Yesterday, the Commission on the 21st Century Economy released its final report and recommendations on ways to update and improve California’s revenue system and make it more reflective of the state’s economy. See the Press Release [2].

The Commission is recommending several significant "big" and "bold" changes to California's tax system with a five-year phase-in plan beginning in 2012.

The Commission's Final Report [3] is 425 pages. Here is a "high level" summary:"

Section One:

These recommendations are of a statutory nature, which means they may be made effective upon passage by a majority of the State Legislature and signature by the Governor.

1. Reduce Personal Income Tax (PIT) for every taxpayer – Reduce the number of tax brackets from six to two. The new tax rate would be 2.75 percent for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5 percent for taxable income above that amount. These changes would retain the PIT’s progressive nature but reduce income tax rates for all taxpayers. The proposal would reduce the amount of income tax paid by 29 percent.
2. Eliminate the corporation tax and minimum tax – Eliminate the corporate tax, which is currently at 8.84 percent. The $800 minimum franchise tax should also be eliminated.
3. Eliminate the state general purpose sales tax – Eliminate the current 5 percent state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation. Elimination of the sales tax would phase in over five years.
4. Establish a business net receipts tax (BNRT) – Establish a new tax, not to exceed 4 percent, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes.
5. Create an independent tax dispute forum – This forum would provide taxpayers with a forum for resolving disputes with the state.

Section Two:

This recommendation requires a change in the State Constitution or a state ballot initiative in order to be effective.

1. Strengthen the state’s Rainy Day Reserve Fund – Increase the target for the reserve from 5 percent of revenues to 12.5 percent and restrict the government's ability to use reserve assets so that the reserve is available to help fund services during recessionary periods.

For more information see the Commission's website [4] and Final Report Presentation [5].

What do you think of the Commission's recommendations?

How will they effect your business?

Do you think the legislature and Governor will enact these changes?