Archive for September, 2009

California Home Loans Follows Tax Debate Closely

Wednesday, September 30th, 2009

By William Selway and Michael B. Marois

Sept. 29 (Bloomberg) — A California commission created by Governor Arnold Schwarzenegger proposed lowering taxes on top earners, repealing sales taxes and replacing the corporate profits tax with a new levy pegged to business revenues.

The changes are part of an overhaul suggested for the tax code of the most-populous U.S. state to escape the revenue swings that left the state wracked by massive budget deficits in the wake of the stock market crash and recession. Schwarzenegger endorsed the commission’s recommendations and said he will call the legislature into special session to consider them.

“The boom-and-bust economic cycles the current tax system depends on has turned our state budgeting system into an unpredictable rollercoaster ride that brings windfalls one year and painful deficits the next,” Schwarzenegger said in a statement.

The recommendations, if enacted, would make sweeping changes to the tax code of California, the home of companies including Google Inc.,Wells Fargo & Co. and Walt Disney Co.

The tax code, developed more than 70 years ago, has failed to adapt to economic changes and relies heavily on income taxes from top earners, the commission said. California was among the state’s hardest hit by the recession that began with the tumbling value of real estate, just as it was earlier this decade by the collapse of the Internet stock bubble.

Two Tax Rates

The 14-member commission, appointed by Schwarzenegger and Democratic leaders of the Legislature, said California’s six different tax rates, now as high as 10.5 percent for those earning more than $1 million, should be replaced with just two. It suggests a 2.75 percent rate for couples earning as much as $56,000, with a 6.5 percent rate for those earning more.

The panel also called for replacing the corporate income tax with one based on businesses’ gross receipts, a broader measure intended to capture a greater share of economic activity in California. The sales tax would also be repealed.

“Sometimes crisis can serve as a catalyst for real reform,” said Gerald Parsky, the chairman of Aurora Capital Group, a Los Angeles-based investment firm, who served as chairman of the tax commission.

Report Draws Fire

The recommendations were backed by only nine members of the panel, who broke along party lines. The proposals immediately drew criticism from the California Chamber of Commerce and the California Labor Federation. The labor group urged lawmakers to reject the recommendations, predicting they would increase taxes on the majority, reduce job creation, and put pressure on businesses to raise prices.

“The proposals are a step backward, shifting the tax burden from the wealthiest taxpayers to middle- and low-income families,” said Art Pulaski, the executive secretary of the labor group. “These proposals would entomb California in perpetual recession.”

California’s legislature had difficulty agreeing on changes to the tax code and annual budget this year, steps that required the consent of two-thirds of lawmakers, even as the state was on the brink of insolvency.

Assembly Speaker Karen Bass, a Democrat from Los Angeles, said she asked an Assembly committee to schedule hearings on the recommendations, giving businesses and advocates for people with low income a chance to weigh in.

‘Full Assessment’

“I know there have been concerns raised by the business community and concerns raised by advocates for middle-class families and low-income workers,” she said in a statement. “Californians deserve a fair and full assessment of the ways these recommendations would affect them — whether positive, negative or neutral.”

Since October, when Schwarzenegger created the commission, the governor and lawmakers wrestled twice more about spending as the worsening economy depleted California’s revenue, leaving the state to pay some bills with IOUs from July until September to avoid running out cash.

The changes also could ease California’s reliance on annual cash flow borrowing, such as the $8.8 billion the state borrowed Sept. 23. California was forced to pay as much as 1.5 percent yield on the short term notes, twice the interest rate of similar notes sold by New Jersey one month earlier as investors demanded more to compensate for the state’s fiscal volatility.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: September 29, 2009 17:10 EDT

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