STATE OF CALIFORNIA COMMISSION ON THE 21st CENTURY ECONOMY YZ REVENUE AND TAXATION STRUCTURAL ALTERNATIVES XW PUBLIC MEETING Thursday, February 12, 2009 9:06 a.m. – 5:03 p.m. University of California, Los Angeles De Neve Plaza, Plaza Room De Neve Commons 351 Charles E. Young Drive, West Los Angeles, California XW 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 – February 12, 2009 A P P E A R A N C E S COMMISSION ON THE 21ST 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 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 MONICA LOZANO Publisher/CEO La Opinión Daniel P. Feldhaus, CSR, Inc. 916.682.9482 2 st Commission on the 21 Century Economy – February 12, 2009 A P P E A R A N C E S COMMISSION ON THE 21ST CENTURY ECONOMY Commissioners Present continued REBECCA MORGAN President Morgan Family Foundation RICHARD POMP Alva P. Loiselle Professor of Law University of Connecticut CURT PRINGLE Mayor City of Anaheim ---o0o--- COTCE Staff Present MARK IBELE Board of Equalization Commission Staff Director ASHLEY SNEE GIOVANNETTONE LORI HSU ANTONIO LOCKETT JESSICA MAR MICHELLE QUINN Staff Writer MARGIE RAMIREZ WALKER ---o0o--- Daniel P. Feldhaus, CSR, Inc. 916.682.9482 3 st Commission on the 21 Century Economy – February 12, 2009 A P P E A R A N C E S Public Testimony MICHAEL FEINSTEIN former Mayor & City Council Member City of Santa Monica JOHN LAIRD on behalf of Speaker of the Assembly, Karen Bass District 47 Presentations “Observation on Income, Sales and Consumption Taxes” CHARLES E. MCLURE, JR. Senior Fellow Hoover Institution Stanford University JAMES R. HINES, JR. Professor Department of Economics and School of Law University of Michigan “Broadening California’s Tax Base I – Tax Expenditure Programs” PAUL WARREN Principal Policy Analyst Economics, Revenue and Taxation Legislative Analyst’s Office State of California ALLEN PROHOFSKY Manager Tax Policy Research Franchise Tax Board State of California ROBERT INGENITO Chief, Research and Statistics Board of Equalization State of California Daniel P. Feldhaus, CSR, Inc. 916.682.9482 4 st Commission on the 21 Century Economy – February 12, 2009 A P P E A R A N C E S Presentations “Broadening California’s Tax Base II - Sales Taxes on Services” ANNETTE NELLEN Professor Department of Accounting and Finance San José State University ERIC I. MIETHKE Partner Nielsen Merksamer Parrinello Mueller & Naylor, LLP ROBERT INGENITO Chief, Research and Statistics Board of Equalization State of California “California’s 21st Century Economy” JERRY NICKELSBURG Senior Economist Anderson School of Business University of California, Los Angeles Panel One – “Observations from Organizations” DAVID WOLFE Legislative Director Howard Jarvis Taxpayers Association LENNY GOLDBERG California Tax Reform Association Panel Two – “Observations from Organizations” TERESA CASAZZA President California Taxpayers’ Association Daniel P. Feldhaus, CSR, Inc. 916.682.9482 5 st Commission on the 21 Century Economy – February 12, 2009 A P P E A R A N C E S Presentations Panel Two – “Observations from Organizations” continued JOSEPH R. CROSBY COO & Senior Director Council on State Taxation KYLA CHRISTOFFERSEN Policy Advocate, Legal & Taxation California Chamber of Commerce MICHAEL D. SHAW Legislative Director National Federation of Independent Business Panel Three – “Observations from Organizations” JEAN ROSS Executive Director California Budget Project - and – J. FRED SILVA Senior Fiscal Advisor California Forward “Approaches to Broadening the State’s Tax Base” MARK IBELE Commission on the 21st Century Economy State of California Also Present ANNE MAITLAND Tax Research Specialist Franchise Tax Board ---o0o--- Daniel P. Feldhaus, CSR, Inc. 916.682.9482 6 st Commission on the 21 Century Economy – February 12, 2009 Table of Contents Item Page Welcome and Introductions Chair Parsky ............................ 10 Public Comment Michael Feinstein ......................... 11 Commissioner Comments ......................... 17 Presentations “Observations on Income, Sales, and Consumption Taxes” Charles E. McLure, Jr., Senior Fellow Hoover Institution Stanford University ........................ 54 James R. Hines, Jr., Professor Department of Economics and School of Law University of Michigan .................... 65 “Broadening California’s Tax Base I – Tax Expenditure Programs” Paul Warren, Principal Policy Analyst Economics, Revenue and Taxation Legislative Analyst’s Office State of California ...................... 86 Allen Prohofsky, Manager Tax Policy Research Franchise Tax Board State of California ...................... 92 Robert Ingenito, Chief Research and Statistics Board of Equalization State of California ...................... 99 Daniel P. Feldhaus, CSR, Inc. 916.682.9482 7 st Commission on the 21 Century Economy – February 12, 2009 Table of Contents Item Page Presentations continued “Broadening California’s Tax Base II – Sales Taxes on Services” Annette Nellen, Professor Department of Accounting and Finance San José State University ................. 123 Eric Miethke, Partner Nielsen Merksamer Parrinello Mueller & Naylor LLP ............................. 128 Robert Ingenito, Chief Research and Statistics Board of Equalization State of California ..................... 138 “California 21st Century Economy” Jerry Nickelsburg Senior Economist Anderson School of Business University of California, Los Angeles ..... 162 Observations from Organizations Panel One David Wolfe, Legislative Director Howard Jarvis Taxpayers Association ....... 190 Lenny Goldberg California Tax Reform Association ....... 194 Panel Two Teresa Casazza, President California Taxpayers Association ......... 218 Daniel P. Feldhaus, CSR, Inc. 916.682.9482 8 st Commission on the 21 Century Economy – February 12, 2009 Table of Contents Item Page Observations from Organizations continued Panel Two continued Joseph R. Crosby, COO & Senior Director Council on State Taxation .................. 225 Kyla Christoffersen Policy Advocate, Legal and Taxation California Chamber of Commerce ............ 231 Michael D. Shaw, Legislative Director National Federation of Independent Business ................................... 237 Panel Three Jean Ross, Executive Director California Budget Project ................ 266 J. Fred Silva, Senior Legal Advisor California Forward ..................... 274 Commissioner Discussion and “Approaches to Broadening the State’s Tax Base” Mark Ibele Commission on the 21st Century Economy State of California ..................... 304 Adjournment ................................... 318 Reporter's Certificate .......................... 319 Daniel P. Feldhaus, CSR, Inc. 916.682.9482 9 st Commission on the 21 Century Economy – February 12, 2009 1 BE IT REMEMBERED that on Thursday, February 12, 2 2009, commencing at the hour of 9:06 a.m., at the 3 University of California, Los Angeles, De Neve Plaza, 4 Plaza Room, De Neve Commons, 351 Charles E. Young Drive, 5 West, Los Angeles, California, before me, DANIEL P. 6 FELDHAUS, CSR 6949, RDR, CRR, in the state of California, 7 the following proceedings were held: 8 --o0o-- 9 CHAIR PARSKY: Welcome, ladies and gentlemen. 10 I know that there are a few commissioners that are not 11 here yet, and I know will be here. But we'll try to run 12 these commission meetings on time, and so we'll begin. 13 First of all, I want to thank our hosts at UCLA 14 for making all these arrangements for us. We thank them 15 very much. Our chancellor stopped by to say "hello." Our 16 executive vice-chancellor came by, as well, last evening. 17 And on behalf of all of the commissioners, thank 18 you, UCLA, very much. 19 This is our second public hearing of the 20 Commission on the 21st Century Economy. And we have a 21 very full agenda, as you can see from the screen, which 22 we will try to get through as efficiently as possible. 23 We welcome public participation in these 24 sessions. And so the first item for us is to hear from 25 anyone in the public that would like to make comments, Daniel P. Feldhaus, CSR, Inc. 916.682.9482 10 st Commission on the 21 Century Economy – February 12, 2009 1 and then I'll ask the Commissioners to make some comments 2 if they would like. 3 Two of our commissioners were not with us at 4 the last meeting, and so I will certainly ask Becky and 5 Bill to make comments, if they would like, and then anyone 6 else. I'll try to give a few observations as we begin 7 before our agenda. 8 With that, there is one member of the public, 9 Michael Feinstein is here and he has some comments to make 10 to this commission. 11 MR. FEINSTEIN: I had no idea I'd be the only 12 one. Anyway, good morning. I'm a former mayor and city 13 council member in Santa Monica. I served on SCAG’s 14 Regional