California tax commission proposals at a glance

By The Associated Press, The Associated Press
1:18 p.m. September 20, 2009

Recommendations for reforming California's tax structure from the

Commission on the 21st Century Economy:
– Personal Income Tax: Replace the state's existing progressive income tax structure (10.55 percent for millionaires) with a flatter structure. The two rates would be 2.75 percent for individuals earning up to $28,000 a year or $56,000 for joint filers, and 6.5 percent for incomes above that amount.

The standard deduction would be $22,500 for individuals and $45,000 for joint filers. Deductions would be limited to mortgage interest, property taxes and charitable contributions.
– Sales and Use Tax: The state's portion of the sales and use tax would be phased out over five years by reducing it 1 percentage point each year.

Local sales taxes would remain in effect.
– Corporate Tax: This business levy would be eliminated.
– Business Net Receipts Tax: At the heart of the commission's proposal would be a plan to replace the sales and corporate taxes with a business net receipts tax, to be imposed on all companies doing business in the state.

The tax would be calculated by subtracting a firm's purchases from its gross receipts. The commission defines gross receipts as payments a business receives from all sources, such as the sale or exchange of property, the performance of its services or the use of its property or equipment. A yet-to-be-determined tax rate would be applied once the business's purchases are subtracted from that total.

Commissioners have said the tax rate could be around 4 percent.

They say switching to such a model would capture service sectors that are currently not taxed, such as legal, engineering or accounting services. Critics worry it could be challenged in court and drive up the cost of doing business in California, making the state less competitive.

A group of tax policy experts suggested the commission consider simply expanding the state sales tax to services while at the same time creating a tax exemption for certain business purchases, such as office furniture or factory equipment.

The exemption would be an incentive for the business community to support broadening the sales tax to auto repairs, haircuts and other services currently not taxed, their letter stated.

– Rainy Day Fund: The panel recommends increasing the target amount the state sets asides in reserve, from 5 percent to 12.5 percent of the state's general fund. The governor could tap the fund only when revenue is insufficient to provide spending at last year's level, adjusted for population and inflation changes.

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