Nearly three dozen California business groups have taken a strong stand against proposals for an overhaul of the state's tax system, saying they would increase business costs and kill jobs.
The proposals are under consideration by a state commission, and include increases in taxes on commercial properties and fuel. Also on the table is a proposal for a net receipts tax, a new tax on business revenue.
A coalition of 34 business groups, led by the California Chamber of Commerce, sent a letter Aug. 21 to Gerald Parsky, chairman of the Commission on the 21st Century Economy, to back away from the commercial property and fuel tax hikes, and to reconsider the business net receipts tax.
The Long Beach and Redondo Beach chambers of commerce were the two groups from the L.A. area that signed the letter. Also in the coalition are numerous trade groups representing industries that do business statewide.
The commission is preparing to send a slate of tax reform proposals to Gov. Arnold Schwarzenegger and the Legislature next month. Schwarzenegger has said he will call a special session of the Legislature to consider the proposals.
The proposed tax hike on commercial properties would remove some Proposition 13 protections. The concept has been dubbed "split roll" because it would separate commercial from residential properties.
The split-roll plan would require more frequent assessments for commercial property. That change could net $7.5 billion a year more in taxes from commercial property owners.
The fuel taxes would be imposed both on gasoline dispensed at the pump and on crude oil pumped out of the ground; the commission has not released an estimate of how much additional revenue they would generate.
"We believe the split-roll property tax and the energy tax would be extremely detrimental to California's economy," the letter states.
The potential hike in commercial property taxes is of great concern to the Long Beach Area Chamber of Commerce.
"A split-roll property tax would mean a $7.5 billion tax increase on employers, further deepening the impacts of this tough economy and doing nothing toward creating jobs," said Randy Gordon, chief executive of the Long Beach chamber.
Higher fuel taxes would be a special hardship for industries such as transportation and aviation, the letter states. The Air Transport Association, which represents major air carriers, is another group that signed the letter.
Other business group signatories include the California Business Properties Association, the California Retailers Association, the Western States Petroleum Association, the California Hotel & Lodging Association and the Motion Picture Association of America.
Schwarzenegger and the Legislature created the commission last fall as the state's economy and tax receipts were cratering; it was tasked with coming up with proposals to make the state's tax revenue system less volatile. Currently, California relies heavily on personal income tax revenues that fluctuate wildly with the fortunes of high-net-worth individuals, contributing to a boom-bust cycle for state revenues. Over the last 18 months, revenues have plummeted, opening budget gaps of up to $40 billion.
Also, the state's sales tax, created nearly a century ago, is geared toward a manufacturing economy and does not include many services.
A special case is Proposition 13. As the state faces increasing budget constraints, critics contend that the tax-relief measure is unfairly advantageous for commercial property owners.
Under Proposition 13, properties are routinely reassessed upon change of ownership. Because commercial properties change hands less frequently than residential properties, critics say that gives commercial owners billions of dollars in tax breaks.
The commission which is composed of seven members appointed by Schwarzenegger and seven by the Legislature was originally supposed to release its recommendations in April. But the commission soon became bogged down in ideological battles, with many of the legislative appointees looking for new tax revenue streams and the gubernatorial appointees seeking revenue-neutral approaches, meaning that any tax increase would be offset by a cut. The latest deadline is now set for late September, but that may slip, too.
Last week, the commission held hearings in the Bay Area and Los Angeles, focusing mostly on the business net receipts tax. Business groups say they want the commission to back off this proposal until its impact can be studied further.
The business net receipts tax is designed to replace corporate income taxes, and some sales and personal income taxes.
"Some sectors of our economy could be devastated by this and others could come out winners," said Loren Kaye, president of the California Foundation for Commerce and Education, a Sacramento think tank affiliated with the California Chamber of Commerce. "We just don't know and think it is premature to propose this without considering its impact."
Groups that represent the interests of small businesses are particularly concerned that a proposal for a business net receipts tax could hit their members especially hard.
"Most small businesses aren't corporations, so they wouldn't benefit from the elimination of the corporate income tax and could get a double taxation hit," said Michael Shaw, legislative director of the California chapter of the National Federation of Independent Business.
Also, Shaw said, there's concern that a net receipts tax could end up imposing steep taxes on low-margin companies with high payrolls.
"The way it's proposed now, the net receipts would be calculated by taking the total sales and subtracting out payments made to suppliers and landlords, but you could not subtract out payroll expenses," Shaw said. "So if you're a low-margin, labor-intensive business, you could get hit very hard."
Manufacturing representatives are also concerned about the net receipts tax provision. They say it would discourage companies from keeping or creating manufacturing jobs in the state.
"It penalizes production employment," said Greg Hines, tax reform advocate for the California Manufacturers and Technology Association. "This is likely a recipe for outsourcing manufacturing jobs out of the state. With an average wage of $66,000, California's economy and state government simply can't afford any more manufacturing losses."
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