Tax Reform Proposal in CA Contains Elements of Idea Floated Here

The California Tax Commission will soon release its suggestion for a massive reshaping of that state's tax structure. This morning's Wall Street Journal has an editorial praising elements of the proposal.

Even more impressive is the recommendation to eliminate the corporate income tax and the 5% of the sales tax that contributes to the general fund. These would be replaced by a broad-based Business Net Receipts Tax of no higher than 4%. This taxes businesses on what they produce, minus their costs of purchases from other firms. This is similar to a value added tax.

One benefit of this new levy is that it creates a level playing field among industries and reduces tax favoritism based on the power of lobbyists in Sacramento.

That sounds somewhat similar to the Net Economic Activity Tax proposed a few years ago by the Prosperity Partnership in Seattle. Here's how the plan is described in a 2008 post in Crosscut.

So what is NEAT? It's a kind of value-added tax imposed at each step of making a product, but it's subtractive, only taxing the value added, not the previous or cumulative value of the product, as a sales tax does. Productive labor is counted, making it a form of flat income tax. Small business is exempt, if less than $50,000, and a worker's first $20,000 is exempt. The tax would replace the hated B&O tax (levied on gross business, so punishing startups that are not yet profitable) and the state portion of the property tax (probably the most hated tax).

(See also this article in the Puget Sound Business Journal by Deirdre Gregg.)

Commentary has more on the California proposal, including a useful link to this AP story on the Tax Commission and its work.

Given the Golden State's notoriously gridlocked politics, it's hard to see a complex, integrated reform package getting through the meat grinder. But the proposal has a lot of sensible elements, including a backing away from the highly progressive (and volatile) personal income tax that has chased investment out of state. 

Thoughts?