California Injury Attorney Blog

The centerpiece of the plan will be a tax that few people in California have ever heard of, is virtually untested in the world, is disliked by business and labor interests alike and one that even commissioners acknowledge has not yet been fully vetted.

It is called a business net receipts tax. It would be paid by businesses in every industry. Businesses would subtract from their gross receipts the costs they pay to other businesses for the purchase of materials and services, then pay a tax of about 4 percent on the difference. They could not subtract the key expenses of payroll or interest payments.

Very small businesses would be exempt, because the requirement to pay the tax would not be triggered until a business reached $500,000 in annual gross receipts.

The commission envisions that over time the revenue produced by the BNRT would allow California to eliminate its corporate income tax, do away with the state sales tax and dramatically reduce personal income taxes.

Critics on the left and right have a far different view. They believe the BNRT proposal ought to be dead on arrival.

"If this is the starting point, we've taken several steps behind the starting line," says Michael Shaw, an analyst with the National Federation of Independent Businesses. "It creates a labor tax, which is a huge problem for the retail and service industries."

The chief selling point of the BNRT is that it would provide a way to levy a consumption tax -- everyone agrees that businesses would largely pass along the tax to consumers -- on products other than just the tangible goods that are now subject to sales taxes.

Schwarzenegger and legislative leaders clearly hoped the panel, called the Commission on the 21st Century Economy, would devise a way to broaden the base of consumption taxes as a way to reduce the volatility of a California tax system that is extraordinarily dependent on income taxes.

The original hope was the commission would produce a report that could be put to an up-or-down vote in the Legislature, but commissioners acknowledge their recommendations are not yet refined enough for that.

Schwarzenegger has said he will call a special session of the Legislature to deal with the ideas submitted by the commission. He has been strongly advocating for changes that would reduce the volatility of the state's existing tax system in the hope of ending the roller-coaster cycle of booms and busts experienced by state government.

The BNRT would achieve the goal of producing new revenues in order to allow a shift away from the more volatile income tax.

Law firms would pay it, golf courses would pay it as would landscaping services, amusement parks, accounting firms, hospitals -- all businesses that produce services that are not now subject to the sales tax.

Shaw said he believes the tax's chief appeal to the commission is that it provided a way to deal with the politically sensitive issue of levying a sales tax on services without having to confront it head-on.

"Sales taxes on services are not popular," he said. "The truth is that this just takes the sales tax and shifts it to the business side of the equation rather the transaction side. This would be hidden from the consumer because the tax would be hidden in the price of goods."

Support on the commission is far from unanimous, and it remains unclear how many of the 14 commissioners will sign the final report. Seven of the commissioners were appointed by Republican Schwarzenegger, and seven by Democratic legislative leaders.

Because it would tax a business's payroll costs, it would disproportionately tax knowledge-based industries, which everyone agrees is the best thing California has going for it.

Accordingly. the net receipts for a company such as Wal-Mart would be a much smaller percentage of gross receipts than a company such as Oracle. While much of Wal-Mart's expenses are buying inventory, most of the value of what Oracle sells is the brainpower of its highly compensated, highly skilled work force.

Question: What type of businesses do we want to encourage in the California economy?

The commission analysis acknowledges its proposed tax changes would shift much of California's tax burden away from the very wealthy, who would be the chief beneficiary of a reduction in the personal income tax. The changes, according to the commission's analysis, would reduce revenue from the state income tax by $14 billion a year, with $7 billion of the savings going to the top 3 percent of taxpayers, or those who make more than $200,000 a year in adjusted gross income.

The California Tax Reform Association, notes the BNRT would compound the shifting of the tax burden to the poor and middle-class by effectively taxing rents. Especially since landlords could not subtract interest payments on their property from their gross receipts, they would be forced to raise rents to cover the new taxes.

The Federation of Independent Businesses said another drawback of the BNRT is it would tax struggling, startup businesses exactly the same as established, profitable ones. The existing corporate income tax is levied only on profits

The California proposal is modeled largely on a similar tax enacted in Michigan in 2007, although the rate of the Michigan tax, 0.8 percent, is just a sliver of the 4.2 percent rate mentioned by the commission.