibility than that. And we’ll send
5 around -- we’ll send around a little description of
6 how you can communicate to your fellow commissioners.
7 COMMISSIONER EDLEY: Thank you.
8 COMMISSIONER POMP: Mr. Chair?
9 CHAIR PARSKY: Have we --
10 COMMISSIONER POMP: I need a point clarified.
11 I’d like to work with our discussion, the
12 elements, and maybe put together a possible package for
13 unanimity. You’re not saying that we can’t play with what
14 we’ve talked about; are you?
15 CHAIR PARSKY: I’m saying that we’ve all agreed
16 that we will deal with revenues only.
17 COMMISSIONER POMP: Right.
18 CHAIR PARSKY: We’re not going to deal with
19 expenditures.
20 COMMISSIONER POMP: Right, that’s fine.
21 CHAIR PARSKY: So that’s Guideline Number 1.
22 COMMISSIONER POMP: Right.
23 CHAIR PARSKY: Number 2, we’re going to deal
24 with the elements of taxation outlined.
25 COMMISSIONER POMP: Right.
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1 CHAIR PARSKY: Right, and we’re going to do
2 further analysis of the business net-receipts tax, because
3 a number of commissioners are contemplating including that
4 in lieu of the sales tax and/or the corporate income tax.
5 COMMISSIONER POMP: I understand. But I guess
6 what I’m saying, if I want to put together a package with
7 some people and attempt to reach unanimity, I am free to
8 try and do that?
9 COMMISSIONER EDLEY: You just can’t tell any of
10 us.
11 COMMISSIONER POMP: I just can’t –- right,
12 right.
13 CHAIR PARSKY: You have to communicate in
14 Connecticut. And other than that, you’re free.
15 COMMISSIONER POMP: And Chris is far too
16 negative for me to want to communicate with him.
17 CHAIR PARSKY: And my suggestion is, in order
18 to start with unanimity, start with the gentleman next to
19 you; and if you achieve unanimity between the two of you,
20 we want to hear it.
21 COMMISSIONER POMP: We are closer than you might
22 think.
23 COMMISSIONER BARRALES: Whether or not it breaks
24 the law.
25 CHAIR PARSKY: Secondly -- that won’t break the
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1 law.
2 COMMISSIONER POMP: I would like to see if
3 there’s any empirical data, rather than anecdotal, about
4 the effect of the personal income tax on the California
5 economy, so I have not seen any yet. If there is, I’d
6 like to, you know, have the staff make that available, so…
7 COMMISSIONER BOSKIN: You should send around the
8 Milken Institute study. It’s not the kind of empirical
9 study that I think that Richard is referring to, but it
10 gets to that.
11 COMMISSIONER POMP: Well, and plus whatever
12 other studies there might be.
13 CHAIR PARSKY: We’ll get you some data on that
14 subject.
15 Okay, are we okay in proceeding this way?
16 COMMISSIONER KEELEY: One last question,
17 Mr. Chairman.
18 Mr. Chairman, the only aspect of this that --
19 well, there’s probably a thousand aspects I’m not clear
20 on, but I totally agree, as you know, with what we’ve
21 agreed to this afternoon.
22 I would like to explore with you what level of
23 analysis or presentation the staff is going to now
24 provide, now that we have essentially said, “This is the
25 universe. If it’s inside the box, that’s fine; if it’s
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1 outside the box, it doesn’t get talked about anymore.”
2 We’ve now got the universe defined.
3 The same kind of analysis that was put into --
4 or a similar kind of analysis that was done for the BNRT,
5 is that now going to be done, or some level of analysis
6 done with regard to carbon fuels and the other issues that
7 are now the known universe or the constellation of planets
8 that are in this solar system that we’re dealing with?
9 What is the staff going to do with regard to that on a
10 going-forward basis, sir?
11 CHAIR PARSKY: Well, we have three forms of tax
12 that are still on the table that would require extensive
13 analysis. The fuels tax or -- with all due respect, the
14 fuels tax, split roll, and the severance tax on new oil
15 drilling. On each of those, I would like all the
16 commissioners, in the spirit of proceeding, to step back
17 and see if they believe unanimity could be achieved about
18 including those.
19 As of the moment, I think everyone thinks it
20 can. But I want everyone to think about that.
21 It would take extensive additional work -- not
22 so much on the fuels tax, but the split-roll property tax
23 would take an extensive amount of additional analytical
24 work by the staff, which we can ask the staff to do. And
25 I think our Commissioner Boskin that suggested the new
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1 form of severance tax needs to describe it in a little
2 more detail so the staff can know what to analyze.
3 COMMISSIONER HALVORSON: What, technically, is a
4 severance tax?
5 CHAIR PARSKY: Well, I think it’s described as,
6 we would permit new drilling for oil, and there would be a
7 royalty fee, severance -- however you wanted to describe
8 it -- applied to every bit of oil newly drilled.
9 COMMISSIONER HALVORSON: So a drilling tax?
10 CHAIR PARSKY: As I said the name.
11 So I would just ask -- and I will be in touch
12 with people -- I’d just ask you to think about that; but
13 I do think in particular -- in particular, I think
14 Commissioners should think about the analytical work that
15 they want the staff to do on the split-roll property tax.
16 That, we have not analyzed in great depth. And it would
17 take a significant amount of work -- which we can
18 commission, and would. But subject to that, the rest of
19 the package, the analytical work is very much ongoing.
20 And I don’t think it would take a lot of incremental staff
21 work to put together exactly -- I mean, I think the staff
22 has done some of this on the fuels tax already, and would
23 do more -- to be in a position to discuss it in the same
24 position as the personal income tax and the sales and use
25 tax and so forth.
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1 COMMISSIONER MORGAN: Mr. Chairman, I’m
2 concerned, as was, I believe, Curt Pringle, about the
3 timing. If we extend our work until September 15th , the
4 Legislature will be in recess. And it will be -- our
5 recommendation will be battered and bruised, as he said,
6 by the time they get back in January. So either we have
7 to not wait that long to get our recommendations going
8 forward, or we have to wait much longer, until the
9 Legislature is back in session in January, it seems to
10 me. Because I, for one, would not like to see our
11 recommendations hanging out there for three months.
12 CHAIR PARSKY: John?
13 COMMISSIONER COGAN: Becky, I’ve got to disagree
14 with you. It seems to me that when you’re proposing, if
15 we were to get to this point, a massive overhaul of the
16 California tax system, I think you want it to sit out
17 there for a long time. Let people get fully -- a full
18 understanding of what’s in it and what it does. I don’t
19 think it’s right to think about a proposal like this as
20 one we can rush through the system before everyone figures
21 out what’s in it.
22 I’m also mindful of something that Bob said when
23 he briefed us on the net-receipts tax. He went through a
24 time-line of how long it took in Michigan and how long it
25 took in other states to get it through. And it was on the
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1 order of 18 months or so. And so my sense is, even though
2 we’d like to have the Legislature move quickly on
3 something, my sense is the reality of it is it’s not going
4 to be that quick, nor should it be.
5 COMMISSIONER MORGAN: And I’m not trying to
6 rush it. I’m just saying, what is our expectation? And
7 if we want it to be fully debated in the Legislature,
8 then let it hang. But that being the case, it would be
9 my prediction that we’d better not make very many
10 recommendations. Because when it is debated for a long
11 period of time, there will be more “no” votes.
12 CHAIR PARSKY: Well, my only reaction is, it
13 will be impossible for us to come up with meaningful,
14 well-thought-through recommendations by July 31. That’s
15 not --
16 COMMISSIONER MORGAN: I agree.
17 CHAIR PARSKY: That’s not possible. But I do
18 think we want to think a little bit about what date after
19 that.
20 I do think that the Legislature may -- will
21 want to hold hearings without enacting anything. That’s
22 their prerogative and obligation. And may take place
23 post-September 15 th . I don’t know. I will have some
24 discussions about that and come back to everybody.
25 Okay, are we okay with proceeding this way?
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1 COMMISSIONER COGAN: Thank you, Mr. Chairman.
2 CHAIR PARSKY: Thank you all very much.
3 (The meeting concluded at 4:55 p.m.)
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REPORTER’S CERTIFICATE
I hereby certify:
That the foregoing proceedings were duly reported by me at the time and place herein specified; and
That the proceedings were reported by me, a duly certified shorthand reporter and a disinterested person, and was thereafter transcribed into typewriting; and
That the foregoing transcript is a record of the statements of all parties made at the time of the proceeding.
IN WITNESS WHEREOF, I have hereunto set my hand on the 20 th day of July 2009.
______DANIEL P. FELDHAUS California CSR #6949 Registered Diplomate Reporter Certified Realtime Reporter
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