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					                   STATE OF CALIFORNIA

    COMMISSION ON THE 21st CENTURY ECONOMY



                   STATE OF CALIFORNIA
                  REVENUE & TAXATION

         FUNDAMENTAL TAX ALTERNATIVES
                   Part Two



                       PUBLIC MEETING

                      Tuesday, June 16, 2009
                       9:05 a.m. – 4:20 p.m.

               University of California, Los Angeles
                   De Neve Plaza, Plaza Room
                        De Neve Commons
                 351 Charles E. Young Drive, West
                      Los Angeles, California



Reported by: Daniel P. Feldhaus
              Certified Shorthand Reporter #6949
              Registered Diplomate Reporter, Certified Realtime Reporter

               Daniel P. Feldhaus, C.S.R., Inc.
                    Certified Shorthand Reporters
              8414 Yermo Way, Sacramento, California 95828
        Telephone 916.682.9482         Fax 916.688.0723
                     FeldhausDepo@aol.com

                                                                           1
      Commission on the 21st Century Economy – June 16, 2009


                  A P P E A R A N C E S


      COMMISSION ON THE 21ST CENTURY ECONOMY

                  Commissioners Present

                      GERRY PARSKY
                    Commission Chair
                  Aurora Capital Group

                  RUBEN BARRALES
                   President/CEO
      San Diego Regional Chamber of Commerce

                      MICHAEL BOSKIN
                         Professor
                   Stanford University

                        JOHN COGAN
                         Professor
                   Stanford University

                 EDWARD DE LA ROSA
               Founder and President
       Edward J. De La Rosa & Company, Inc.

                CHRISTOPHER EDLEY, JR.
                 Dean/Professor of Law
               Boalt Hall School of Law

                      GEORGE HALVORSON
                        Chairman/CEO
                     Kaiser Foundation

                   WILLIAM HAUCK
       Trustee, California State University
                      Director
Blue Shield of California & Blue Shield Foundation

                    JENNIFER ITO
        Research, Training, Policy Director
                        SCOPE

                    FRED KEELEY
          Treasurer, County of Santa Cruz
       Professor, San José State University


         Daniel P. Feldhaus, CSR, Inc.   916.682.9482          2
Commission on the 21st Century Economy – June 16, 2009


            A P P E A R A N C E S


COMMISSION ON THE 21ST CENTURY ECONOMY

            Commissioners Present
                      continued

              REBECCA MORGAN
                 President
         Morgan Family Foundation

              RICHARD POMP
   Alva P. Loiselle Professor of Law
       University of Connecticut

                  CURT PRINGLE
                      Mayor
                City of Anaheim

                     ---o0o---

             COTCE Staff Present

            MICHAEL C. GENEST
      Commission Executive Director
           Director of Finance

                 MARK IBELE
         Commission Staff Director
           Board of Equalization

         ASHLEY SNEE GIOVANNETTONE

                     LORI HSU

                ANTONIO LOCKETT

                   JESSICA MAR

                 MICHELLE QUINN
                  Staff Writer

               PHIL SPILBERG
         Chief, Financial Research
           Department of Finance

            MARGIE RAMIREZ WALKER

   Daniel P. Feldhaus, CSR, Inc.   916.682.9482          3
Commission on the 21st Century Economy – June 16, 2009


            A P P E A R A N C E S

             COTCE Staff Present
                      continued



               Public Testimony

              WILLIAM SPILLANE
         California State Director
                 FairTax.org

                 JOHN VALENCIA
               Life Technologies

           MICHAEL FEINSTEIN
  former Mayor & City Council Member
         City of Santa Monica

                     ---o0o---


                     Presenter

              ROBERT CLINE
           National Director
 State and Local Tax Policy Economics
             Ernst & Young
   (Re: Business Net-receipts Tax)

                     ---o0o---




   Daniel P. Feldhaus, CSR, Inc.   916.682.9482          4
            Commission on the 21st Century Economy – June 16, 2009



                            Table of Contents
Item                                                                 Page


Welcome and Introductions

       Chair Parsky         .............................              7


Public Comments

       William Spillane
       California State Director
       FairTax.org     .............................                   9

       John Valencia
       Life Technologies ...........................                  11

       Michael Feinstein
       former Mayor & City Council Member
       City of Santa Monica .......................                   15


Commissioner Comments            ..........................           18


Presentation on a Business Net-Receipts Tax

       Robert Cline
       State and Local Tax Policy Economics
       Quantitative Economics and Statistics
       Ernst & Young LLP           .................                  36


Staff Presentation on Tax Alternatives

Introduction re Tax Alternative Packages..........                   149

Package 1

       Uniform Personal Income Tax
       Eliminate Corporation Tax
       Eliminate State Sales Tax
       Business Net-receipts tax   .................                 178



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            Commission on the 21st Century Economy – June 16, 2009


                            Table of Contents
Item                                                                 Page


Staff Presentation on Tax Alternatives continued

Package 2

       Simplified Personal Income Tax
       Investment Tax Credit
       Reduce Corporation Tax Rate to 7%
       Reduce Sales and Use Tax by 1%
       Business Net-receipts tax ................                    200

Package 3

       Simplified Personal Income Tax
            Three brackets
       Eliminate State Sales Tax on business
       Investment purchases
       Reduce Corporation Tax Rate to 7%
       Reduce Sales and Use Tax by 1%
       Business Net-receipts tax .................                   206


Options

       Option A

       Carbon Tax on Gas, Diesel, and Jet Fuel
       at 18¢/gallon              .................                  215


       Option B
       Capital-Gains Rate Reductions of
       1%, 2%, 3%, 4%, and 5%     .................                  217


Commission Discussion of Options and Next Steps .                    221


Adjournment        ..................................                280


Reporter’s Certificate           .........................           281

                                  --o0o--

               Daniel P. Feldhaus, CSR, Inc.   916.682.9482                 6
              Commission on the 21st Century Economy – June 16, 2009


 1             BE IT REMEMBERED that on Tuesday, June 16,

 2   2009, commencing at the hour of 9:05 a.m., at the

 3   University of California, Los Angeles, De Neve Plaza,

 4   Plaza Room, De Neve Commons, 351 Charles E. Young Drive,

 5   West, Los Angeles, California, before me, DANIEL P.

 6   FELDHAUS, CSR 6949, RDR, CRR, in the state of

 7   California, the following proceedings were held:

 8                                 --o0o--

 9             (The following proceedings commenced with

10             Commissioners Morgan, Cogan, and De La Rosa

11             absent from the meeting room.)

12             CHAIR PARSKY:       we’re going to try to begin our

13   public hearing.    We have a few commissioners that aren’t

14   here and will be coming in.         But I think if we get

15   started, we will attempt to a move through our agenda as

16   efficiently as possible.

17             Let me just say, on behalf of the Commission,

18   I want to thank UCLA for hosting us.

19             We have two public hearings that will remain,

20   this being one and then we have a public hearing in

21   San Francisco in July, as we move towards attempting to

22   come up with some recommendations.

23             I’ll have a few comments to make after our

24   public-comment period.       But I want to say that the

25   subjects that we’re going to be discussing today are very

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482        7
              Commission on the 21st Century Economy – June 16, 2009


 1   important.    I think we are moving towards asking the

 2   commissioners to consider recommendations.                     There are a

 3   number of issues that will come out of this.

 4                We welcome commentary from the public in

 5   particular.    We’ll be discussing a new form of tax that

 6   doesn’t exist in California, and that’s a tax that we will

 7   want to make sure we solicit and obtain as much commentary

 8   as we can about.

 9                As I said, I’ll make a few more comments before

10   we get into our discussion.

11                The agenda for today will be, after the

12   public-comment period, we’ll have a presentation by

13   Bob Cline about this new form of tax, referred to as a

14   “business receipts tax.”          We will then move to a

15   discussion of some options in terms of reform, packages --

16   we refer to them as packages of various forms of a tax.

17   Some taxes obviously exist in California.

18                The staff will make a complete presentation

19   about each of the packages, and Commissioners will engage

20   in a dialogue.     And we have some alternatives that could

21   apply to any form of change that we’ll discuss.

22                We’ll try to come together this afternoon and

23   see if we can’t give some clear direction to the staff

24   in terms of refinement and see if we can’t move toward

25   a concrete set of recommendations by the end of July.

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482                 8
               Commission on the 21st Century Economy – June 16, 2009


 1                As I said, I’ll come back and make a few more

 2   comments before the presentation.

 3                So with that, I want to thank all the

 4   commissioners for their hard work.               And we’ll turn to our

 5   public-comment period.

 6                We have three gentlemen that have asked to

 7   speak:   William Spillane, John Valencia, and Michael

 8   Feinstein.

 9                And in that order, if you’d come forward.             And

10   if you could -- we’ll take all of your comments in

11   writing, of course; but if you could limit your oral

12   presentation to about two minutes, that would be very

13   helpful to us.

14                The first one, William Spillane.

15                MR. SPILLANE:      Thank you.

16                I’m William Spillane, the volunteer California

17   State Director of FairTax.org.             Most of you have probably

18   heard of it.    It’s actually an attempt at the federal

19   level to eliminate the income tax and the payroll tax

20   completely, as well as other taxes, and replace it with a

21   national sales tax, inclusive sales tax, calculated the

22   same way an income tax is, on an inclusive basis.

23                Let me remind you of the famous words of

24   Dr. Milton Friedman:        “Only people pay taxes.”

25                Well, what does that mean?             It means businesses

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             9
              Commission on the 21st Century Economy – June 16, 2009


 1   don’t pay taxes.      So while you rearrange the deck chairs,

 2   push the deck chairs off the boat that talk about taxing

 3   businesses because those taxes are passed on.                   They have

 4   to be passed on to somebody.

 5                Alan Greenspan, before Congress, said, “Capital

 6   doesn’t pay taxes.       It’s passed on to somebody else.”

 7   Of course, nobody asked him a question, they didn’t know

 8   what he was talking about.

 9                So it’s either the customer or the employee or

10   the owner.    Those are the only three people as groups it

11   can be passed to.      And usually it’s the customer, if

12   there’s any pricing power.           So whatever you come up with,

13   don’t tax businesses.        Businesses are fleeing California.

14   Let’s get them back.

15                Look at Ireland.        They dropped their income tax

16   to 12 percent.     And after a millennia of poverty, they

17   suddenly got rich.       Investment flowed in.             Investment is

18   a source of jobs.

19                Now, the Fair Tax is structured as a federal

20   program, so it eliminates the payroll tax, as well as the

21   income tax, tax on dividends, capital gains, the

22   alternative minimum tax, and the death tax.                    So that’s a

23   problem with the states.

24                But the Missouri House of Representatives just

25   passed it.    It got tied up in the Senate.                In a committee,

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             10
                Commission on the 21st Century Economy – June 16, 2009


 1   somebody got rid of it.         There are lots of oxen being

 2   gored, no doubt about it, by the Fair Tax.                     But it’s the

 3   best thing possible.        $22 million in research on this

 4   project.   It’s not a back-of-the-envelope thing.                   Please

 5   look into it.     I’ll leave some material.

 6              But the Fair Tax can be used in California.                    It

 7   will take some adjustments, and it should be used at the

 8   national level and ultimately at the state level.

 9              We’re not popular very much in California.

10   That’s my fault.      But in other states, our people are

11   standing shoulder-to-shoulder.             We have 52 co-sponsors in

12   Congress for the Fair Tax.           Only one Democrat, because one

13   of the parties is hostile to it for no good reason,

14   because it supports all levels of income.                  All levels.

15   It’s good for all of us.          It’s good for America.

16              Thanks very much.

17              CHAIR PARSKY:        Thank you very much.

18              John Valencia.

19              MR. VALENCIA:        Good morning, Mr. Chairman,

20   Members.   John Valencia here representing Life

21   Technologies Corporation, headquartered in Carlsbad,

22   California, and its chairman and CEO, Greg Lucier.

23              Mr. Keeley, Mr. Pringle, Mr. Houck, good

24   morning.

25              COMMISSIONER HAUCK:           Good morning.

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482              11
                 Commission on the 21st Century Economy – June 16, 2009


 1               MR. VALENCIA:        Very briefly, Mr. Lucier regrets

 2   he couldn’t be here in person but felt that the

 3   Commission’s work was significant enough.                   You have his

 4   comments in full, in writing.

 5               Founded in ‘87, Life Technologies began as

 6   Invitrogen Corporation.          It is a biotechnology research

 7   tools company.       Its products are in every nonprofit, every

 8   academic lab, such as UCLA, and every commercial

 9   biopharmaceutical lab.          It helps -- its products promote

10   research.    It keeps bench sciences moving forward rather

11   than having to replicate their experiments from ground

12   zero each and every time.

13               With the acquisition of Applied Bio Systems in

14   Foster City in Northern California, it also has applied

15   technology, such as DNA sequencers that are found, for

16   example, in forensic labs that help determine cold cases

17   through DNA sequencing.

18               Let me just quote the most significant point

19   that Mr. Lucier wanted me to make this morning.                      He

20   believes that the number-one priority for the Commission

21   is to address the goals established for you by the

22   Governor in the context of retaining and creating

23   private-sector jobs in the state of California.                      Few, if

24   any, of the state’s common goals for government can be met

25   if the state’s not generating new jobs, new economic

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482              12
              Commission on the 21st Century Economy – June 16, 2009


 1   activity, and the tax revenue they create.                     And we believe

 2   all proposals provided to the Commission should be judged

 3   against that priority.

 4             They must also be judged relative to the tax

 5   structure and the benefits available to companies in other

 6   states and in other countries.

 7             Life Technologies, for example, has fully a

 8   third of its employee population here in California, well

 9   in excess of 3,000 employees, out of a global employee

10   population of closing in on 10,000.

11             It’s present in seven other states with

12   facilities and it’s got a sales presence in at least a

13   hundred countries around the globe, and is under constant

14   petition and solicitation to either expand

15   second-generation into those states or locations or

16   simply relocate and abandon California.

17             And as Mr. Lucier works to integrate the

18   consolidation of two companies, you can imagine that

19   boards of directors and shareholders ask that same

20   question routinely.

21             His defense, first and foremost, though not a

22   tax policy, per se, is the incredible, enduring strength

23   of the UC system.      So a wonderful coincidence that we are

24   here at UCLA.

25             But for that system -- and, again, while not a

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482              13
                 Commission on the 21st Century Economy – June 16, 2009


 1   tax issue, per se -- without its advancement and without

 2   the synergy that it provides, particularly in life

 3   sciences and biotechnology, there would be little

 4   distinction between California and many other states,

 5   particularly as relates to the incentives and to the

 6   policies.

 7               His positive proposals are detailed in the

 8   letter.   I won’t repeat them.

 9               I will conclude with his recommendations,

10   several of which you’ve discussed over your several

11   hearings to date, on two that the company finds

12   particularly objectionable.            Particularly, given where it

13   is physically located in California, Carlsbad in North

14   San Diego County, Foster City on the South San Francisco

15   peninsula, arguably two of the most expensive real

16   property locations anywhere on the global.

17               He -- Mr. Lucier -- encourages you, in the

18   strongest terms possible, to reject any recommendation

19   for a split roll for property tax.                This will create a

20   disincentive for investors to build their own developments

21   in California, forcing investment dollars and jobs to go

22   to more favorable jurisdictions.

23               And finally, he encourages, based on the service

24   sector that is particularly critical to life sciences, he

25   discourages actively the Commission from recommending an

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482          14
                 Commission on the 21st Century Economy – June 16, 2009


 1   increase in the sales-tax base, expanding to personal

 2   services.

 3               With that, Mr. Chairman, Members, thank you very

 4   much.

 5               CHAIR PARSKY:        Thank you very much.

 6               Michael Feinstein.

 7               MR. FEINSTEIN:         Good morning.         And I’ve come

 8   back a second time to speak to you again in support of the

 9   carbon tax.     And I also want to say, you’ve inspired me

10   for reform.     I’ve joined the California Constitutional

11   Convention Movement, hearing how you were trying to make

12   change.    So it’s going to keep happening in the state.

13               In terms of the carbon tax, I just want to add

14   to what I said before, that I think you shouldn’t think of

15   it as a tax.      I think you should just be thinking of it as

16   a cost of business, just like land and labor.                    Because, in

17   essence, a carbon tax is simply being conscious of the

18   commons.

19               And right now, we externalize cost onto the

20   commons.    But there’s no reason it shouldn’t just be seen

21   as a regular part of doing business.                 So I wouldn’t want

22   to put it off as something external that we’re imposing

23   upon the system.

24               Number two, obviously, it’s cheap to pollute and

25   expensive to work.        And the incentives, for that reason,

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482            15
              Commission on the 21st Century Economy – June 16, 2009


 1   I would argue are in the wrong place in our system.

 2             But an analogy -- and I would take a different

 3   perspective than our previous speaker, who spoke against

 4   the split roll -- when Prop. 13 came in, I don’t think any

 5   of us said, “Okay, going forward in the future, we want to

 6   see a disproportionate amount of the burden on homeowners

 7   versus business.”     But it’s played out that way because

 8   commercial properties don’t reassess.

 9             Well, in essence, we have the same problem, by

10   lack of having a carbon tax, we are adding more of a

11   burden in the system by taxing work than we should on

12   economic activity, compared to taxing pollution.                  And I

13   think there’s a parallel there.           And the corrective action

14   of putting in a carbon tax would realign that in a healthy

15   way for our economy.

16             Third, the $20 that you heard in your March

17   presentation is very modest.          It is a good starting point,

18   but it is not a great burden on the state.                   And what I

19   would add is that when you heard your presentation in

20   March, at that point the Obama Administration -- there

21   was no indication that it was not going to go down the

22   same path that the President, when he was a candidate,

23   said he was going to put all the permits out for auction.

24   But right now, as we’ve seen, they’re talking about making

25   85 percent allocated to business and only 15 percent for

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482                16
                Commission on the 21st Century Economy – June 16, 2009


 1   auction.   That’s the mistake the Europeans made.                   That’s

 2   why it hasn’t worked in Europe.             And, therefore, we can’t

 3   count on the federal government to start us down the right

 4   path in terms of showing leadership and helping the

 5   environment through a carbon tax, because they’re taking

 6   the wrong approach in their cap-and-trade approach.

 7              I would also add in terms of leadership, I was

 8   in Bali in December of 2007 at the UN Climate Change

 9   Conference there.       And it’s not just a question of us

10   trying to spur leadership inside the United States and

11   having California standards adopted nationally, like we

12   did with the catalytic converter.               But the folks from the

13   G-77 countries who were saying, “We’re not going to go

14   ahead and make the kind of commitments on climate change

15   because the western and northern countries who have

16   created the bulk of the problem on the planet not only

17   aren’t reducing their percentage by themselves but, in

18   effect, a lot of the other countries felt that not only do

19   we have to reduce our own emissions by X-percent, but

20   because we’re responsible for so much that happened

21   before, we need to go beyond that because already the

22   global carbon sink has been filled by our emissions.”

23              So when we get to the climate-change

24   negotiations in Copenhagen in December of this year, we

25   really have to show that this country is taking very

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             17
              Commission on the 21st Century Economy – June 16, 2009


 1   affirmative steps.

 2             And a carbon tax, in starting in California,

 3   I think wouldn’t help just spur innovation in the United

 4   States and change in the long run, but it would be a

 5   global signal that would give a lot more confidence to

 6   other economies that need to embrace more internalization

 7   of costs to actually do so.

 8             Thank you.

 9             CHAIR PARSKY:       Thank you very much.

10             (Commissioner De La Rosa entered the

11             meeting room.)

12             CHAIR PARSKY:       That concludes the members of the

13   public that have asked to speak at this hearing.

14             At our next hearing, we’ll also welcome

15   commentary from the public as well.

16             Before we turn to the presentation of the

17   business-receipts tax, I just want to make a couple of

18   comments, and then certainly any commissioner can make

19   comments that he or she wishes.

20             (Commissioners Cogan and Morgan entered

21             the meeting room.)

22             CHAIR PARSKY:       I think there have been a number

23   of discussions in the public of the need for reform.

24   Reform is a concept that I think a lot of people are

25   talking about now with respect to California and the

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482        18
                 Commission on the 21st Century Economy – June 16, 2009


 1   structure of California, how we go about governing; in

 2   some people’s minds, lack of governing.

 3               This Commission -- are you waving?

 4               THE VIDEOGRAPHER:          I lost audio.

 5               CHAIR PARSKY:        Well, that’s okay.             Some people

 6   do not mind.

 7               COMMISSIONER COGAN:           Now, you can say what you

 8   really think.

 9               CHAIR PARSKY:        In any event, I think it’s

10   important to have the public and the commissioners stay

11   focused on what the Commission was asked to do.                      There are

12   other organizations, one of which -- California Forward --

13   I’ve had a chance to meet with several leaders in, and we

14   have two representatives on the Commission that are also

15   members of California Forward.              They have very important

16   work underway in the areas of reform, under the heading of

17   reform, that I know that they will come forward with.

18               Our commission was asked to focus on the tax

19   system of California.         But we certainly have the

20   opportunity, in connection with our report, to make

21   reference to other important reform efforts that are

22   underway.    And I think we all should consider that as we

23   are finalizing our report.

24               If you focus on our task, one of the gentlemen

25   mentioned the goals.         And I have commented on those goals

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482              19
              Commission on the 21st Century Economy – June 16, 2009


 1   at each of our hearings.        I want to comment on them again.

 2   And then as we go into a discussion today of specific

 3   reform efforts with respect to the tax system, I think

 4   we’ll ask the staff and we’ll ask Bob to see each of the

 5   proposals for reform through the prism of these goals, to

 6   see how we are addressing the goals.

 7             One of the goals was to help reform the tax

 8   structure to reflect the state’s 21st century economy.

 9   And the economy in the state of California has changed

10   rather dramatically over the course of the last few years,

11   and I think we need to take that into account as we

12   development reform proposals.

13             Second, was to help reduce the volatility that

14   is created under the existing tax structure, and

15   particularly its dependence on the personal income tax,

16   and an element of the personal income tax, namely, the

17   capital-gains tax.

18             When we paused and asked that our report not be

19   due in April but rather be due at the end of July, in

20   part, that was due to the ballot initiatives that were for

21   the voters to act on, that voters clearly did act in a

22   very strong way, rejecting each of those initiatives.             But

23   it was clear from the initiatives that were put forward,

24   that had they been enacted, they would have, in some way,

25   addressed the issue of volatility.

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482        20
               Commission on the 21st Century Economy – June 16, 2009


 1              We, I think, had a discussion about how much of

 2   an impact it would have.         And I think there were a number

 3   of points of view that would have said the expenditure

 4   side and a rainy-day fund would not necessarily have

 5   solved all of the volatility questions, leaving still the

 6   need for this commission, as we look at our reform

 7   proposals, to see volatility as one of the our goals to

 8   try to address.

 9              Without the ballot initiatives, it becomes even

10   more important because we don’t have those reforms before

11   us.   And it was important for this to see whether those

12   initiatives could have passed.

13              Third, the tax reform proposal should be aimed

14   at long-term economic prosperity for the state.                    So

15   economic prosperity, economic growth, job creation are

16   clear objectives that we should test against any of the

17   proposals that we consider.

18              Fourth, we should see, to the extent we can, how

19   changes would improve the ability of California to compete

20   with other states for jobs -- job creation or jobs and

21   investments.

22              Next, whatever the reform proposals are should

23   reflect principles of sound tax policy, including elements

24   of simplicity, efficiency, predictability, ease of

25   compliance and administration.            We should test them, how

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482             21
               Commission on the 21st Century Economy – June 16, 2009


 1   would they impact any of those tax policies.

 2              And finally, we should ensure that the tax

 3   structure is fair and is equitable.                And we need to have

 4   an open discussion about changes that we’re suggesting in

 5   the context of distributing the tax burden among our

 6   citizens, how it impacts issues of progressivity,

 7   regressivity.    And all of these proposals that you will

 8   hear today will be tested, if you will, against that.

 9              I would only urge that the commissioners, as you

10   look at changes, I think -- I think, unless we decide that

11   our report should reflect the fact that the Commission

12   didn’t need to be established -- and some may think

13   that -- but the existing system doesn’t address all of

14   those goals adequately.         So whatever we do, it will

15   involve a change in the existing system.                 And that change,

16   on each of those goals, may result in moving some things

17   around with respect to those goals.                And I think it’s

18   important that we bear that in mind.

19              I mean, any member of the Commission can

20   certainly raise their hand and say, “We don’t like any of

21   these reform proposals.         We should just leave the system

22   alone.”   I haven’t heard that, but that’s certainly an

23   option.   But my point is that we can measure each of those

24   goals against the existing system, and we should; but we

25   have to recognize that there will be changes when you come

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482          22
               Commission on the 21st Century Economy – June 16, 2009


 1   forward with reform.

 2                So with that in mind, as I said, we’re going to

 3   try to divide our presentation and discussion today into

 4   two parts.

 5                The first part will be a discussion of a new

 6   form of tax that was raised by a number of people

 7   presenting and a number of the commissioners.                  And we’ve

 8   engaged Ernst & Young, and Bob Cline in particular, to

 9   develop an analysis of a new form of tax for California.

10                And then after that, we will go through some

11   proposals, packages that are options, that we tried to

12   pull together based on input that we got from the

13   commissioners in terms of how they would like to look at

14   reform.   And we’ll try to see how we can get through.

15                With that, do any commissioners wish to make any

16   other comments before we start?

17                COMMISSIONER BOSKIN:          Richard’s light is on.

18                CHAIR PARSKY:      Richard?

19                COMMISSIONER POMP:         Well, as long as the light’s

20   on.

21                CHAIR PARSKY:      Richard, the light can be on or

22   off.   It doesn’t matter.

23                COMMISSIONER POMP:         I must say, apropos of your

24   losing audio, I was giving a talk and my mike went off,

25   and someone in the back stood up and said, “We can’t hear

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482           23
                Commission on the 21st Century Economy – June 16, 2009


 1   you.”   And someone in the front said, “Well, we can; and

 2   you’re not missing anything.”            So…

 3              CHAIR PARSKY:        Is that a commentary?

 4              COMMISSIONER POMP:           Not on our speaker in this

 5   case.

 6              Gerry, I just want to make sure, in terms of

 7   bookkeeping, when do you plan to circulate a draft?                    You

 8   have a number of wordsmiths on this commission.                     And I

 9   suspect there’s going to be a rather elaborate vetting

10   process.   And I just want to make sure that there is

11   time for that.      And if there are more, let’s say,

12   noncontroversial elements of the report -- background,

13   information, whatnot -- maybe we could get that circulated

14   sooner rather than later.          And, God forbid, the

15   possibility of a dissenting report, so…

16              CHAIR PARSKY:        We don’t talk about that.

17              We will start that circulation shortly.

18              What I hope everyone will focus on today, is

19   to see whether or not we can come away from this meeting

20   with some direction to the staff on a specific proposal or

21   proposals that people want more work done on between now

22   and our last meeting.

23              The analysis that you will hear, you may not

24   find adequate.      You may want to have more work done.                And

25   we’ll try to see how we should staff that incremental

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482                24
              Commission on the 21st Century Economy – June 16, 2009


 1   work.

 2             With respect to other elements of the report, we

 3   will start circulating around that very shortly.

 4             Michael?

 5             COMMISSIONER BOSKIN:           I think your points and

 6   Richard’s points are very well taken, and if I could maybe

 7   elect to try to assist right now in fleshing out kind of

 8   the process and the structure.

 9             CHAIR PARSKY:       Okay.

10             COMMISSIONER BOSKIN:           Obviously, we’re going to

11   see if we can come up with a reform package that may leave

12   some elements of the current system in place.                 It may

13   change others, it may junk the whole thing for something,

14   whatever it is -- and hopefully we can, but in any event.

15             Then, there have been a whole bunch of more

16   specific proposals which might be superseded if we came up

17   with a package or not.

18             Then there are a whole bunch of, as you put it,

19   ideas that are related to the tax system, but may be more

20   on the budgeting side and on other aspects of our fiscal

21   and the large system, including regulation and spending

22   and intertemporal movements of funds, et cetera.

23             And it seems to me that it would be a good idea

24   to leave here with a process for not just vetting those,

25   but for structuring those.         So if someone could envision,

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482             25
                Commission on the 21st Century Economy – June 16, 2009


 1   for example, either -- since it’s not in our direct

 2   purview, it would be somewhat presumptuous of us as a

 3   commission, I think, to say, “Do this on the spending

 4   side.”    But we could say, in addition to these things, we

 5   recognize the close interaction of taxes and spending for

 6   many reasons.     The reason we have taxes is so we can have

 7   revenue to spend on various government functions, and we

 8   need to have an effective government.

 9               The reason -- so they’re closely related; but we

10   should either have -- there may be a few that everybody on

11   the Commission would agree to, and we could maybe separate

12   it into things where there was unanimity or overwhelming

13   consensus, and those where at least a few commissioners

14   thought that ought to be looked into.                And that would give

15   an opportunity for some ideas which we haven’t had time to

16   flesh out, but that several members thought without all

17   the others feeling since they hadn’t thought about it or

18   don’t agree with it, that they have to keep it out of the

19   report.   So we could have two separate categories of that

20   sort, it seems to me.

21               The one area that falls between, which I think

22   ought to be included within the body of the report and our

23   main recommendation, are the administrative and regulatory

24   things with respect to the tax system.                 We heard some very

25   compelling evidence, and I’m sure virtually everyone in

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482          26
              Commission on the 21st Century Economy – June 16, 2009


 1   this room has had some experience just by the mathematical

 2   laws of probability, of having some screwy thing go on

 3   with the administration of the state tax system.                   And we

 4   had all this compelling discussion.

 5                And maybe I’ll defer to Richard and Chris and

 6   the lawyers, et cetera -- but that we have an adjudication

 7   mechanism where one of the two sides is the judge.                   And

 8   that just seems that’s kind of prima facie outrageous in a

 9   democracy.    And I think there was kind of strong consensus

10   that setting up an independent adjudication mechanism of

11   some sort -- and if we could get a small list of those

12   things, we could include those.             But they’re really

13   specific to the tax system as opposed to the larger fiscal

14   system, and spending and deficits and borrowing and

15   lending and so on.

16                CHAIR PARSKY:      Any other comments?

17                I would just say that -- I’m sorry, go ahead,

18   Chris.

19                COMMISSIONER EDLEY:         Thank you, both -- all

20   three of you for those comments.

21                The only thing I want to add is that I don’t

22   feel as though we’ve directly engaged the 21st-century

23   dimension of our charge as yet.             And that gives me a

24   little bit of concern.         And I hope we’ll have an

25   opportunity to discuss what that might entail.                    Because

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482                27
                Commission on the 21st Century Economy – June 16, 2009


 1   apart from the carbon-tax ideas, while I recognize that

 2   there’s nothing new under the sun, I think we ought to

 3   give it a little bit more cogitation.

 4               CHAIR PARSKY:       Michael?

 5               COMMISSIONER BOSKIN:           As perhaps the person here

 6   with the most cognizance of long-running economic history,

 7   I think that’s a good point, but we’re nine years into the

 8   century.   If we went back a century, we would have an

 9   economy with the same standard of living as Argentina,

10   life expectancy of 43.         If we went back 20 years, probably

11   a quarter of the products we use in our daily life didn’t

12   exist.

13               So my interpretation –- everybody is free to do

14   this the way they want -- maybe we should have a more

15   thorough discussion of it -- is that at least now, and

16   in the next few years, we know some things have changed

17   relative to when the tax system was set up.                    Services have

18   grown relative to goods, for example.                But trying to

19   exactly get the idea of what the economy will look like,

20   we wouldn’t even get agreement around the table, I’m sure

21   what we’d like it to look like 50 years from now.

22               So I think, at a minimum, we can take account of

23   things that have changed up to now, relative to some

24   decades ago, when many features of the tax system were

25   put in.    That’s how I’ve interpreted the spirit of the

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             28
                Commission on the 21st Century Economy – June 16, 2009


 1   21st century, rather than trying to guess or have us

 2   engineer -- try to engineer what the economy will look

 3   like.    I think that’s very problematic, in my opinion.

 4   I think that none of us would be prescient enough to tell

 5   us what the economy will look like in 20 or 30 years, let

 6   alone in 90 years from now.

 7                CHAIR PARSKY:      I do think your point is well

 8   taken in terms of -- I think we can and should be in a

 9   position to summarize where the economy has come as

10   opposed to predicting where it will go in terms of shifts.

11   And that, it seems to me, we ought to be in a position to

12   be able to recite, in some form, in the report.

13                Now, we may not have had an adequate enough

14   discussion of that, and we should make sure we do.                  But

15   I didn’t interpret, Chris, what you were saying as trying

16   to predict where the economy will go.

17                COMMISSIONER EDLEY:         Well, I’m not sure what I

18   meant.

19                But Michael’s -- look, I agree, obviously, that

20   thinking about what the economy might look like in the

21   future is, if not a fool’s errand, let’s just say that

22   there’s increasing amounts of uncertainty to it as one

23   looks out.

24                On the other hand, I would think that there are

25   some important trends about which we could be reasonably

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482              29
              Commission on the 21st Century Economy – June 16, 2009


 1   confident, or at least confident enough for those to be

 2   the predicate for policy judgments.

 3             For example, what’s happening with sales, with

 4   services, the service sector.          Are there trends that we

 5   should expect with respect to the share of household

 6   income derived from salaries and wages versus other

 7   sources of income.

 8             Are there competitive strategies being adopted

 9   by other jurisdictions increasingly, which we ought to try

10   to anticipate and counter?

11             So I’d just like us to keep it in mind because,

12   frankly, looking at the -- if one looks at the set of

13   prescriptions that emerge from this commission, and there

14   is nothing that’s forward-looking, then I think reasonable

15   observers might conclude that we really weren’t trying to

16   prepare the state for the generation ahead and we’re being

17   purely reactive.

18             CHAIR PARSKY:       Becky?

19             COMMISSIONER MORGAN:           I think that I would agree

20   with Chris that we have not had much discussion on what

21   today and 20 years from now is likely to look like.

22             I do have a report from the Bureau of Economic

23   Analysis that shows California in the second lowest

24   quartile of growth.      And of 21 factors that are growing,

25   only four of them are two-digit growth, i.e., 20 percent

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482        30
                 Commission on the 21st Century Economy – June 16, 2009


 1   or 40 percent.       And if we’re looking at taxing what’s

 2   growing -- not taxing towards growing so it will keep

 3   growing, those kinds of statistics that are put out by the

 4   Bureau of Economic Analysis might be worth looking at.

 5   But I certainly would like California, as I look at this

 6   map of the states all around us that are in the highest

 7   quartile of growth -- economic growth -- I’d like to get

 8   there for California.         And our current policies don’t get

 9   us there.    So that’s what I’m looking at:                 Can we develop

10   policies that will bring us higher in the country, in our

11   economic standing.

12               CHAIR PARSKY:        George?

13               COMMISSIONER HALVORSON:              My sense, from

14   observing what’s been happening lately and a little bit of

15   what we’ve learned in this commission, is that the state

16   goes from budget crisis to budget crisis.                   We’re

17   constantly dealing with crisis decision-making.                      We’re

18   making short-term decisions all the time in the context of

19   a long-term world.        And as a result of that, we’ve got

20   setbacks in multiple areas relative to our schools or

21   infrastructure, basically, the overall operations of

22   California.     And we really need -- and this was kind of

23   21st century -- we really need a vision for where we’re

24   going.   We need to have a sense of where are we going with

25   the state, what are the revenue needs going to be in the

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482                31
              Commission on the 21st Century Economy – June 16, 2009


 1   future, what are the expense needs, what are we going to

 2   do with the school system, what are we going to do with

 3   our colleges, what we going to do with our streets and

 4   roads, what’s that going to cost us?              And then we need to

 5   work backward, I think, from that vision, and think of it

 6   as a multiyear vision, and create a revenue flow that

 7   supports and sustains that.         And that needs to be a

 8   combination, I think, of some kinds of reserving for the

 9   good times to get us through the bad times; but also some

10   flexibility relative to revenue, so that when we get to a

11   crisis point, we don’t go back in and impair the

12   infrastructure or impair the vision, but we can actually

13   get through the time period.          Some combination of

14   borrowing, some combination of tax increases -- there has

15   to be some revenue flexibility.           Because if we don’t

16   create a smoothing, then we are going to perpetually be

17   damaging our ability to achieve the vision.

18             And if we start with a vision and have a really

19   clear sense of what we want California to be, and then

20   work backward from that to figure out the plan, and then

21   work backward from the plan to figure out the funding,

22   I think we’ll be doing the state a major service.

23             When we get into our funding decisions, if we

24   make them in that context, I think we’ll be better served.

25             CHAIR PARSKY:       That’s certainly an appropriate

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482         32
                Commission on the 21st Century Economy – June 16, 2009


 1   comment.

 2              I just would urge the Commissioners to keep in

 3   mind that our task is not to determine the size of

 4   government and the magnitude of services that the

 5   government of California should provide.                 That’s really

 6   up to the elected officials.            And when we get into a

 7   discussion of revenue-neutrality, I think this will come

 8   out more clearly.

 9              That, ultimately, whatever we recommend, I do

10   think that the Legislature is committed to act on.                  But

11   the amount of revenues to be created and the amount of

12   expenditures to be made is a decision for them to make.

13              We can certainly make reference to the need for

14   reforms and how the process goes; but the Commission was

15   certainly not created in order to do the job of the

16   elected officials.

17              COMMISSIONER HALVORSON:              We don’t need to pick

18   the amount of money that’s spent, but we should have a

19   vision for California and know what that vision is going

20   to cost us.    And that ought to be the Legislature, and

21   then we as a Commission can help figure out how to have a

22   revenue source that gets there.

23              So I don’t think we should set the -- I’m not

24   suggesting that we set the revenue level, but I’m saying

25   that this crisis-to-crisis mode doesn’t make any sense,

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482              33
               Commission on the 21st Century Economy – June 16, 2009


 1   and we need a smoothing process that will be far superior.

 2             CHAIR PARSKY:        I think you’ll see in some of the

 3   analysis that’s done, that any one of the packages would

 4   address that issue in a much better way than the existing

 5   system, which is part of the measure.

 6             COMMISSIONER POMP:           Three points.          Three good

 7   points.

 8             First, I’d like to just reinforce the good

 9   doctor’s observations on improving the administration,

10   the tax system.     We had very thoughtful inputs from the

11   American Bar Association.         We had a presentation orally

12   that was very insightful.         This helps enhance the business

13   climate in some intangible way.

14             Second, no matter what the level of government

15   is, we have all the great questions that you started

16   today’s meeting with.       So these are really independent of

17   whatever level the Legislature ultimately chooses.

18             The third point, I’ll tell you what’s a little

19   missing, and it picks up on the dean’s point, and there’s

20   still time, it would be useful to hear from the SBE and

21   the FTB on what changes in the economy, of a technological

22   nature, have meant for the challenges of applying the

23   existing statute.      You know, concept of delivery, a very

24   critical concept.      It is a completely new challenge to

25   determine what “delivery” means in an era where I can send

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482                34
               Commission on the 21st Century Economy – June 16, 2009


 1   you an e-mail attachment, and you could download it on a

 2   plane.   I no longer know where it is being delivered.

 3              You know, it sounds like such a pedestrian

 4   example, but it’s a very important example, and it’s sort

 5   of emblematic of the changes in the economy and the

 6   challenges they pose for traditional statutes.

 7              And it might be useful to get something in

 8   writing from both sales tax and corporate income tax,

 9   probably less so personal income tax, but I don’t know --

10   just seeing what the Internet and the whole technological

11   revolution has meant in terms of the existing statutes.

12   And it may bolster some of the proposals and move to a

13   different method of taxation.

14              CHAIR PARSKY:       I think those are good

15   suggestions.

16              Okay, let’s now move to the next item on our

17   agenda, which is a presentation, and then a discussion of

18   a business receipts tax.

19              Let me just say that our commission engaged Bob

20   Cline and Ernst & Young to help us with an analysis of

21   this new form of tax.

22              And I’ll let Bob introduce his long title that

23   is on that card.     But I’ve had an opportunity to spend

24   some time with Bob, along with our staff.                 And I think he

25   comes with a very strong reputation in this area.

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482           35
                 Commission on the 21st Century Economy – June 16, 2009


 1                I would just urge the commissioners to let him

 2   go through his analysis, then we’ll come back and engage

 3   fully in a discussion, question-and-answer session.

 4                Bob, if you’ll introduce your long title, that

 5   would be helpful.

 6                MR. CLINE:      All right.          Mr. Chairman, Members of

 7   the Commission, thank you for giving me an opportunity to

 8   talk with you today about some of the preliminary results

 9   of analysis we’ve done, looking at the concept called a

10   “net-receipts tax.”

11                I am in the national tax practice at

12   Ernst & Young.       I’m National Director of State and Local

13   Tax Policy Economics.         And what I am is an economist.

14   That’s how I view the world and the type of words that I

15   use.   I’m not an accountant, and I’m not a tax lawyer.               So

16   I’m probably --

17                CHAIR PARSKY:       To some, that’s welcome relief.

18   To others…

19                MR. CLINE:      No comment.         Yes.    Not being

20   judgmental, but I am an economist that has spent most of

21   my professional career on state and local tax policy

22   issues.   And I’ve testified in a number of different

23   states, to tax commissions, to legislative committee

24   meetings.    And whenever the topic comes around to tax

25   reform, I’m often asked in my presentation, the first

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482         36
               Commission on the 21st Century Economy – June 16, 2009


 1   question often is, “Tell us what the lighthouse state is.

 2   Tell us which state has the right system.                  Tell us where

 3   we ought to look for the state of the art.”                    And, of

 4   course, I have to start out with saying, there is no such

 5   thing.   Every state is absolutely unique in terms of its

 6   economy, its traditions, its current tax system, and its

 7   future direction.

 8                You can learn from the experience of others, but

 9   it is a California discussion.             And, unfortunately, there

10   isn’t that best practice that you can pick up on.

11                So let me talk a little bit –- and,

12   Mr. Chairman, with your direction, I’ll try to keep my

13   remarks focused and talk about what you think is

14   important.    And I know you won’t let me ramble on in

15   different directions.        So I’d like to focus on what is of

16   interest to you folks.

17                Just very quickly, in terms of what I’d like to

18   do, although you can’t adopt another state’s tax system,

19   there are lessons to be learned, especially over the last

20   three or four years.        California is not alone at creating

21   tax-study commissions and looking at alternative ways of

22   taxing households, as well as business.                 So maybe there

23   are some insights, some lessons to be learned.

24                I want to talk just briefly about what are some

25   of these new taxes bases that other states are considering

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             37
               Commission on the 21st Century Economy – June 16, 2009


 1   and of which several states have actually adopted.

 2              I’ll talk about my interpretation of the concept

 3   of a net-receipts tax.        In working with the staff and the

 4   chairman, we’ve talked about the concept of a net-receipts

 5   tax.   But I want to make sure you understand what we’re

 6   estimating as we look at our analysis.                And then talk

 7   about the preliminary estimates of the dollar amounts that

 8   might be raised from the tax base, as well as just initial

 9   discussion of who may bear the burden of the tax when the

10   dust finally settles and if a new tax is implemented.

11              So that’s the agenda.

12              This isn’t really a disclaimer, but just to

13   reiterate what the chairman said, is that we were asked

14   to look at -- to analyze the revenue impact of the

15   incidence, the economic incidence of a new concept, the

16   net-receipts tax for California.               And I just want to

17   reiterate that Ernst & Young and I will have no positions,

18   no recommendations on the policy side.                We will try to

19   provide you with the insights and information that may

20   help you make some decisions about the direction you want

21   to move in.

22              Let me very quickly tell you what I have heard

23   in other states about the objectives that states are

24   pursuing -- legislators, commissions, governors, and

25   others.

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482            38
               Commission on the 21st Century Economy – June 16, 2009


 1              What are they trying to accomplish with their

 2   business tax reform?       And I think, Mr. Chairman, it’s

 3   going to reiterate some of those objectives that you’ve

 4   already outlined.

 5              I put at the top, “States are trying to improve

 6   their business tax competitiveness.”               And they’re talking

 7   about the system of business taxation, everything from the

 8   property tax, to sales tax on business inputs, to the

 9   corporate income tax, and beyond.              They’re talking about a

10   system of taxation; and states are concerned about how

11   competitive their current systems are compared to other

12   states.   So that’s a key issue.

13              They’re making changes that reduce the taxes

14   on mobile capital.      And other than buildings set in

15   concrete that might last for decades and decades, most of

16   the capital that business invests today is mobile.                 It

17   may take four or five years to move from one location to

18   another if the economic conditions change or public-policy

19   conditions change, but most capital invested by business

20   today is mobile.

21              So states are looking at how to reduce taxes on

22   mobile capital, including property-tax reductions.                 And

23   I’ll talk a little bit about Ohio, Texas, and Michigan.

24   And all three of those reform efforts had a substantial

25   property-tax component.

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482              39
                 Commission on the 21st Century Economy – June 16, 2009


 1               And I know that that may not be the California

 2   situation, but I just wanted to point out that that is

 3   part of what states are up to.

 4               They’re looking for ways to shift the tax burden

 5   out of state.      That’s always -- it’s a time-honored

 6   approach to state business taxation, in particular.

 7   They’re looking for ways in order to extend the tax reach

 8   beyond the borders of the state.                 That would include, for

 9   example, trying to figure out a way to impose a tax that

10   doesn’t come under the restrictions of Public Law 86-272,

11   which restricts the application of a net income tax on

12   business.

13               They’re also trying to figure out how to collect

14   the sales tax from out-of-state sellers that sell into the

15   state.   And that’s the question of the Quill case, in

16   protecting out-of-state sellers from being a taxpayer in

17   a state.    These issues are important.               They’re

18   cross-border issues of how to expand the scope or the

19   extent of taxation.

20               Point Number 2, though -- clearly, Mr. Chairman,

21   you emphasized this one earlier -- they’re looking for a

22   more stable source of revenue.              Just a reminder of where

23   we’ve been.     The corporate income tax fell 24 percent in

24   the last recession, 2001 -- 2000, 2001 -- it fell

25   24 percent.     In the last five years, state corporate

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482         40
                Commission on the 21st Century Economy – June 16, 2009


 1   income taxes have gone up -- have more than doubled.

 2   They’ve increased 115 percent.             And so far, this

 3   recession, they’re down 20 percent, just a reminder of

 4   how volatile the corporate income-tax base is.

 5              States are trying to find a way to tax all

 6   forms of doing business, not just C-corporations.

 7   S-corporations, pass-through entities -- all forms of

 8   doing business.

 9              The argument is broader base, lower rates, less

10   economic distortions.        And those are usually considered to

11   be pluses for a state and local tax system.

12              They are, as I mentioned, trying to find

13   effective ways to tax those cross-border sales under the

14   sales tax or consumption taxes in the light of the Quill

15   restrictions on states’ abilities to tax out-of-state

16   sellers.

17              And finally, states are changing their

18   perspective on how to think about business taxation.                I

19   think -- I would say the tradition has been more in the

20   line of, thinking about businesses in terms of

21   profitability and, therefore, having an ability to pay

22   taxes out of their current flow of income.

23              The subtle shift, or not-so-subtle shift, is a

24   perspective that says that more weight is being given to

25   the benefits perspective.          Whether a business is

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482            41
              Commission on the 21st Century Economy – June 16, 2009


 1   profitable or not, it’s using state and local government

 2   services, and should pay a fair contribution to cover the

 3   cost of those services.

 4                And so to understand that distinction, property

 5   tax, more of a benefits tax, doesn’t depend upon your

 6   level of profitability directly.                Corporate income tax

 7   certainly, definitely linked to your ability to pay or

 8   your net income.

 9                All right, now, here’s a table I have been using

10   in my presentations that is more information than we want

11   to talk about right now.          But I’ve put this together in

12   trying to describe what states are up to and what are

13   these different business taxes floating around out there.

14   So this is my taxonomy of new state business taxes.                   And

15   they’re ranked from the top to the bottom in terms of the

16   total size of the tax base, roughly.

17                So at the top, you have general gross-receipts

18   taxes, like the new Ohio commercial activities tax, called

19   the “CAT.”

20                The traditional, the old guard, Washington state

21   business and occupation tax, the B & O tax.                    The base is

22   basically gross receipts of a business, whether those

23   receipts come from selling to final consumers, to

24   households, to other businesses in terms of selling them

25   inputs, gross-receipts taxes.            You have a sale, it’s in

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             42
                 Commission on the 21st Century Economy – June 16, 2009


 1   the base and subject to taxation.                Very broad base.

 2               Texas, under their new margin tax, has one

 3   option you could choose, which says that your base is

 4   70 percent of gross receipts.             So it’s floating around in

 5   the new system in Texas.

 6               There’s a modified gross-receipts tax.                    That’s

 7   a tax base that’s now has appeared in Michigan.                      Michigan

 8   replaced its old single-business tax with a new Michigan

 9   business tax.      Two components:          One is a gross-receipts

10   tax with modifications, and the other is a business-income

11   tax.

12               Their modified gross-receipts tax is gross

13   receipts minus your purchases of tangible personal

14   properties from other companies, to try to get rid of the

15   pyramiding and the multiple taxation that occurs if you

16   tax all those transactions under a gross-receipts tax.

17   So they’ve subtracted out purchases of tangible personal

18   property.    The base gets more narrow as they make the

19   subtractions.

20               Value-added tax comes next.               Now, the

21   value-added tax, which really has been around for quite a

22   while -- when I was kind of reviewing my notes, it turns

23   out that Michigan actually had something what they called

24   the “business-activity tax” they adopted in 1953, which

25   was a modified value-added tax.              It happened one year

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482              43
               Commission on the 21st Century Economy – June 16, 2009


 1   prior to France adopting the credit invoice value-added

 2   tax.   Michigan actually had a value-added tax before

 3   Europe did, by one year as it turns out.

 4              Their single business tax was the latest version

 5   of that that was adopted in 1975, and died a not-too-quiet

 6   death in -- where are we -- 2007.

 7              But for about 50 years, Michigan experimented

 8   with different versions of a value-added tax.

 9              New Hampshire does have a value-added tax.

10   It’s called the “business-enterprise tax,” which works in

11   combination with their corporate tax, or their business

12   income tax.

13              What’s the base here?           Gross receipts minus the

14   purchase of tangible personal property from other

15   companies, minus services purchased from other companies.

16              So once you move to the value-added tax, you’re

17   subtracting all purchases from other companies.                    And that

18   is sort of truly getting at eliminating this pyramiding

19   that occurs under a gross-receipts tax, or the old

20   European turnover tax.        The same type of problem.

21              And so you kind of see, as you make these

22   subtractions, you’re moving down the list.                    Then you have

23   a gross-margin tax, another version of Texas.                   Gross

24   receipts minus cost of goods sold, which includes

25   purchases of tangible personal property, but it includes

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482              44
              Commission on the 21st Century Economy – June 16, 2009


 1   a lot of other things.        But that’s one version of three

 2   bases in Texas.

 3             Texas also has the third version, which is the

 4   labor-adjusted tax base, gross receipts minus labor costs.

 5             Now, you choose one of these three bases.                    You

 6   don’t get multiples in Texas, but you choose the one that

 7   gives you the lowest liability.

 8             And then as we get to the bottom of the table,

 9   you’ve got the business income tax, the income tax applied

10   to all forms of doing business, basically.                    And finally,

11   you’ve got the corporate income tax, net income tax only

12   applied to the corporate sector.

13             And the world consists of this combination,

14   this bundle.   The U.S. states are using some -- this

15   combination of different ways to think about a

16   business-entity tax designed to raise substantial amounts

17   of revenue.    There are other smaller taxes, net-worth

18   taxes and others, but these are the major business taxes.

19             Now, I think in terms of thinking ahead and the

20   experience from other states, I think the real issue is

21   what’s going to happen to these gross-receipts taxes in

22   Ohio, Texas’ version, Michigan’s version.                 What’s going to

23   happen over time?     I think the business community will

24   press for more and more subtractions from the base.                   And

25   if they do, these taxes that are gross-receipts taxes

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482              45
                Commission on the 21st Century Economy – June 16, 2009


 1   today might look more like a modified value-added tax in

 2   the not-too-distant future.           But that’s a little bit of

 3   speculation on my part.

 4               The size, these taxes matter.               They differ in

 5   size, they differ potentially in economic impact,

 6   competitiveness, stability, what have you.

 7               Just some back-of-the-envelope numbers for you,

 8   really.    We said, what if you wanted to raise $50 billion

 9   nationwide from one of these alternative bases?                     What kind

10   of rate would you need?         So it’s not a California example,

11   it’s no specific state example.

12               Corporate income tax, about 5.8 percent,

13   averaged over all the activity in the U.S.

14               A business income tax including not only C-corps

15   but all other forms of business, 3.3 percent is the rate

16   that would raise $50 billion.

17               The value-added tax, pretty close to 1 percent.

18               And a gross-receipts tax, .3 percent.                   And that

19   just shows you why the gross-receipts tax is a very, very

20   powerful base.      It includes all those final sales, but

21   also all those intermediate sales of one business to

22   another.   And that’s why you can use a .3 percent rate to

23   collect $50 billion nationwide.

24               So it gives you some idea of the size of these

25   bases.

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482              46
                 Commission on the 21st Century Economy – June 16, 2009


 1               So they’re different taxes, they clearly have

 2   different sizes, and raise different amounts of revenue.

 3               Now, Mr. Chairman, if you would kind of give me

 4   guidance here.       I’ll just mention a few things about the

 5   recent experience.        And we may come back to these in

 6   questions and answers.          But Ohio, really back in 2005,

 7   Ohio was still reeling from the 2000, 2001 recession.

 8   They had lost 200,000 jobs in the state of Ohio.                     And they

 9   wanted to change.        They felt that whatever they did,

10   whether on the spending side, the revenue side -- they

11   needed to do something to strengthen their economy and to

12   grow the jobs.       So they threw out the corporate income

13   tax, the property tax on tangible personal property, got

14   rid of the net-worth tax, and made a number of other

15   substantial changes.

16               It resulted in the adoption of a new tax -- this

17   was the gross-receipts tax.            The rate was .26 percent --

18   it still is.      Up to $1 million of your gross receipts, you

19   pay $150.    Beyond a million dollars, you pay 2.26 percent

20   times the excess revenue.           And so, in effect, you don’t

21   file a return unless you have $150,000 of receipts and you

22   don’t start paying at this .26 percent rate until you have

23   a million dollars of receipts.

24               Just an example we’ll come back to, is that it’s

25   important to figure out what size of kind of minimum

                      Daniel P. Feldhaus, CSR, Inc.   916.682.9482             47
                Commission on the 21st Century Economy – June 16, 2009


 1   filing threshold or exemption these new systems should

 2   have, because there’s an awful lot of small businesses out

 3   there that you probably don’t want to be in a new tax

 4   system.    So the minimum threshold kind of takes those

 5   businesses out.

 6                Ohio applies to all forms of doing business and

 7   most industries.      There are a few exceptions.               But it’s a

 8   very broad tax in terms of the types of businesses and

 9   industries.

10                They adopted economic nexus.              This was important

11   to them.   They said that if you’re selling into the state,

12   even if you don’t have payroll and property or a physical

13   presence in the state, you’re going to be a taxpayer.

14   It’s the economic-nexus provision.               Now, that was

15   important because they thought that they had to protect

16   the in-state companies from competition that wouldn’t have

17   to pay the CAT tax.

18                As I mentioned, they eliminated a number of

19   taxes.    And they actually cut overall businesses taxes by

20   about $1.4 billion as part of their reform package.                   The

21   jury is out as to whether or not those cuts will stick in

22   this fiscal environment.          But so far, the package has been

23   unchanged.

24                The state and the Legislature maintains that

25   Public Law 86-272 doesn’t apply to this new tax.                    It’s not

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               Commission on the 21st Century Economy – June 16, 2009


 1   an income tax.     And, therefore, you’re not protected in

 2   any way in terms of selling into the state of Ohio.

 3              They phased in over five years -- which I think

 4   is a point worth noting -- new systems, replacing old

 5   traditional systems, there are risks, there are risks in

 6   understanding if you got it right the first time, risks in

 7   revenue forecasting.       Ohio decided to phase the old one

 8   out and the new one in over a five-year period.

 9              The revenue, in the first few years, have

10   actually come in stronger than predicted or forecasted at

11   the time the tax was adopted.

12              Very briefly on Texas.              I’ve already set Texas

13   up, and they threw out the old income/net-worth tax on

14   business, adopted the margin tax.              Three different bases.

15   You choose the one that gives you the minimum liability.

16   It certainly adds complexity to the new system.                    But what

17   they were trying to do is to keep the distribution of tax

18   liabilities across industries and across tax size,

19   taxpayer size categories to a minimum.                So they put in a

20   lot of bells and whistles to make the new system match up

21   closer to the old system in terms of liabilities.                   And

22   that’s not easy when it’s a different base from the old

23   system.   So you end up with this kind of new package.

24              Unlike Ohio, they increased taxes on business

25   substantially in their package, and they redistributed a

                    Daniel P. Feldhaus, CSR, Inc.   916.682.9482               49
                Commission on the 21st Century Economy – June 16, 2009


 1   lot of taxes from one industry to another and from one

 2   type of business to another.

 3              They used the destination sales apportionment

 4   formula.   100 percent sales coming in to the state

 5   determines the amount of your margin U.S.-wide that goes

 6   into Texas.    They said Public Law 86-272 is not

 7   applicable, and they require mandatory combined reporting,

 8   something California has had for years, so that’s not

 9   anything new for you.

10              They didn’t phase in the new tax.                   It came in

11   full-blown.    Unfortunately, the first year, revenue came

12   in 20 percent below the forecast.

13              I know you’ve asked some questions about how

14   reliable our initial estimates are of some of these new

15   bases.   Texas -- I think Ohio got it right, Texas did not.

16   They’re down about $2 billion in expected tax collections.

17              And already -- I mentioned earlier that you have

18   to pay attention to these minimum fees -- or the minimum

19   threshold, not fees -- but minimum threshold before a

20   taxpayer files a return.          Texas started out with a

21   $300,000 minimum threshold.           This year, the Legislature

22   just passed a bill that will increase it permanently to

23   $600,000, and temporarily to $1 million.                 And the argument

24   is, they don’t want those low-profit, small businesses in

25   this recession being hit with substantial new taxes under

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482                50
              Commission on the 21st Century Economy – June 16, 2009


 1   the margin tax.    So they’re already changing that minimum,

 2   thinking that they didn’t get it right the first time,

 3   the minimum threshold.

 4             Michigan.      As I mentioned, Michigan’s been

 5   experimenting for 50 or 60 years, trying to figure out how

 6   they should tax business.        In 1953, they actually had a

 7   business-activities tax, which is a subtraction method

 8   that you take gross receipts minus purchases from other

 9   companies with limitations, and that’s the tax base.

10             They abandoned it in 1967.              And just as kind of

11   a footnote to history, the governor who pushed for

12   eliminating the business-activities tax was George Romney.

13   And George Romney, as you may remember, was president of

14   American Motors.    And American Motors back in those days

15   lost money year after year after year.               And George Romney

16   argued strongly that the business-activities tax, based

17   upon modified value-added, was taxing his company when it

18   wasn’t making any money.        And he was a strong proponent of

19   making the change.

20             And then in 1975, the business community and the

21   Legislature brought back the value-added tax after a run

22   of two recessions and sharp fiscal problems that brought

23   back the value-added tax as a single business tax; and

24   it lasted until, as I said, 2007, when it was replaced

25   with this new business income tax plus a modified

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                 Commission on the 21st Century Economy – June 16, 2009


 1   gross-receipts tax.

 2               Unfortunately, they’ve already hit business with

 3   a 22 percent temporary tax increase on top of these

 4   original rates that were in effect for one year because

 5   of the fiscal crisis in Michigan.                Again, nothing to be

 6   learned there perhaps because of the uniqueness of

 7   Michigan.    But they’re changing; they continually tinker

 8   with their system of business taxations.

 9               The gross-receipts tax in Michigan raises

10   about two-thirds of the total revenue, the modified

11   gross-receipts tax.         It applies to most businesses.

12   Destination tax, economic nexus, kind of 100 percent sales

13   factor apportionment coming in to the state.

14               They did allow a subtraction for the purchase of

15   tangible personal property to sort of get at that

16   pyramiding, to reduce pyramiding, business-to-business

17   sales being taxed.        But they weren’t willing to go back to

18   a pure version of value-added taxation by also allowing a

19   subtraction for services purchased from other companies.

20   So they’re in the twilight zone again, between one system

21   and another.

22               A lot of targeting credits were still in the new

23   system.   Significant property tax reductions.                   And what

24   was clear from the figures is that the new system in

25   Michigan, as has been the case in Texas and Ohio, the new

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               Commission on the 21st Century Economy – June 16, 2009


 1   systems will shift the tax liability from businesses in

 2   the manufacturing capital-intensive sector to businesses

 3   that are more labor intensive and more likely to be in the

 4   service sector.     There are reasons for that shift, some

 5   intended and some unintended.           But that’s a general

 6   conclusion from the other state experiences.

 7              COMMISSIONER BARRALES:              Services –- are we

 8   holding up questions?

 9              CHAIR PARSKY:       Hold on.

10              Bob, go ahead.

11              MR. CLINE:      I’ll make a note on services.

12              CHAIR PARSKY:       There will be several.

13              MR. CLINE:      Okay.     New Hampshire, briefly since

14   New Hampshire is the state that continues to have a

15   modified -- a value-added tax, just briefly, they kept it

16   in parallel with their current corporate business income

17   tax.   It actually applies to more forms of doing business

18   than just C-corporations.         It includes pass-through

19   entities, although their tax liabilities are very small in

20   New Hampshire.

21              You pay the business-enterprise tax at

22   .75 percent of this modified value-added, and you pay a

23   corporate income tax, a business income tax of

24   8.5 percent; but you get to take the business-enterprise

25   tax, the modified value-added tax, as a credit against the

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                Commission on the 21st Century Economy – June 16, 2009


 1   business-profits tax.        And so the way I think about it is

 2   that you calculate your tax under the two different

 3   approaches and pay the larger of the two.

 4                So you have a lot of firms that will probably

 5   always be in the business-enterprise tax based upon

 6   value-added.     Other firms may always stay in the business-

 7   income tax camp.      But they are interacting, the two

 8   systems.

 9                They adopted it because they wanted stability,

10   neutral taxation that doesn’t tax capital more heavily

11   than labor.    They wanted a more neutral economic impact.

12   They wanted to broaden the base, to make sure they got

13   more revenue from all forms of doing business and all

14   industries.    And they were also intentionally going for

15   increasing the number of taxpayers that were taxable in

16   the state.    For example, those that used to be protected

17   by Public Law 86-272.

18                All right, so there is experience out there with

19   taxes --

20                COMMISSIONER BOSKIN:          Could you just briefly

21   summarize that public law?

22                MR. CLINE:     As an economist, I will try.

23                Public Law 86-272 was passed -- and Mr. Pomp

24   can help me out here -- was passed because states were

25   attempting to tax businesses that had only peripheral,

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482        54
                Commission on the 21st Century Economy – June 16, 2009


 1   only minor contacts with the state, perhaps just sending

 2   in salespeople to take orders and then ship the orders out

 3   of state to be filled and to have products shipped into

 4   the state.

 5                And because the states were being fairly

 6   aggressive, the business community and others went to

 7   Congress and said, “That’s overreaching by the states,

 8   they’re taxing interstate commerce that is beyond their

 9   reach,” and Congress passed Public Law 86-272.                      As I

10   understand it, it was a temporary law change that said

11   that the state cannot impose the corporate income tax on

12   a business whose only presence in the state is this sort

13   of solicitation of sales to be serviced outside the state

14   and for goods to be shipped into the state by common

15   carrier.

16                So it really did prevent a number of businesses

17   from being taxpayers under the corporate income tax.

18                It’s still there, but --

19                COMMISSIONER POMP:         It’s a throwback.

20                MR. CLINE:     That would -- yes.

21                A number of other issues dealing with these

22   interstate issues.       The cross-border issues, we’ll come

23   back to in just a few minutes.

24                What is the net-receipts tax?              Again, as I

25   understand it, after talking to the staff and the

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              Commission on the 21st Century Economy – June 16, 2009


 1   chairman, this is how I would describe the tax that we’re

 2   looking at.    The tax base can be thought of two ways:

 3             Number 1, and I think the simplest way to

 4   describe it, the tax base is total revenues of a company

 5   minus all of its purchases from other companies, whether

 6   it’s tangible personal products -- tangible products,

 7   services -- all your purchases would be subtracted from

 8   your gross receipts to get the tax base.                 Of course, that

 9   is, as I’ve already mentioned, a value-added tax.                   That’s,

10   I think, the right way to think of it from an economic

11   perspective.

12             But there’s a different way to look at it.                    You

13   should get exactly the same base, in theory, if not in

14   reality in practice, you should get exactly the same                   base

15   if you say, “Where did the difference between total

16   revenue and total purchases go?”                Well, that’s cash the

17   business had.    What did they do with the cash?                  They paid

18   it in wages and salaries and compensation, including

19   fringe benefits.      They paid it in interest to bondholders

20   or for loans.    They paid it in terms of distributed

21   earnings to investors, capital investors, and they kept

22   some of it as retained earnings.

23             And so the value-added tax could also be thought

24   of as the sum of all the payments that a company makes for

25   the factors that it uses, capital plus labor.

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482             56
              Commission on the 21st Century Economy – June 16, 2009


 1             Sometimes it helps to think of it as total

 2   revenue minus purchases from other firms.                Other cases,

 3   it helps to think of it as the sum of all the payments to

 4   the factors that a company uses in manufacturing or

 5   producing goods and services.

 6             And I’ll probably bounce back and forth in

 7   answering some of your questions, because they really

 8   should be equivalent if you structure them correctly.

 9             But a key feature of what we think the

10   net-receipts tax is that the Commission asked us to look

11   at, the net-receipts tax would allow immediate expensing

12   of capital equipment.      So when I mentioned that the base

13   could be total revenue minus total purchases from other

14   companies, that includes buying a building or buying a new

15   machine or constructing a building.              The purchase of

16   capital equipment is also immediately deductible against

17   your gross receipts.

18             Now, for those in the know, that’s immediate

19   expensing of capital spending.           It can’t get much more

20   generous than that in terms of reducing the taxes on the

21   flow of income from capital.

22             COMMISSIONER BOSKIN:           Well, we have had

23   investment tax credits, for example.

24             MR. CLINE:      That is correct.           And you could

25   always drive the taxes to negative taxes, so that you

                   Daniel P. Feldhaus, CSR, Inc.   916.682.9482              57
              Commission on the 21st Century Economy – June 16, 2009


 1   actually subsidize the purchase of capital.                  But one of

 2   the real arguments in favor of --

 3             COMMISSIONER BOSKIN:           Which we did in 1981.

 4             MR. CLINE:      That’s correct.

 5             One of the real arguments in favor of this kind

 6   of tax on value-added is that if you allow the full

 7   expensing of equipment, it’s called a consumption

 8   value-added tax.    And it probably does -- it has a strong

 9   incentive to increase capital investment relative to the

10   corporate income tax, which falls primarily on the return

11   to capital.   And so it will change the relative

12   attractiveness of people versus machines, machinery and

13   equipment; and it will, in a sense, have a neutral

14   treatment of those two big buckets of inputs.

15             You’ll pay the same additional tax whether you

16   hire another person, pay them $100,000, or buy a machine

17   that costs $100,000.

18             What happens in the future, you’ve got to deduct

19   the cost of the machine when you bought it.                  In the

20   future, there’s no additional depreciation.                  There’s no

21   subtraction in the future for depreciation.                  So in a

22   sense, some people would also argue, it gets rid of

23   depreciation tracking over time.              But in reality, a state

24   tax like this will be operated in tandem with the

25   corporate income tax, at the federal level will draw on

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                 Commission on the 21st Century Economy – June 16, 2009


 1   it, and so you’ll still see these concepts floating around

 2   out there.

 3                As I say, it’s a consumption-style VAT.                 It

 4   doesn’t really tax the normal return on capital

 5   investment.     And I think it can be thought of as a

 6   consumption tax.       So it looks more like a sales tax than

 7   it does a corporate income tax.              But it would be

 8   administered as an entity-level business tax, not as a

 9   transaction tax.       So you have to -- you’re kind of forced

10   to change the way you use your words and your perspective.

11   And when you think about this kind of tax, think more

12   about an entity-level tax, maybe the sum of these payments

13   to factors, or total revenue minus purchases from other

14   companies if that helps you understand what the tax is.

15                All right, then very quickly, let’s get down to

16   what we did in preparation for this meeting.

17                We tried, our first charge was to coming up with

18   a preliminary estimate of our understanding of what this

19   proposal is.      And I’ve tried to kind of outline what that

20   is.   We assumed it’s going to apply to all forms of doing

21   business, corporations as well as pass-through business

22   entities.    It applies to almost all firms in all

23   industries, with some exceptions.                We did not put into

24   the base the value-added of federal, state, and local

25   governments; nonprofits, including education and health

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                 Commission on the 21st Century Economy – June 16, 2009


 1   services.    We did not put in the value-added for religious

 2   and charitable institutions; and we left out financial

 3   services and insurance from the base.

 4               COMMISSIONER EDLEY:           We should have taxed the

 5   private universities.

 6               MR. CLINE:       I believe we did.

 7               CHAIR PARSKY:        We’re going to let you get Boalt

 8   up to the level on your own.

 9               MR. CLINE:       All right, well, moving on to the

10   details, so these are standard exemptions that were done

11   in Michigan and New Hampshire and Europe.                   They tend to

12   be what countries and states have decided should not be

13   included in the base.

14               Financial services and insurance, the concept

15   is, they would continue to be taxed under their current

16   tax structures, not moved into -- as we estimated the

17   impact, not moved into the net-receipts tax.

18               Generally, you’ll see statements -- anyone who

19   has studied value-added taxation -- strong statements that

20   says no country has yet figured out how to effectively tax

21   insurance and financial services under a value-added tax.

22   It’s difficult.       It is difficult to define what

23   value-added is, and it’s difficult to find out whether

24   interest paid is a purchase from other firms or it’s part

25   of the value-added of a bank.             So there are real

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                Commission on the 21st Century Economy – June 16, 2009


 1   challenges.    And for our initial estimates, we left those

 2   two industries out.

 3              We put in a small-business exemption, $500,000.

 4   It sounds like a big number; but from my earlier

 5   discussion of the other states, it’s not out of line with

 6   what we’re seeing in some of these other non-income tax

 7   based systems.

 8              We apportion the base to California using a

 9   single sales factor apportionment formula.                     It’s the new

10   formula that is an option now in California under the

11   corporate income tax.        And we assume that it would apply

12   to all of the taxpayers under the net-receipts tax.

13              What it means is that exports are subtracted

14   from your -- if you think of it as total receipts minus

15   purchases, your total receipts from your exports, in a

16   sense, are not taxable because it’s a destination-sales

17   concept.   If you ship out of California, you don’t pay tax

18   on the value-added of that taxpayer at that point.                    But

19   if someone ships into California, that shipper, that

20   seller into California would pay the value-added tax on

21   the sale that came into California.                So you do tax the

22   imports, you don’t tax the exports.

23              That’s not quite like the credit-invoice system

24   in Europe, which fully removes exports and imports from

25   the tax system.      There’s still some embedded taxes

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 1   floating around in the background here on exports.                    So

 2   it’s not like the credit-invoice system, but it is a

 3   destination-sales apportionment system.

 4              Here’s some preliminary numbers.                    Now, here’s

 5   what we did, and let me just quickly step through the

 6   columns.

 7              By major industry groups, these are our

 8   estimates of the initial tax base from this net-receipts

 9   tax given what I described as assumptions about how it

10   might work.    And I can guarantee you that, regardless of

11   where this commission goes, if it does include this type

12   of new tax, it’s not going to look exactly like this.

13   So this is not a specific legislative proposal; this is

14   our initial estimate of what a tax with these

15   characteristics might look like.

16              The first column is “Apportioned Gross

17   Value-Added.”     The word “gross” because I haven’t dealt

18   with capital yet.       Gross value-added from 100 percent

19   California companies that operate and sell in California

20   only, plus all of the multistate firms selling into

21   California.    It’s the value-added that goes with all of

22   those sales.     So I call it the apportioned value-added

23   into California.      1.3 -- and I have to be careful to get

24   the units of measurement right -- that’s $1.3 trillion.

25   The base is $1.3 trillion, starting point.                     And you see

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 1   the distribution by industries.

 2             Now, let’s go to the second column.                    “Capital

 3   Expenditures.”     This kind of consumption value-added tax

 4   lets you subtract all of your capital purchases, say,

 5   real and tangible personal property gets subtracted from

 6   value-added to get a net-receipts tax base.                    So we

 7   estimate, in this initial version, that $232 billion of

 8   capital expenditures in one year would be subtracted,

 9   giving you a net-receipts tax base of a little over

10   $1 trillion.

11             “Small-Business Exemption” will exempt a lot

12   of companies but not necessarily a lot of dollars of

13   value-added.    We estimate that the small-business

14   exemption at $500,000 would reduce the base by about

15   $105 billion.    That’s about a 10 percent reduction in the

16   base.

17             So if you kind of back up, the capital

18   expenditures reduce the gross base by about 18 to

19   20 percent.    The small-business exemption reduced the

20   net base by about 10 percent, to give you a rough idea

21   of magnitudes.

22             Subtract the small-business exemption, and you

23   have $942 billion in the tax base.               And the table shows

24   you how that’s distributed.

25             Now, we did not at this point, because we don’t

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 1   know what the package of changes might look like that the

 2   Commission is considering or may actually recommend, we

 3   did not try to put this tax into a system of changes or a

 4   package of changes.       So right now, we’re just looking at

 5   it as a stand-alone piece, an additional piece to the

 6   system.

 7             CHAIR PARSKY:        And we will see this in the

 8   context of other changes.         This is at the 2007 level.

 9   But we’ll need to see this in the context of a complete

10   business cycle.     We’ll get into all of that.               But this

11   just will give you an idea of the way in which the tax

12   base gets calculated.

13             MR. CLINE:       And, Mr. Chairman, I think we’re

14   almost there, if I could have just a --

15             CHAIR PARSKY:        Yes.     You’re doing just fine.

16             MR. CLINE:       -- a couple of minutes.

17             CHAIR PARSKY:        Keep going.

18             MR. CLINE:       The next page, just to help those

19   who don’t want to make the divisions or the

20   multiplications by themselves, this is simple proportional

21   amounts that will be raised from a 1 percent tax rate, or

22   different tax rates.       A 1 percent tax rate would raise

23   $9.4 billion with this, as we have described and based

24   upon our initial estimates of this tax, 1 percent rate,

25   raising less than $10 billion, but $9.4 billion in

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 1   revenue.

 2               Now, what we didn’t do, when we changed the rate

 3   here in our simple table, is we did not do dynamic

 4   feedback analysis, where we would try to estimate what

 5   would happen to the private sector as you increased the

 6   rates more and more and more.             It would have a negative

 7   effect on the base, and it would reduce the additional

 8   revenues from increasing the rate.                We’d have to build

 9   that dynamic impact in to really get a much more complete

10   picture of what would happen at different rates of

11   taxation.

12               But, now, what I do want to share with you in

13   closing is our initial look at where we think this tax

14   burden in the long run will fall after its put into place,

15   and consumers and businesses have had time to adjust their

16   behavior.    We have a tax-incidence calculator, a model

17   that we use to do these kind of analyses.                   And basically,

18   what that model was saying is that the ultimate burden of

19   the tax is going to be determined by the market conditions

20   in which businesses operate.             For example, if you have

21   businesses in California selling only in California and

22   selling to local markets, we would assume that a tax

23   increase like this, or a new tax, this net-receipts tax,

24   would very likely be passed along in higher prices to the

25   consumers within California that are buying in these local

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 1   markets.

 2              The process gets a little bit more complicated

 3   for imports from other states.

 4              The import coming in, as I mentioned, would be

 5   subject to value-added taxation or the net-receipts tax

 6   for the portion of the value-added from that company

 7   selling into the state, but it might come in with less of

 8   a tax burden embedded in it would, than a company that

 9   operated in California paid the embedded tax -- was

10   subject to value-added taxation throughout the different

11   steps.

12              It’s not pyramiding, but somebody’s paying this

13   tax on the value-added at each step.                So you might have

14   in-state companies having a higher embedded value-added

15   tax than some of these out-of-state companies selling into

16   California.    That will hold down the ability of some of

17   the California companies to pass along their full taxes

18   and higher prices within California.                In that case, we

19   think the burden is going to be passed back not to

20   capital, but to labor and land and other more fixed

21   capital in California.

22              To the extent the California companies can’t

23   pass all of their embedded tax and the final value-added

24   tax forward to in-state consumers in higher prices, a

25   significant portion -- most of it will be passed backwards

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 1   to lower wages for people working in California, lower

 2   payments to the owners of land, and some other reductions

 3   in the payments -- to capital, but it’s a modest amount.

 4             The reason why California wouldn’t be able to

 5   shift a lot of this back to capital owners is because if

 6   California increases a tax like this in isolation of

 7   everyone else, others aren’t going to raise their tax,

 8   the multistate companies outside of California; and,

 9   therefore, you don’t have the ability to pass it along to

10   U.S. or California consumers.          So most of it is passed

11   back to labor as a factor of production.

12             So that’s kind of our initial thinking about

13   this tax, of where it’s going and what happens.                   And what

14   I’m about to show you is a chart that shows how we think

15   this tax would be distributed by adjusted gross-income

16   levels of residents of California.             But the exercise at

17   this point is not to put this new tax in a package of tax

18   changes, but to look at this net-receipts tax distribution

19   by AGI levels in isolation.

20             So the exercise we did was to have the existing

21   tax structure, put the net-receipts tax on top of it, and

22   see how that changes the distribution of business taxes in

23   California.

24             We’ll be ready to do that type of analysis if

25   the Commission recommends some packages of changes that

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 1   might include the net-receipts tax.

 2             CHAIR PARSKY:       And just to pause so the

 3   commissioners understand the process, I talked rather

 4   extensively to Bob.      And although we need to look at this

 5   in package format, I thought the commissioners would want

 6   to see, in just looking at this form of tax in isolation,

 7   what the impact would be.        It will be obviously important

 8   for commissioners to see, well, if we move in this

 9   direction, what other changes would we want to make in

10   order to adjust the distribution impact of this tax.

11             MR. CLINE:      So just to mention that mechanically

12   the way we do this, is we make the tax change and we look

13   at effective tax rates industry by industry in California,

14   and we determine, based upon those effective tax rates,

15   how much of the tax might be shifted through in higher

16   prices, depending upon market conditions; how much might

17   be shifted out of state, be exported.              So we go through

18   this calculation industry by industry.

19             And what happens is sort of an intermediate step

20   in this process.    Just to give you an example, we took a

21   $10-billion net-receipts tax, ran it through our

22   calculator, determined that about 71 percent of the

23   $10 billion would go to higher prices for California

24   consumers, 19 percent lower income to labor in California,

25   and about a 9 percent reduction in capital income in

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 1   California.   Land would be the clearest example of

 2   immobile capital that would bear the burden.                  And a very

 3   small portion exported.

 4              Now, it’s highly concentrated on consumption

 5   because we put this on top of all other business taxes in

 6   California.   And California can’t shift that increment

 7   outside of the state to any significant extent.                    So it’s

 8   this marginal impact, looking at what would happen with a

 9   $10 billion net-receipts tax put on top of other state

10   and local business taxes in California.                I think that

11   percentage on consumption will come down as we fine-tune

12   these estimates and we think about some of the subtleties

13   in the shifting process.         So I think it may be an upper

14   bound.   But it is what we are showing in our initial run.

15              COMMISSIONER BOSKIN:           So --

16              CHAIR PARSKY:       Wait.      Complete your discussion

17   before we move on.

18              MR. CLINE:      I’m one slide away.

19              CHAIR PARSKY:       I know.         One slide.

20              MR. CLINE:      So we took those buckets, we put

21   the $10 billion into those buckets, and then we needed to

22   distribute the buckets by AGI categories.                 And we used

23   various proxies.     For example, for capital income, we used

24   interest and dividends received from information the FTB

25   provided us from individual tax returns.                We have

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 1   consumption distributions by AGI from consumer expenditure

 2   surveys.   We have wages and salaries distributed by AGI

 3   brackets from the FTB income-tax data.                 So we used those

 4   distributions to distribute these buckets by AGI brackets.

 5               So then the graph on the next page shows you

 6   what we found with this initial look at the way we have

 7   described the concept of a net-receipts tax.                   Notice that

 8   it would be characterized as regressive.                 The percentage

 9   of AGI paid at each decile of income, we’ve arranged --

10   and this is probably the last time you’ll see a graph with

11   deciles of income on it because the Commission staff is

12   putting together distributional analysis in a different

13   way, and we will be integrating what we do into that

14   format.    But for purposes of this graph, we just ranked

15   all the families from lowest to highest incomes, and

16   divided them into 10 percent slices, the deciles.

17               Now, we’ve left out the first decile, not

18   because we’re trying to make a policy statement about

19   low-income people, but just because from the data we use,

20   the variation and the noise in that first decile is very,

21   very large.    Not too many people that do the incidence

22   analysis feel comfortable that they are actually picking

23   up the distribution of taxes in that first decile of

24   low-income people because the data we use, like

25   expenditure data, tends to overstate expenditures and

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 1   understate income.       And it sort of blows up the impacts.

 2   But the picture is the same.            The first decile would be

 3   higher, but the decrease continually over the income range

 4   would be the same.       It’s about 1.2 percent for this

 5   $10-billion net-receipts tax.            For the second decile, that

 6   begins at about $30,000 of income, and goes down to

 7   .6 percent of the tenth decile income level.

 8              So it is, according to our initial calculations

 9   of the proposal that we’re looking at, as we interpreted

10   it, it is a regressive tax in terms of just looking at

11   this marginal incidence.

12              Mr. Chairman, I do have kind of a concluding

13   slide on lessons learned or we could go to specifics.

14              CHAIR PARSKY:        Oh, no, go ahead.

15              MR. CLINE:       Okay.

16              CHAIR PARSKY:        Finish the slide.

17              MR. CLINE:       There are -- kind of ending this

18   discussion that maybe has gone on a little bit too long,

19   some lessons learned, I think, from other states.

20   Business tax reform packages have been multiple tax

21   changes.   When you’re talking about reform, you’re not

22   talking about increasing the rate of a single tax; you’re

23   talking about changes in multiple taxes in the system of

24   state and local taxes.

25              The jury is out as to whether or not the changes

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 1   should be considered revenue-neutral.                I think this

 2   commission is probably tackling that issue.                    It’s been

 3   tackled in every one of these other states.                    Should it be

 4   revenue-neutral in terms of business taxes, should it be

 5   revenue-neutral in terms of the sum of business and

 6   household taxes, what do you mean, how to think about

 7   revenue-neutrality.

 8                The states that have allowed -- have sort of

 9   relaxed the revenue-neutrality constraint for business

10   taxes have had more flexibility to deal with the

11   significant redistribution of tax liabilities from one

12   industry to another and from one type of taxpayer to

13   another.

14                What every state’s experience has shown is that

15   you may get relatively small changes in overall taxes and

16   have almost as many winners as you have losers if you’re

17   just counting firms whose liability goes up or down, you

18   may have almost as many winners as losers, although the

19   dollar changes are concentrated in a small number of

20   companies.    But you just have to understand that you’re

21   going to get significant redistributions of liabilities.

22                I think it’s prudent to understand what they are

23   so there are no surprises; that you do understand what

24   kind of alternative you’re looking at.

25                Identify those winners and losers, and

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 1   document -- try to identify them, try to capture that in

 2   terms of your estimates.

 3                I think it’s important to involve the business

 4   community in any discussion of a change in fundamental

 5   form of taxing business entities.               These are really

 6   complex issues, complex taxes, every business is

 7   different.    And you really do need business’s feedback to

 8   understand winners and losers, as well as the unintended

 9   consequences of major changes.

10                Pay attention to the transition issues.                You’ve

11   got to get from your old system to the new system, if you

12   go in that direction.        You have to phase it in.             I think

13   you have to consider seriously phasing in.

14                You have to look at the balance-sheet impacts.

15   Business will be very upset if they lose the deferred-tax

16   assets, like net operating losses that they’ve been

17   carrying forward to future years.               If those disappear

18   because the corporate income tax is eliminated, how will

19   those asset values be protected for the firms on their

20   balance sheets?     States are giving serious attention to

21   those kind of transition issues.

22                And then finally, focus on the long-run economic

23   benefits of a more competitive state and local tax system.

24   It is jobs, it is the growth of the economy that’s the

25   objective.    And you should consider the competitiveness

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 1   aspects of the changes, consider the positive benefits on

 2   the private sector of a more competitive system, and try

 3   to build the case for change in terms of jobs and income

 4   and growth in the state economy.

 5              So kind of a conclusion of my remarks, kind of

 6   looking at the work we did for the net-receipts tax, as

 7   well as experience in other states.

 8              CHAIR PARSKY:       Thank you very much.            I think

 9   that was quite thorough.

10              This is a complicated subject.               I think the

11   Commission was asked to look at whether or not major

12   reform should be recommended, putting forward a new form

13   of tax.   It certainly would fit that category.

14              But please bear in mind that, at least for our

15   discussion today, two stages:           One stage was to try to

16   understand the mechanics of this form of tax, maybe some

17   want to see it in the context of, as described, a form or

18   it looks like the sales tax.           And there are some people

19   that have said, well, the state sales tax ought to be

20   applied -- it’s not fair to have the state sales tax not

21   apply to services.      Clearly, this form of tax would extend

22   to services.

23              Others may see this as a way of dealing purely

24   as a business tax, and may say, “Well, this is a better

25   approach to take than the existing state corporate income

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 1   tax.”   So there are a lot of different ways to look at it.

 2                At first, I will tell you that I was a little

 3   bit petrified at the notion of putting forward a new tax

 4   for us to consider.       But I think we’re in a situation

 5   where we should consider real reform.                We may decide to

 6   reject it.    So part of the method here is to get this form

 7   of tax out there, let the public see it, let us see it,

 8   talk to people about it.

 9                Obviously, Bob has done a tremendous amount of

10   work in this area.       And then potentially see it in the

11   context of a package of changes that would address, I’m

12   sure, some of the concerns that some of you may have on

13   the regressivity issue that was presented; but it should

14   be seen in the context of the package.

15                Okay, with that, let’s see if we can’t go down

16   the line -- and focus a little bit on trying to get Bob

17   to dialogue on the nature of the tax, how it would work,

18   and so forth.    But everything’s open.

19                Yes, Edward?

20                COMMISSIONER DE LA ROSA:            Thank you very much

21   for a great presentation.

22                I just was wondering if you had any idea of the

23   top two or three ways by which taxpayers might try to game

24   the system to reduce the burden on them at the expense of

25   others?

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 1               MR. CLINE:       As I mentioned, as an economist, not

 2   being a tax lawyer or an accountant, I don’t have the

 3   familiarity with the details of individual taxpayers’

 4   situations.     But let me comment a little bit about some of

 5   the challenges, some of the real problems that I think the

 6   net-receipts tax would encounter.

 7               One thing that happened in Michigan -- maybe

 8   the most challenging aspect of the system, the new

 9   system, with a single business tax in Michigan and the

10   business-activities tax before, was to try to figure out

11   what to do about capital investments made in other states.

12   For example -- and they’ve tried four or five different

13   versions of how to deal with that issue.                  Initially, they

14   said, under the single business tax, is that you only got

15   the subtraction for capital expenditures if you invested

16   in buildings in Michigan; or if it was tangible personal

17   property, you only got to subtract the apportioned amount

18   that was apportioned using payroll and property located in

19   Michigan.

20               So they tried to tie this expenditure deduction

21   for capital equipment to Michigan.                It had to occur in

22   Michigan.

23               Well, it got challenged in the legal courts as

24   discriminating against interstate commerce; and they

25   backed off of that and went to some alternative ways of

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 1   trying to determine where the capital expenditures

 2   occurred and what would be subtracted.

 3                When the SBT finally went out of business, it

 4   had reached its sunset, they had migrated to an investment

 5   tax credit for investment in Michigan, which seemed to,

 6   they thought, finally resolve the issue.                 But it creates

 7   complexities and it raises issues.               I wouldn’t say tax

 8   planning or gaming issues, but it does fundamentally

 9   ask -- it asked in Michigan, does Michigan want to give a

10   subtraction for a capital investments in another state or

11   should they try to limit those benefits only to Michigan

12   capital investments?

13                And so there’s real complexity, and it’s an

14   issue that has to be really thought through and dealt with

15   carefully.

16                But it’s big.      I mean, you saw the size of the

17   base.   There was, like, an 18 to 20 percent subtraction

18   from the gross net-receipts tax base for capital-

19   expenditure deductions.

20                And so I would say that just given the magnitude

21   of that number, it deserves real careful attention and

22   discussion, whether -- I wouldn’t call it gaming, I just

23   call it a fundamental issue in the structure of the tax.

24                CHAIR PARSKY:      Ruben?

25                COMMISSIONER BARRALES:             So for the net-receipts

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 1   tax, obviously, the burden, if you will, is –- the burden

 2   is not to get feedback -- the burden is on consumers.             And

 3   then the second tier would be on labor income.

 4             If one of our primary goals is to create more

 5   jobs, retain more jobs, isn’t there -- it seems as though

 6   there would be pressure -- which is not a bad thing --

 7   for more productivity, but to reduce labor costs. So some

 8   could argue that this actually wouldn’t help create jobs,

 9   it would actually do the opposite.

10             MR. CLINE:      Excellent question and observation.

11   An important one also.

12             In Michigan, the SBT was this additive approach.

13   Not total revenue minus purchases, but summing up the

14   payments to factors.

15             Although it treated capital and labor uniformly,

16   imposing the tax on the contribution of both, when you

17   looked at the return data, it showed that about 70,

18   75 percent of the base was labor compensation in a heavily

19   unionized state.    It caused trouble continuously over the

20   life of the SBT because there were arguments that you’re

21   taxing labor too heavily.

22             What happened is that they switched the -- they

23   rebalanced, with more of the tax coming from labor’s

24   value-added than capital’s value-added, which was the

25   corporate income tax, rebalanced, was treating them both

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 1   in a neutral way; but there still were people who said,

 2   “It looks like a tax on labor to me.                It’s too high.

 3   Let’s exempt unemployment comp.             Let’s exempt workers’

 4   comp.”

 5              And continuously, kind of looking at that as

 6   an additive approach, they kept focusing on the wage

 7   component, arguing that it was not providing the

 8   incentives necessary to expand the employment as opposed

 9   to capital investment.

10              I think economists, in general, take a longer

11   view and say, without capital equipment, without the

12   increased productivity, the wages and salaries won’t grow

13   as rapidly.   Capital is just as important in the future

14   income stream of creating an income stream for labor, that

15   you don’t just jettison that balanced approach to taxing

16   the two categories of inputs; you kind of try to hold the

17   line and say, “No, it’s a reasonable way to create the

18   base.”   But, yes, you still see these efforts to try to

19   reduce the perceived portion of the tax paid by labor’s

20   contribution.

21              COMMISSIONER BARRALES:               Right.

22              CHAIR PARSKY:        Curt?

23              COMMISSIONER PRINGLE:            Yes, thanks.

24              I kind of want to just understand a little bit

25   more about this exercise that we’re engaged in.

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 1               What you really are looking at is a replacement

 2   of the bank and corp. tax, primarily; right?                    I mean,

 3   that’s what -- all of the presentation doesn’t address

 4   other areas where there’s business taxes; is that right?

 5               MR. CLINE:       That is correct.           This is only

 6   looking at the net-receipts tax in isolation, with the

 7   important assumption that financial institutions and

 8   insurance would be kept under the current system.

 9               COMMISSIONER PRINGLE:            So bank and corp. tax

10   minus banks?

11               MR. CLINE:       Right.

12               COMMISSIONER PRINGLE:            So we’re really in a

13   juxtaposition of where this tax would fit in a context, it

14   is more -- I mean, I understand this application of the

15   sales-tax realm, and I guess that’s where I kind of want

16   to just ask a couple questions.

17               What do you do under this?               I mean, I’m just

18   looking at your basic premise as to what that net is.                     And

19   you basically state it’s total receipts minus all

20   purchases from other firms.

21               And so is that all purchases of goods and

22   services?

23               MR. CLINE:       Yes, it is.         All purchases of goods

24   and services.

25               COMMISSIONER PRINGLE:            Is it all purchases with

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 1   an existing sales tax?

 2             MR. CLINE:       If you could explain it a little bit

 3   more for me.

 4             Is it in the gross receipts or --

 5             COMMISSIONER PRINGLE:            No.     Is there a payment

 6   of -- I mean, are you contemplating that there would be

 7   or would not be a sales tax on those purchases of goods?

 8   That would also be deducted as a part of that deduction

 9   from the total receipts?

10             MR. CLINE:       Thank you for the clarification.

11             I believe the -- this is only looking at the

12   net-receipts tax in isolation.            And a question -- and so

13   whatever other taxes are in place, would continue to be

14   imposed when we did the net-receipts tax calculations

15   here.

16             CHAIR PARSKY:        I think, Bob, what Curt may be

17   asking, though, is in doing the calculation for what the

18   base would be on which a rate would be applied, what

19   impact, or not, would existing sales tax or other taxes

20   have on it?

21             COMMISSIONER PRINGLE:            Well, but more

22   specifically --

23             COMMISSIONER BOSKIN:            If you subtract the gross

24   price for the net of tax price?

25             MR. CLINE:       Yes, we don’t have an explicit

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 1   subtraction for that in our calculations.                  The question

 2   is, whether or not the GDP accounts, how they handle it --

 3   I know it’s an indirect tax on the GDP accounts.                  What I

 4   don’t know --

 5             COMMISSIONER BOSKIN:             You say cost of purchases

 6   from other firms?

 7             MR. CLINE:        The question is whether -- and I

 8   guess I can’t say to the extent to which if the sales tax

 9   were passed along in higher prices -- the real question is

10   not what was listed as the sales tax -- 6 percent or

11   7 percent -- on the invoice --

12             COMMISSIONER PRINGLE:             Or 8 percent or 9.

13             MR. CLINE:        Right.

14             No, the real issue is, from our perspective of

15   trying to understand what it is -- from an incidence

16   perspective, it’s trying to trace through the ultimate

17   change in prices when given that combination.                  But we did

18   not make an explicit adjustment to remove the sales tax

19   from gross receipts.

20             COMMISSIONER PRINGLE:             Okay, that’s all I wanted

21   to find out.

22             MR. CLINE:        Yes, we did not.

23             COMMISSIONER PRINGLE:             So you -- so under the

24   next column, “Firm’s payments for labor and capital,” you

25   would -- therefore, you created two definitions of what’s

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 1   been measured.

 2             MR. CLINE:        Right.

 3             COMMISSIONER PRINGLE:             In this case, the firm’s

 4   payments for labor and capital.             But, therefore, all other

 5   taxes that are paid would also be taxed; is that right?

 6             MR. CLINE:        The way to think about it is --

 7             COMMISSIONER PRINGLE:             I mean, they would not be

 8   deducted is what I’m asking?

 9             MR. CLINE:        That’s a detail that would have to

10   be worked out in the proposal.             I believe that the SBT in

11   Michigan began without any subtractions for sales taxes

12   from the gross sales amount.            But over time, those systems

13   have changed.    And I think, in fact, in the CAT tax maybe

14   in Ohio now, they’ve allowed some subtractions for excise

15   taxes and sales taxes.

16             COMMISSIONER PRINGLE:             No, thank you.        I just

17   wanted to get, Mr. Chairman, to the point of talking about

18   removal of these business inputs.               I mean, what we are

19   deducting, a percentage increase in the sales tax on top

20   of that is what the business is paying for that good.                  So

21   they’re paying the price for buying that new delivery

22   truck, plus the sales tax on that.               And I guess in my

23   head, I’m trying to see what we are replacing, or at least

24   what we’re discussing.

25             MR. CLINE:        Right.

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 1              COMMISSIONER PRINGLE:            And if we’re replacing

 2   just the corporate tax rate businesses pay, that’s one

 3   thing.   If we’re replacing the corporate tax rate, plus

 4   the sales tax on goods that businesses pay, that’s another

 5   thing.   And that’s all I’m trying to get at.

 6              CHAIR PARSKY:        And when --

 7              MR. CLINE:       We haven’t dealt with that.

 8              CHAIR PARSKY:        They haven’t done that, but when

 9   you look at the packages in preliminary form, you will see

10   one package would eliminate the corporate tax and the

11   sales tax, state sales tax.

12              COMMISSIONER PRINGLE:            On the business

13   consumption?    Or are you making it a collective on

14   everything?

15              CHAIR PARSKY:        Wait until you see how the

16   packages will work, of course.

17              COMMISSIONER PRINGLE:            Okay.      Very good,

18   Mr. Chairman.    And I’ll wait and see that.                   And, in fact,

19   I just want to look in terms of what that charge through

20   business is.

21              CHAIR PARSKY:        Right.

22              COMMISSIONER PRINGLE:            So, say, if it’s a

23   deduction here, then it’s a deduction just of their

24   corporate income tax charge as opposed to a deduction --

25              CHAIR PARSKY:        Sales tax.

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 1               COMMISSIONER PRINGLE:            So what is the

 2   equivalency to compare.

 3               And there’s always going to be winners, losers,

 4   applications that apply.           But does this, just because this

 5   premise that you had suggested earlier, that purchase of

 6   property, land, buildings, the purchase of those would be

 7   one of those reductions off of the receipts; correct?

 8               MR. CLINE:       Correct.

 9               COMMISSIONER PRINGLE:            So what have you seen in

10   terms of the bias towards purchase versus renting of, you

11   know, space?

12               MR. CLINE:       Right.      That’s also an excellent

13   question.

14               The Michigan experience was that, in theory, if

15   you think of the value-added tax as payments to those

16   factors of production, the base should be compensation,

17   interest paid, rent paid, royalties paid -- what am I

18   missing? -- profits.

19               What Michigan said is that they were concerned

20   about the question you just raised, about biasing renting

21   versus building on your own.             So they reversed the

22   treatment of rental payments.             And so what happens is that

23   rent paid under the old SBT -- rent paid was subtracted

24   from the base, and rent received was added to the base.

25   And they argued that that created the level playing field

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 1   between renting and buying the assets.                 So they

 2   compromised the theory at that point and said, “We’re

 3   going to reverse the treatment of rent.”                 And it was

 4   basically because of the question that you raised.

 5              COMMISSIONER PRINGLE:            But what was your

 6   rationale, to include rent or not to allow the deduction

 7   of rent?

 8              MR. CLINE:       Well, it isn’t our rationale because

 9   it’s not our proposal.

10              COMMISSIONER PRINGLE:            Okay.

11              MR. CLINE:       We just tried to take the broadest

12   definition of value-added --

13              COMMISSIONER PRINGLE:            I see.

14              MR. CLINE:       -- because we don’t have a specific

15   proposal in front of us to work with.                So we didn’t make

16   judgment calls about sales tax or rental payment.                   We just

17   took the broadest measure of value-added.

18              COMMISSIONER PRINGLE:            Okay.      So my question

19   then doesn’t need to be answered because it was somewhat

20   answered before.      The property tax, therefore, that’s

21   paid, even if the receipt -- or the purchase of land or

22   building is deducted off of receipts, that property tax

23   would still be not a deduction off of that, is what you

24   would assume then?

25              MR. CLINE:       No, I’m not going to assume anything

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 1   about that level of detail.

 2             COMMISSIONER PRINGLE:            No, no, no, but your

 3   revenue estimates.

 4             CHAIR PARSKY:        In your estimates.

 5             MR. CLINE:       In the revenue estimates, we

 6   subtracted capital spending from the gross-receipts

 7   number.

 8             COMMISSIONER PRINGLE:            Does that mean property

 9   tax --

10             COMMISSIONER POMP:           Not property taxes, I would

11   assume.

12             MR. CLINE:       At the level at which we estimated

13   this, we did not go through that level of detail.                  We’re

14   using aggregate measures of economic activity in

15   California.    And what that does -- and we’re focusing on

16   compensation, wages and salaries, interest paid, dividends

17   paid, rent paid.     Those concepts, of and by themselves,

18   don’t include taxes.       You know, they’re concepts of the

19   payments to the private-sector factors of production.

20             Now, whether or not you’d want to --

21             COMMISSIONER PRINGLE:            That’s good.        But I

22   believe when you buy a piece of equipment, the cost of

23   that equipment isn’t just the purchase price, it’s the

24   sales price.

25             And I was just similarly looking at if you

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 1   purchase a piece of land, does that tax still apply from a

 2   business perspective?

 3                And you are suggesting, none of those taxes are

 4   reduced -- are eliminated through the proposal.                      I see --

 5                MR. CLINE:      No, our proposal doesn’t deal with

 6   those taxes.      Our proposal looked at these aggregate

 7   payments to the factors of production.

 8                In theory, you could say government gets paid a

 9   portion of value-added.          I believe the way that we

10   actually estimated it, we did not include that government

11   portion of value-added in the base.

12                COMMISSIONER PRINGLE:           Okay.

13                MR. CLINE:      So it may be we took all of those

14   taxes out.     But we didn’t do it explicitly based upon --

15                COMMISSIONER PRINGLE:           I only have two other

16   questions before the chairman turns off my mike.

17                I wanted to -- I understand that now, where

18   you’re coming from.

19                When you talk about extending to out-of-state

20   companies or others that are doing business here, how

21   have other states addressed that ability to capture that

22   activity?    And how deep are they capturing that activity

23   beyond, you know, methods that are being done in

24   California?     Have they addressed things through capturing

25   Internet activity or other things like that?

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 1               MR. CLINE:       Well, I would be glad to talk about

 2   the perspective we had on the apportionment issue from the

 3   analysis that we did of the net-receipts tax.                    We didn’t

 4   look at Internet sales -- you know, all those other issues

 5   you raised were not part of what we were asked to look at.

 6               What is true is that the 100 percent sales

 7   factor apportionment formula that we assumed for

 8   California for the net-receipts tax base estimate, is

 9   consistent with the new option in California.                    And it is

10   consistent with where I think the trend among the states

11   is going.    We probably have -- we certainly have more

12   states now that have 100 percent sales factor

13   apportionment that have equally weighted -- the UDITPA

14   equally weighted formula.

15               So I think in terms of the movement of where

16   states are going, you’re seeing much more heavily weighted

17   sales factors; and, in fact, I think the states are still

18   moving to 100 percent sales factor apportionment.

19               So what that means is that we took a

20   net-receipts tax base -- let’s say the U.S.-wide

21   net-receipts taxes for multistate companies.                    We

22   apportioned it to California based upon the percentage of

23   sales of those companies going into California.

24               So what you have is a value-added tax base

25   which, fundamentally, is where your property and payroll

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 1   is located.    That’s what creates value.               And you’re using

 2   a destination-sales apportionment formula to determine

 3   what state it’s taxable in.           That’s a reality you kind of

 4   accept.   And so this proposal has that combination of

 5   destination-sales perspective, which is market-based,

 6   versus a tax base based upon value-added, which is

 7   origin-based; and you’re getting a mixture of the two in

 8   the way we analyze all this.

 9                COMMISSIONER PRINGLE:          And I would just, maybe

10   in a rhetorical sense, ask the question, how close are we

11   today in California in collecting all of that potential

12   tax that you have estimated on a national basis that’s

13   apportioned to California, how successful have we been at

14   capturing that, therefore, comparing our present system

15   to what --

16                MR. CLINE:     I can’t answer that because I

17   haven’t looked.

18                COMMISSIONER PRINGLE:          -- theoretically –-

19   that’s why I was trying to make it a rhetorical question.

20                MR. CLINE:     No, I haven’t looked at California’s

21   current system, so…

22                COMMISSIONER PRINGLE:          And a final thought,

23   though, I think one of the things that jumps out here is

24   really the distribution of what this tax burden would be,

25   and particularly one that is suggested that it would be

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 1   disproportionate to the consumers.

 2               And, in fact, I think that is a relatively easy

 3   thing to consider.        Because if a sales tax, for example,

 4   were to be extended to services, at least the 71 percent

 5   in higher consumer prices would be reflected; right?                 At

 6   least to the purchase of those services?

 7               MR. CLINE:       If I could answer it this way --

 8               COMMISSIONER PRINGLE:            Sure.

 9               MR. CLINE:       -- what you proposed as expanding

10   the sales tax to inputs, it’s been our experience in other

11   state studies that we’ve done -- we’ve done a study for

12   the Council on State Taxation, for example, where we

13   looked at the base-broadening proposals that states have

14   been making to expand to services under the retail sales

15   tax.   And our general conclusions is that that’s really a

16   discussion of taxing business inputs, not taxing

17   households.

18               We think 70, 75 percent of that new revenue

19   comes from business input purchases -- legal services,

20   accounting services, and other professional services.                And

21   so it’s a question -- it’s a debate about business input

22   taxation.

23               What would happen under the net-receipts tax, is

24   that you would get subtractions for those purchases of

25   services from other companies, from your tax base, in

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 1   determining your net tax base.           So you won’t get that

 2   pyramiding, or that taxation that you get under the sales

 3   tax at very high rates, like 6 or 7 percent on sales of

 4   services from one company to another.

 5             And so some people would argue that something

 6   like this net-receipts tax would be an indirect way to tax

 7   more of the service sector without trying to extend a very

 8   high rate retail sales tax to services that are primarily

 9   consumed by business.

10             But -- so you need to play the two -- you need

11   to recognize the interaction of the two.

12             COMMISSIONER PRINGLE:           Sure.      All right, thank

13   you.

14             And, Mr. Chairman, actually, I know it’s

15   somewhat scary to look at that distribution of the tax

16   burden and to see exactly where it applies and how it

17   applies; but I actually think that theory isn’t bad to

18   extend to all of the different proposals that may be out

19   there, to really see how that interrelates.                  Because we

20   oftentimes talk about different other taxes without really

21   seeing where that tax burden gets distributed.                    And I’m

22   not afraid of having that discussion, and I look forward

23   to it.

24             CHAIR PARSKY:       We will have that discussion as

25   we move to these packages, clearly.

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 1             But one more time, I just want to emphasize, I

 2   thought that for all of us and for the public, it was

 3   important -- this would be a new form of tax.                 As I said,

 4   some commissioners may view this as a mechanism, among

 5   other things, to extend to services.              Others may look at

 6   it differently.    But it needs to be seen in the context

 7   of other changes that would be made.

 8             Fred?

 9             COMMISSIONER KEELEY:           Thank you, Mr. Chairman.

10             Thank you for your excellent testimony and your

11   excellent presentation.

12             MR. CLINE:      Thank you.

13             COMMISSIONER KEELEY:           It was very clear, very

14   concise, and very helpful.

15             I have a few questions.

16             The Chairman, in opening this morning, I think

17   directed or suggested that we look at proposals in the

18   context of the task that’s been given to us by the

19   Governor in establishing the Commission.               So I’m going

20   to try to focus in on that with my questions.

21             First of all, is it your view that the states

22   that have worked to implement a net-receipts tax, that

23   they’ve done so with some thought in mind about what they

24   want their state to look like?           The economic composition

25   of their state, or what they imagine it might look like?

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 1   Do you have any thoughts on that, when you’ve spoken with

 2   these states?

 3               MR. CLINE:       Well, let me just begin with a

 4   clarification that New Hampshire adopted their modified

 5   value-added tax back in 1993, so it’s been around for some

 6   time in New Hampshire.          As I mentioned, Michigan has kind

 7   of experimented with it over a 50-year period.

 8               The new states -- Michigan, Ohio, and Texas --

 9   would not say they have a net-receipts tax or a

10   value-added tax.       They would describe it more

11   accurately -- and accurately, I think -- as gross-receipts

12   taxes.

13               CHAIR PARSKY:        Just stay then with New Hampshire

14   for a moment because it may help in responding.

15               MR. CLINE:       All right.          Now, New Hampshire has

16   argued that the value -- they have the two, they have the

17   corporate income tax running parallel with the value-added

18   tax -- and they have argued that there are benefits to the

19   value-added tax in terms of its broad base, relatively

20   low rate.    They do not include retained earnings of

21   corporations in the tax base, and there’s what -- I think

22   they also exclude rent paid from their tax base.                     I

23   mentioned that Michigan may have adopted that aspect of

24   it.

25               They would argue that it has reduced the level

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 1   of taxation on corporate -- on capital investments

 2   because, as part of the package, they brought down the

 3   rate on the business income tax when they adopted the

 4   broader base value-added tax component.

 5              So I think they would argue that, overall, they

 6   were paying attention to the impact of their system of

 7   business taxes on mobile capital and investments in the

 8   state.

 9              Ohio, certainly --

10              CHAIR PARSKY:       One more time with New

11   Hampshire --

12              MR. CLINE:      Okay.

13              CHAIR PARSKY:       -- because it’s potentially the

14   closest analogy to what you have been discussing.

15              How would you say that form of taxation

16   addresses the issue of promoting economic activity and

17   growth in this state?       How would they say it --

18              MR. CLINE:      Well, I hope I remember this number

19   right.

20              About the time that they adopted -- that New

21   Hampshire adopted this business-enterprise tax, they call

22   it, the “BET” -- they estimated that one-half of 1 percent

23   of their business taxpayers paid seventy- -- I think it

24   was 70 percent -- maybe closer to 60 percent of their

25   taxes.   One-half of 1 percent.

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 1              So they argued that there were very high rates

 2   on capital investments for a handful of company -- a

 3   relatively small number of taxpayers that tended to be

 4   larger capital-intensive taxpayers.               And so they know that

 5   in the change, by bringing down the corporate income tax

 6   rate and replacing it with a broader base tax, all forms

 7   of doing business, low-rate services, manufacturing,

 8   everyone included, that they were bringing down the

 9   effective tax rates own new capital investment in the

10   state.   And that was, I think, done intentionally.

11              COMMISSIONER KEELEY:           Okay.     And when they did

12   that, did that then have the desired effect of growing a

13   bigger pie for them?       Did they attract businesses?            Did

14   they have businesses -- did the businesses think, who were

15   there, said, “This is a good thing.               We’ll now expand

16   because they’ve done this?”          Have other businesses said,

17   “Gee, this is great.       We’re going to migrate to that state

18   because of this change?”

19              MR. CLINE:      I’m not familiar with any research

20   that may have been done in New Hampshire.

21              COMMISSIONER KEELEY:           Okay.

22              MR. CLINE:      But in Ohio, they’ve issued two

23   annual reports.     The Ohio Business Roundtable has issued

24   two annual reports, talking in a sense, testimonials from

25   business, talking about the new CAT system, and the

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 1   substitution of the CAT for the corporate income tax, the

 2   net-worth tax, and tangible property taxes.                   So that

 3   they -- I mean, and it’s anecdotal evidence.

 4             COMMISSIONER KEELEY:            Our State Treasurer, who

 5   used to be the Attorney General, who used to be the

 6   President Pro Tem of the Senate, who used to be an

 7   assembly member.

 8             COMMISSIONER POMP:           School board member.

 9             COMMISSIONER KEELEY:            And used to be a school

10   board member in San Leandro.

11             CHAIR PARSKY:        A young boy.

12             COMMISSIONER KEELEY:            Yes, when he was nine,

13   apparently, he was a school teacher.

14             He has a great phrase.               He says, “The plural of

15   anecdote is not evidence.”          But if you’re saying they put

16   an anecdotal report together then…

17             Let me ask a couple other questions.

18             COMMISSIONER MORGAN:            What is the answer to

19   those anecdotes?

20             COMMISSIONER KEELEY:            It’s whatever story you

21   want to tell presumably is the answer to the anecdotal

22   report.

23             In putting this particular tax or something like

24   this tax in place, those states that have done that,

25   experimented with it and so on, were they clear at the

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 1   outset, in essence, what they were managing towards?

 2               MR. CLINE:       I think they were.

 3               COMMISSIONER KEELEY:            Okay, what were they

 4   managing towards?

 5               MR. CLINE:       And I think I mentioned it in some

 6   of my -- whether it was summary or the overview points --

 7   they were concerned about the competitiveness of their

 8   state and local tax systems.

 9               COMMISSIONER KEELEY:            Okay, so let’s stay with

10   that one.

11               So with the competitiveness of their state and

12   local tax systems, they made a change.                  And what happened?

13               MR. CLINE:       At the time, for example, that Ohio

14   adopted the CAT tax, we, in terms of working with the

15   private sector, actually did modeling of what the expected

16   dynamic impact on the state economy would be from the

17   change.

18               COMMISSIONER KEELEY:            Okay.

19               MR. CLINE:       Then the State Department of

20   Economic Development did their own analysis of the

21   benefits, potential benefits of adopting a different

22   system of business taxation.             And both of our analyses

23   concluded that there were substantial increases -- would

24   be substantial increases in employment and investment

25   compared to the replaced system of business taxes.

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 1              So it’s always one package relative to the other

 2   package.

 3              COMMISSIONER KEELEY:            Understood.         Understood.

 4              And with regard to the issues around jobs and

 5   income, did any of the work that you did or the department

 6   in that state did take a look at the, essentially,

 7   distribution of those either new jobs or increased income

 8   available for wages and benefits?               Did anybody look at

 9   that question?

10              For example, you might get more jobs, but where

11   are those jobs?      You know, what kinds of jobs are they?

12   Are these good-paying jobs?           Are these low-income jobs?

13   Did you have any -- did you look at that?

14              MR. CLINE:       In Ohio in particular and also in

15   Michigan, the analysis of the new system -- replacement

16   system in Michigan, analysis was done of the distribution

17   by occupation, for example, of the potential change in

18   employment.    So those questions were asked and addressed

19   in various ways to different extents across the states.

20   So there was certainly recognition that one of the driving

21   forces behind reform was economic competitiveness.                   So

22   people ought to talk about whether or not they think an

23   alternative system is better for economic development than

24   the current system.        So there were attempts to answer

25   those questions.

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 1             COMMISSIONER KEELEY:           Well, the answer to the

 2   questions depend upon what values you treat.                 For example,

 3   this Commission received a report some time ago about --

 4   that was flogging the idea that Texas was a much better

 5   place to do business than California.              It was done by,

 6   among other people, Art Laffer and some other folks.                And

 7   two of the things they pointed out were just major

 8   benefits of doing business in Texas rather than

 9   California.

10             Number one, that Texas had a lower minimum wage,

11   which I think some people may want to stand up and do back

12   flips and think that’s an extraordinarily wonderful thing;

13   and other people may say, “I wouldn’t consider that,” and

14   I would count myself among them, I don’t think that’s

15   something that you would want to say, “Gee, isn’t that

16   wonderful?”   But those are value-system differences.

17             They also said that a major benefit of doing

18   business in Texas rather than California is that it’s a

19   right-to-work state.      That’s a value-system decision about

20   whether you think that is something you ought to put on

21   the plus list or the minus list.

22             So I go back to the question, when you said that

23   they looked at these issues, so what kinds of jobs,

24   economic growth and development, what took place?

25             MR. CLINE:      I can’t answer that question.

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 1             COMMISSIONER KEELEY:            Okay.

 2             MR. CLINE:       Our responsibility was to look at

 3   the expected impact in terms of revenue of a net-receipts

 4   tax in California.      We were not asked to do a

 5   comprehensive analysis of the experience in other states.

 6             COMMISSIONER KEELEY:            No, no.      Fair enough.

 7   Fair enough.

 8             MR. CLINE:       I just can’t answer that question.

 9             COMMISSIONER KEELEY:            No, that’s fair enough.

10             I think it does raise the question, though, of

11   making changes in taxation, changes in taxation makes

12   changes in job-creation opportunities and so on, per se,

13   that isn’t necessarily a good thing.               It could be, but it

14   isn’t necessarily a good thing.

15             If, for example, you lose 100 jobs and you

16   create 150 jobs, and you lose 100 jobs in the high-tech,

17   high-paying industry and you create 150 jobs in the

18   low-paying service industry, what have you done?                  Is this

19   a good thing or not a good thing?              Those are value

20   decisions you should make based on where you’re trying to

21   manage your economy at some level or what you think tax

22   policy does to simulate growth and development and which

23   parts of the economy.       So maybe we’ll get to that later on

24   as a way to look at it.

25             Let me ask a couple other questions.

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 1             Do you think that the net-receipts tax is fair

 2   and equitable?    And if so, fair to whom and equitable to

 3   whom?

 4             MR. CLINE:      As I said in that introductory

 5   slide, I and E & Y have to be very careful that we’re not

 6   recommending any policy changes for California.                   As you

 7   mentioned, it’s a value judgment as to whether you think

 8   it’s more fair or less fair.          It has tremendous dimensions

 9   across industries, across types of taxpayers, across

10   household AGI levels.      And I just can’t comment on that.

11   I can’t help you there, other than to acknowledge that

12   it’s a key issue.

13             COMMISSIONER KEELEY:           So then let me ask you on

14   page 18, on the incidence of distribution by income

15   deciles and the effective tax rates.

16             So you acknowledge there that what happens is

17   that in the second decile you’re at 1.2 percent, and at

18   the tenth decile, you are at something just below

19   .6 percent; is that right?         Did I get that right?

20             MR. CLINE:      That’s correct.

21             COMMISSIONER KEELEY:           So that looks pretty

22   regressive as -- just on the face, with this one tax, one

23   way, one way to model it, one tax, not looking at the

24   entire package, and so on.

25             But that would have a regressive effect; is that

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 1   correct?

 2                MR. CLINE:     Economists would describe that

 3   pattern as a regressive distribution of taxes.                      It takes

 4   a higher percentage of the income of lower-income people

 5   than higher-income.

 6                COMMISSIONER KEELEY:          And what effect do you

 7   have -- let me try to tie it back.               Instead of asking you

 8   for a value judgment, let me try to go back into what may

 9   be the area you’re more comfortable with.

10                So if that were the case, if that’s the

11   preliminary incidence results, if that became the

12   incidence results, that has, from a business perspective,

13   people making business decisions, what kind of -- whether

14   they want to locate in California or retain their business

15   in California, expand their business in California -- this

16   says what to them?       How does this help make them -- how

17   does this help them make a business judgment if they knew

18   this?

19                MR. CLINE:     My objective, our objective in

20   working with the Commission was much more modest.                     It was

21   to try to give the Commission insight into what had

22   actually -- what we think it would look like, if adopted.

23   I can’t help you in trying to interpret how that issue of

24   equity interacts with the real economy.                 I just can’t help

25   you there.

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 1               COMMISSIONER KEELEY:            Okay.     Let me try one last

 2   question, and I’m not trying to be difficult, I’m truly

 3   trying to understand this.

 4               Let me ask on this point that the Governor gave

 5   us as one of our charges in his Executive Order.                     We are

 6   supposed to improve California’s ability to successfully

 7   compete with other states and nations for jobs and

 8   investments.

 9               Do you have any view, without getting into value

10   judgments, do you have any view about whether or not a

11   net-receipts tax, as outlined here, what effect, if any,

12   that might have on California’s competitiveness with other

13   states and nations for jobs and investments?

14               MR. CLINE:       I don’t --

15               CHAIR PARSKY:        Maybe take a different approach.

16               When other states moved in this direction, did

17   they do an analysis of that question?

18               MR. CLINE:       They did.

19               CHAIR PARSKY:        And when they did, what did they

20   conclude?    Not you, but they.

21               MR. CLINE:       I mentioned that what I did see in

22   both Michigan and Ohio, was analyses of the impact of the

23   proposed changes on the private-sector economy;

24   documenting what they thought the change in total number

25   of jobs would be, the percentage growth in real incomes

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 1   to the residents of the state.           And the studies that I saw

 2   and participated in showed positive economic impacts of

 3   substituting a tax system which had less of a burden on

 4   what I describe as mobile capital, and perhaps a greater

 5   weight on the consumption-tax aspects of the system.              That

 6   was only looking at the economics, not at the equity issue

 7   about changes in the distribution by income level of the

 8   taxes.

 9             CHAIR PARSKY:       No, that’s probably a given.         But

10   at the same time, if you then built into this, well, how

11   would you compare -- for instance, how would you compare,

12   with all that taking into account, this form of tax, with

13   taking -- not proceeding with this tax, but taking an

14   existing sales tax and applying it to services to broaden

15   the base, what then might you see with respect to

16   regressivity and all of those?           And I just want to

17   emphasize that it’s important both because this would be

18   potentially a new form of tax -- and I’m not an advocate

19   of it -- but I think since other states have considered

20   it, it’s really worth thinking about, and it needs to be

21   looked at on its own, but then it needs to be looked at in

22   comparison to others.

23             And, as I said, I think that these other states

24   clearly have attempted to move in this direction with an

25   objective of trying to improve economic activity and job

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 1   creation.    Whether they achieved it or not is something we

 2   can assess.

 3               MR. CLINE:       Right, correct.

 4               COMMISSIONER KEELEY:            Thank you, Mr. Chairman.

 5               My last question is to you, sir.

 6               Whether or not -- Mr. Cline, do you know whether

 7   or not the other states that you focused in on with regard

 8   to the net-receipts tax, if they -- which ones have

 9   personally income tax, state sales tax, and existing bank

10   and corp. tax?

11               MR. CLINE:       That is a very good question, and it

12   comes back to the point I made --

13               COMMISSIONER KEELEY:            You’re so good, telling

14   people they ask good questions.

15               MR. CLINE:       Well, maybe it’s a way of saying,

16   I’ve got a thought about that.

17               COMMISSIONER KEELEY:            I think you described

18   Speaker Pringle’s as “outstanding,” though, and so I’m

19   wondering if…

20               MR. CLINE:       And justifiably so.

21               CHAIR PARSKY:        Be careful, you’re going to be

22   graded.

23               MR. CLINE:       Where were we?          We were going

24   somewhere with this, weren’t we?

25               COMMISSIONER KEELEY:            I asked if they had the

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 1   other taxes, the range that --

 2               MR. CLINE:       Remember the point I made in passing

 3   earlier, the throwaway line almost was, there isn’t a

 4   lighthouse state to look to, to solve the California

 5   problems.

 6               COMMISSIONER KEELEY:            Yes, right.

 7               MR. CLINE:       And if you really -- and the reason

 8   why I was thinking about that a little bit, I was

 9   thinking about       New Hampshire, trying to come to grips

10   with New Hampshire’s dual-tax system and think about it.

11   New Hampshire has no -- am I right? -- no income tax.

12               CHAIR PARSKY:        Right.

13               MR. CLINE:       It has no sales tax; right?

14               CHAIR PARSKY:        Right.

15               MR. CLINE:       That’s all they have.              And that’s

16   why New Hampshire kind of imposes its business tax on all

17   forms of doing business, including partnerships and sole

18   proprietors.      So you kind of have to understand, that’s a

19   different world.

20               CHAIR PARSKY:        Sure.

21               MR. CLINE:       Texas has no income tax.                You’ve got

22   to understand, that’s a little bit of a different world.

23               Michigan, Ohio, Pennsylvania, that really talked

24   about tax change reform, and North Carolina, most

25   recently, Maryland, are states that look like California

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 1   in terms of the structure of multiple taxes that you have.

 2                And so I don’t know how much weight to give to

 3   those outliers of Texas and New Hampshire.                      Certainly,

 4   whatever they’re doing is a source of information and

 5   insights.    But when you think about the system of

 6   taxation, now you’re back to understanding that every

 7   state is unique.

 8                COMMISSIONER KEELEY:           Thank you.

 9                Mr. Cline, again, thank you very much.                   I

10   thought the presentation was very, very helpful and very

11   well presented.       I appreciate that.

12                COMMISSIONER BOSKIN:           Was it very good or

13   outstanding?

14                COMMISSIONER KEELEY:           It was -- I’m still

15   wavering whether it was outstanding, absolutely

16   outstanding, extraordinarily outstanding.

17                MR. CLINE:      There is great inflation that you

18   have to deal with.

19                COMMISSIONER KEELEY:           But thank you, sir, very

20   much.

21                And, thank you, Mr. Chair.

22                CHAIR PARSKY:       Michael.

23                COMMISSIONER BOSKIN:           The Stanford and Cal

24   people on the Commission, we’re quite aware of great

25   inflation.

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 1             I want to just clarify one thing and then I have

 2   a series of my own questions.

 3             So on this regressivity argument, clearly that’s

 4   going to depend on what, if anything else, you did a

 5   stand-alone analysis, the Chairman referred to that.              If

 6   you replaced the corporate tax, that would be more

 7   regressive still.     If you replaced the sales tax, it might

 8   well be less regressive in a stand-alone analysis.

 9             But this 1.2 percent at the bottom, out to

10   .6 percent, is primarily a reflection that low-income

11   people are consuming, roughly, twice as high a fraction of

12   their income as really rich people are, because most of it

13   is passed forward in higher prices; correct?

14             MR. CLINE:      Because, as you saw, the bucket that

15   was -- we put into consumption before we distributed it

16   to AGI levels, was about 70 percent -- 71 percent of the

17   total of the $10-billion increase from the net-receipts

18   tax that we modeled.      Then that is really determining the

19   distribution by AGI.

20             And it is true, when you look at the consumer

21   expenditure survey -- in fact, at the bottom decile, I

22   think I looked at it before I came out –

23             COMMISSIONER BOSKIN:           They consume slightly more

24   than their income --

25             MR. CLINE:      -- that group had maybe 3.5 times

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 1   the spending at that level.

 2             COMMISSIONER BOSKIN:            At the very bottom,

 3   they’re consuming more than their income because --

 4             MR. CLINE:       Correct.

 5             COMMISSIONER BOSKIN:            -- income is increasingly

 6   measuring the cost of transferring.

 7             But in general, that’s the pattern, roughly

 8   2-to-1, when you get to low, middle-income, to high, which

 9   would be about half the dispersion that the Congressional

10   Budget Office estimates, for example, for a carbon tax,

11   where the poor are consuming four times as much

12   carbon-intensive goods as the wealthy as a share of their

13   income.

14             So to put it in perspective, by being broad on

15   all consumption, basically, or almost all consumption,

16   this will be less regressive than some other

17   consumption-based taxes that are on specific products or

18   a subset, maybe more regressive than others you could

19   conclude that were primarily consumed by the rich, for

20   example, like yachts.       So just to put that in perspective.

21   It really depends heavily on the experiment you’re

22   performing.   And we’re going to look in a few minutes or

23   later on at packages where this replaces some other things

24   in a revenue-neutral way.         So I want to transition to

25   that.

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 1              So all of your thinking about distribution, you

 2   have to look at the distribution of the package, I think

 3   is the point.

 4              MR. CLINE:       Absolutely.

 5              COMMISSIONER BOSKIN:            So do you know -- and

 6   you’re welcome to respond just “yes” or “no” to these

 7   questions -- do you know any instance in all of human

 8   history, to be bold about it --

 9              CHAIR PARSKY:        This is “yes” or “no” now.

10              COMMISSIONER BOSKIN:            -- where a gross-receipts

11   tax, a net-receipts tax, or a value-added tax, in their

12   interchangeable concoctions, was initially implemented,

13   and that other major, other than in a state case,

14   reconfiguring revenue-neutral business taxes, other major

15   taxes, like an income tax or a payroll tax, or a state

16   sales tax were completely abolished?                There is the general

17   thing that the Europeans got rid of their turnover taxes

18   for VAT.

19              MR. CLINE:       Right.

20              COMMISSIONER BOSKIN:            Did they abolish income

21   taxes?   Did they abolish payroll taxes?

22              MR. CLINE:       Well, as you said, I think as a

23   qualifying phrase there, certainly among the states,

24   they’ve been substitutes for other major taxes.

25              COMMISSIONER BOSKIN:            Major other business

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 1   taxes?

 2             MR. CLINE:      Major other business taxes.

 3             So now we’re -- one thing you need to do --

 4   the reason why this is such a difficult discussion -- it

 5   is for me, and I think it may be for members of the

 6   Commission -- is that you have to bounce back and forth

 7   between thinking of it as a business tax and thinking of

 8   it as a consumption tax.

 9             When you’re thinking of it as a consumption

10   tax -- and I think some of your questions certainly were

11   leading in that direction -- then you think sales tax

12   versus the net-receipts tax.

13             If you’re thinking about business tax, you

14   think corporate income tax, tangible personal property

15   tax, sales tax on business input purchases versus the

16   net-receipts tax.     And I will acknowledge, it’s very

17   difficult to bounce back and forth between those two.

18   But because Ohio and Michigan and Texas really were

19   adopting those taxes as business taxes, they tended to

20   make substitutions for existing tax -- major taxes on

21   businesses.

22             COMMISSIONER BOSKIN:           On businesses?

23             There’s no instance you’re aware of where a

24   personal income tax or a payroll tax was abolished?

25             MR. CLINE:      Not that I’m aware of.

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 1              COMMISSIONER BOSKIN:            Okay.     The next question:

 2   Do you know of any instance where a theoretically pure, or

 3   only trivially deviated from theoretically pure base, was

 4   implemented originally and maintained with only trivial,

 5   if any, departure for a prolonged period of time?

 6              MR. CLINE:       I think the Social Security tax

 7   system has been extremely stable over time.

 8              COMMISSIONER BOSKIN:            No, I’m talking about

 9   these.

10              MR. CLINE:       Oh.    But I would be careful.

11              For example, I would say that the gross-receipts

12   taxes on utilities have been as steady and stable and

13   unchanged over time as almost any other state and

14   local --

15              COMMISSIONER BOSKIN:            I’m not asking about a

16   gross-receipts tax on utilities.                I’m talking about a

17   general gross-receipts, net-receipts, or a value-added tax

18   that’s a major component of revenue, haven’t they all had

19   their bases basically whittled away in small or in large

20   measure?

21              MR. CLINE:       I think that is -- I’m not familiar

22   with what’s happening to the bases in Europe.                   I assume

23   that they’re being whittled away over time, as almost all

24   the tax bases are.

25              COMMISSIONER BOSKIN:            So then the conclusion

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 1   from that is, we have to be aware that if we recommend

 2   something, while if we were extremely fortunate and it

 3   happened to be implemented originally the way we wanted,

 4   which is also debatable, whether the political system is

 5   capable of doing that -- but if it happened, we might

 6   wind up in shortly or medium order with an imperfect

 7   value-added or net-receipts tax, replacing our imperfect

 8   other taxes.   So we ought to be comparing -- so compare --

 9   all I’m trying to get at is, comparing a pure, idealized

10   net-receipts tax to existing imperfect taxes, which have

11   had the pleasure of being whittled away over time for

12   various reasons.

13             It may be a little -- especially as we think

14   about the 21st century –-

15             MR. CLINE:       But, again, I would say --

16             COMMISSIONER BOSKIN:            -- may be a little bit --

17   a little bit unfair to the existing tax system, as bad as

18   it may well be.

19             MR. CLINE:       It could be, right.

20             COMMISSIONER BOSKIN:            That we need to take

21   account of the fact that this may happen.

22             Now, we can’t not do -- I’m not suggesting that

23   we not propose a great reform because something might

24   happen to it later, and we just want to be cognizant of

25   it.

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 1             MR. CLINE:      Absolutely.

 2             COMMISSIONER BOSKIN:           And to the extent we can

 3   think about ways to build in protections to that, that

 4   would be a good thing.

 5             MR. CLINE:      And what I would say from the state

 6   experience is that it is important how you think about the

 7   tax when you adopt it.

 8             As I mentioned, that in Michigan -- there’s been

 9   this ongoing debate about whether they should have

10   administered it as a subtraction VAT or an addition VAT.

11   And there are people who really think it makes a

12   difference.   It makes a difference in your ability to

13   defend the base, and in order to explain what it is you’re

14   trying to accomplish and what your objectives are.                  But

15   I also mention another thing about these taxes.                   Certainly

16   it was true in Michigan, that the SBT tax rate was never

17   increased in Michigan, it was only decreased.                 And there

18   are people who would argue that that was because everybody

19   was in the same boat together.           Business -- you couldn’t

20   divvy -- you couldn’t drive wedges in the business

21   community and have the C-corps conflicting with the

22   S-corps, battling with the partnerships.               Everybody was

23   in the boat together, and they -- business uniformly

24   opposed changes in the tax rates on the upside.                   Although,

25   as you pointed out, the base itself will get altered over

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 1   time consistently.

 2               COMMISSIONER BOSKIN:            Let me come back to that

 3   base in a minute and then come back to the type of how to

 4   do this also.

 5               So in the base, the chairman and others have

 6   alluded -- and you sort of alluded to the fact that you

 7   could think of this as a generalized consumption tax,

 8   you’re kind of spreading the sales tax, the current sales

 9   tax to services, in a sense, is one way to think about

10   this a little bit.

11               But that implies that businesses are going to be

12   paying -- you might say, collecting because they’re going

13   to pass the bulk of the tax forward in higher prices, on

14   a wide range of items that our citizens aren’t used to

15   paying taxes on.       For example, rent; for example, doctors’

16   services, and things of that sort.

17               That’s correct; right?

18               MR. CLINE:       I believe we excluded medical

19   services.    We said --

20               COMMISSIONER BOSKIN:            You said nonprofit medical

21   services.

22               MR. CLINE:       I’ll check, but I think we excluded

23   all health care.

24               COMMISSIONER BOSKIN:            Your statement said

25   nonprofit such as education.

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 1                MR. CLINE:     I’ll check that, I could have been –

 2   I’ll check that because I think the intention was -- well,

 3   most of -- we’ll check that because I think the intention

 4   was not to tax medical care.

 5                CHAIR PARSKY:      Right, that was the intention.

 6                MR. CLINE:     That was the intention, yes.

 7                COMMISSIONER BOSKIN:          Maybe if you could double

 8   check that.

 9                MR. CLINE:     I will do that.

10                COMMISSIONER BOSKIN:          But the English seems to

11   say only nonprofits, which it’s an issue about nonprofits

12   versus profits.

13                MR. CLINE:     Okay.

14                COMMISSIONER BOSKIN:          Do you have any estimate

15   of the total number of new tax-paying entities or, you

16   might say, tax-collecting entities to the extent they pass

17   it forward, that will be paying taxes in California?                   A

18   new tax in California?

19                MR. CLINE:     I can’t give you that number.              We

20   are looking at an estimate of that change.                     We do

21   understand that there will be additional firms beyond the

22   S-corps and the C-corps that are currently -- but that’s

23   the role of the minimum threshold, the business minimum

24   threshold.    That’s barely -- until we know if the

25   Commission has a particular, specific proposal, we’d have

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 1   to -- that’s a key --

 2              COMMISSIONER BOSKIN:           Well, it would be really

 3   good to just get a quick idea of how many, if there’s

 4   none, how many, if there are one or two typical

 5   thresholds, 250 or 500 or something like that.                     It would

 6   just be a good idea because you can expect that 98 percent

 7   of them are going to scream when this is announced,

 8   probably some fraction of them should scream because they

 9   won’t have pricing power.         Another large fraction will see

10   that it’s substituted for other things they want to get

11   rid of.   That may be a good thing for them.                  But in any

12   event, we ought to get some idea.              And also, we have to

13   give some thought as to how this will be administered and

14   where those resources are going to come from and how it’s

15   going to be administered.         And that’s kind of the first

16   step to start thinking about that, it seems to me.

17              Then it seems to me there are a whole bunch of

18   transition issues.      Several were mentioned.               You mentioned

19   net operating losses.       But we also have a variety of

20   things, for example, that, depending on what other taxes

21   this might substitute for or reduce, there’s a lot of

22   income in the future that will either be exempt or subject

23   to tax in the current tax system, that would be taxed if

24   those funds were then consumed later on.                And so we’re

25   going to have to think about that in terms of the

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 1   distribution, not just by income decile or income

 2   quintile, but by young versus old, things of that sort,

 3   for example, it seems to me.          And it would be good to get

 4   some information, some baseline information about that

 5   so we can both figure out -- if you use that to decide

 6   how interested we are in this, and also decide if we are

 7   interested, what other types of things might be necessary

 8   to remediate some of the particular hit to certain

 9   vulnerable groups, and also anticipate some of the

10   political reactions, so we have some idea of all that.

11             So I think just dealing with an abstraction at

12   this level is a good start.         But I think we have to flesh

13   it with a lot of these kinds of useful information.

14             Then just a technical question, why not go

15   straight to something like a credit invoice VAT?

16             MR. CLINE:      I had a conversation with a tax

17   research director in another state yesterday, and the

18   issue came up in that conversation.              I think --

19             COMMISSIONER KEELEY:           Excuse me, just for the

20   kindness of all of us, what does that mean?

21             CHAIR PARSKY:       Explain that so we can understand

22   what the shorthand from our professor is.

23             MR. CLINE:      Well, as I --

24             COMMISSIONER BOSKIN:           Credit invoice value-added

25   tax, which is a very common way to implement a value-added

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 1   tax.

 2                MR. CLINE:     Yes.     As I mentioned -- again, I

 3   might have mumbled or mentioned it in passing -- the

 4   border-adjustment issue is really significant.                    It’s

 5   significant on the capital-expenditure deduction, it’s

 6   significant on how you determine where value-added is

 7   attributable for a state tax calculation.                  It’s really

 8   important.

 9                What we were describing as our understanding of

10   the generic animal to be estimated was a value-added tax

11   apportioned to California using destination sales, where

12   companies make their sales, as the determinant of how you

13   get value-added into the tax base in California.                   And that

14   resulted in saying the sales coming in are taxable, the

15   sales going out are not taxable.

16                If you look at Europe, what they’ve done is

17   adopted a credit invoice method, because they didn’t like

18   the old system, which was a gross-receipts tax system,

19   the turnover, they got rid of that, put in their new

20   value-added tax system.

21                They operated differently.             They handled the

22   cross-border issues in a different way.                 Remember, they

23   were driven by uniformity, by coordination across

24   countries.    They wanted to bring down those barriers

25   across countries.      So they said to make sure that if a

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 1   product was sold from France into Germany, it didn’t come

 2   into Germany with all the taxes embedded from France.

 3   Because they wanted Germany to have the right to tax that

 4   product at whatever rates Germany wanted to use.                  It’s

 5   Germany’s decision, not France’s decision.

 6             So they set up this credit-invoice method, I

 7   think primarily driven by that board or adjustment, which

 8   said that the French company gets to not only not pay tax

 9   on the product itself, but it gets refunds on any taxes

10   its paid other companies, embedded value-added taxes on

11   prior stages.

12             And so when that product leaves France to go to

13   Germany, it has no value-added tax embedded in it at all

14   from France; and all the value-added tax, in a sense, gets

15   imposed on the first sale into Germany.                 I mean, that’s

16   the way to coordinate across the countries.

17             I don’t think we have the same perspective

18   within the United States.          I don’t think we think that

19   products from Michigan sold into California should carry

20   exactly the same taxes as a product that’s sold -- that

21   is produced in California.           I mean, we just are not ready,

22   I think, to make those kind of border adjustments.

23             If we did, then the net-worth tax for California

24   would have to say, okay, we’re going to tax the value

25   coming into the state, and it’s the VAT rate, so we’ll

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 1   maybe get that right.         It’s coming in, so it’s the full

 2   VAT rate on California imports.              But what will you do

 3   about the exports out of California?                 How are you going

 4   to make sure that the companies, at every step of the way

 5   in California, that paid that value-added tax on that

 6   product, how do you make sure that all of that gets

 7   refunded to someone, and removed from the sale, out of

 8   California, into Michigan?

 9               I don’t think we know how to do that.                    You’d

10   have to make up ad hoc numbers to say, “Every durable,

11   every appliance that leaves California has 30 percent

12   value-added tax embedded in it.”                 So I don’t think we’re

13   ready to make those kinds of adjustments.

14               COMMISSIONER BOSKIN:            That’s why I asked the

15   question.    I thought everybody should understand that it’s

16   precisely the border tax adjustments --

17               MR. CLINE:       And --

18               COMMISSIONER BOSKIN:            -- that are at issue, and

19   why we don’t go directly to a --

20               MR. CLINE:       But it’s more than that.                The credit

21   invoice method is thought of as a sales tax, transaction

22   by transaction.

23               The net-receipts tax and the value-added taxes

24   in Michigan and New Hampshire were not thought of as

25   transaction taxes.

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 1             You didn’t keep track of every transaction and

 2   the tax embedded.     I mean, that’s for the sales-tax world,

 3   it’s not the business entity world.

 4             At the end of the year, you total up your total

 5   sales, you subtract your total purchases, or you total up

 6   your compensation, interest paid, dividends, et cetera,

 7   and you send in the tax return.           That’s -- I think,

 8   fundamentally, those are different systems from an

 9   administrative perspective.

10             COMMISSIONER BOSKIN:           I agree with that.       But

11   I think the way to think about them administratively is

12   other than the border-tax adjustments, which you did a

13   good job of doing, all you’re doing is simplifying a state

14   transaction VAT by having it administered, by having it

15   withheld at the company level, and paid at the company

16   level, presuming the companies will pass it forward.

17             MR. CLINE:      I think that’s a working assumption,

18   that’s correct.

19             CHAIR PARSKY:       If each commissioner doesn’t

20   feel like they have to ask questions.              If anyone has some

21   additional questions, I’m going to ask Richard Pomp to be

22   the last questioner.      But proceed ahead.

23             Becky?

24             COMMISSIONER MORGAN:           Yes?

25             CHAIR PARSKY:       Proceed.

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 1               COMMISSIONER MORGAN:            Thank you.

 2               I would like, just for clarification, why the

 3   net-receipts tax calculations was added to existing state

 4   and local taxes?       Wouldn’t we want to look at it as net

 5   receipts?    You know, take the gross tax and subtract

 6   whatever we chose to?         If you assume we’re going to

 7   continue to pay all of these taxes, then we are, in fact,

 8   increasing the tax burden.

 9               MR. CLINE:       You’re absolutely right.                And I may

10   have made a statement that was misleading.                      I think it

11   was.

12               COMMISSIONER MORGAN:            On page 16, where you said

13   it’s “added to.”

14               MR. CLINE:       And the right -- maybe the accurate

15   statement is, we looked at the net-receipts tax in

16   isolation, not as part of a package that might involve the

17   increases and decreases.           But when we came to trying to

18   estimate who bears the burden of the tax, we had to start

19   from somewhere.       So we started from the assumption that

20   the current system of taxes in California is there, and we

21   added the net-receipts tax on top of it.

22               COMMISSIONER MORGAN:            Okay.     So that’s not --

23               MR. CLINE:       So we were really trying to look at

24   it in isolations without the package.

25               COMMISSIONER MORGAN:            And Michael is right,

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 1   based on what was in here, it is the nonprofit medical

 2   services --

 3               MR. CLINE:       Yes, I’m going to check on that.

 4               COMMISSIONER MORGAN:            -- therefore,

 5   partnerships, whether they be doctors or lawyers or any of

 6   those, would come under the net-receipts tax; right?

 7               MR. CLINE:       I’m going to absolutely verify that

 8   health care was either in or out of that estimate.

 9               COMMISSIONER MORGAN:            Well, if it’s nonprofit or

10   profit; because if it’s a partnership of doctors, they

11   hope to make a profit.          They don’t always, but…

12               And, Mr. Chairman, I guess this is a process

13   question.    I had understood that the Commission was to

14   take to the Governor and the Legislature proposals of

15   reforms; and that the Speaker and the President Pro Tem

16   had agreed that they would take it to the Legislature for

17   a vote, up or down.         Certainly, a net-receipts tax or any

18   other changes in taxation take a two-thirds vote in the

19   houses.   And I, therefore, wonder, something as complex as

20   a net-receipts tax, certainly can’t go on that up-or-down

21   vote, it would appear to me.             Therefore, what will our

22   recommendation relative to this three hours that we’ve

23   spent on this be?

24               CHAIR PARSKY:        I wouldn’t attempt to presume

25   what our recommendations would be.

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 1                COMMISSIONER MORGAN:          I mean, how can they go

 2   for --

 3                CHAIR PARSKY:      But -- but the operating

 4   assumption we have, is that the reform will be a package.

 5   And as you will -- of tax changes.               It may include a new

 6   tax, it may not include a new tax.               But that package of

 7   changes, we’re going to measure on the basis of

 8   revenue-neutrality.        We’re going to measure that, as you

 9   will see, starting as soon as this presentation is

10   completed.

11                And in that context, the Legislature has

12   indicated a willingness to address this with an up-or-down

13   vote.    So we’re not suggesting that there would be a vote

14   on one particular package -- on one particular tax, which

15   may cause an increase or a decrease, but on the package of

16   changes.

17                COMMISSIONER MORGAN:          But a vote on the changes

18   themselves –-

19                CHAIR PARSKY:      Yes.

20                COMMISSIONER MORGAN:          -- that would be proposed?

21                CHAIR PARSKY:      If we can reach agreement.

22                COMMISSIONER POMP:         Without a bill.

23                CHAIR PARSKY:      No.     Let me clarify that.

24                If we can reach agreement, we would seek, at the

25   request of both the Governor and the Legislature, we would

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 1   seek assistance to craft a bill that would be -- we would

 2   take our recommendations, and we would convert them into

 3   one or more bills that would be addressed by the

 4   Legislature.    That’s the objective, if we can reach

 5   agreement.

 6                COMMISSIONER MORGAN:          And just for my

 7   understanding -- I’ve been out of Sacramento a while.               I

 8   assume anything to deal with --

 9                CHAIR PARSKY:      I’ve never been in Sacramento.

10   That’s okay.

11                COMMISSIONER MORGAN:          That’s probably a good

12   thing.

13                It is a two-thirds vote?

14                CHAIR PARSKY:      Well, we can have a discussion

15   about this.    But if it’s revenue-neutral and the package

16   is considered, it is not a two-thirds vote.

17                COMMISSIONER MORGAN:          Okay, that’s the

18   clarification that I think is helpful.

19                The other possibility, is it not, is that we

20   could take things that would more easily get through the

21   Legislature for an up-or-down vote, and have a second list

22   of things that they should consider in the next year?

23                CHAIR PARSKY:      We have every option open to us.

24                COMMISSIONER MORGAN:          Good.

25                CHAIR PARSKY:      We can do the most difficult or

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 1   the least difficult, let’s just see in the context.                    But,

 2   again, this presentation, I just want to indicate one more

 3   time, this presentation of a new tax is complicated.                    And

 4   any change in the tax system will be a complicated

 5   exercise.    But I do think, since other states have really

 6   gone at this and since there have been a number of

 7   suggestions coming from commissioners and others, that we

 8   need to look at how we can do a combination of things.

 9   Potentially broaden the base of taxation, lower the rates.

10   That’s coming there.         So you have to step back and say,

11   “Well, how can this be accomplished?”

12               This approach is one component of how you can

13   accomplish that.       It’s not the only one, but it is one.

14               Chris?

15               COMMISSIONER EDLEY:           I’ll pass, Mr. Chairman.

16               CHAIR PARSKY:        John?

17               COMMISSIONER COGAN:           I’ll pass.

18               CHAIR PARSKY:        Bill?

19               COMMISSIONER HAUCK:           No.

20               CHAIR PARSKY:        Jennifer?

21               COMMISSIONER ITO:          No.

22               COMMISSIONER COGAN:           We’ll give our time back.

23               CHAIR PARSKY:        Don’t worry.         I don’t know

24   whether this is the right side or the left side.                     However,

25   that side will not give it up permanently.

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 1              COMMISSIONER HALVORSON:             I will pass.

 2              CHAIR PARSKY:       Okay, Richard?

 3              COMMISSIONER POMP:          It’s good to see Bob again.

 4   Bob and I actually have litigated some cases together, and

 5   this is nice to see him wearing a different hat.

 6              The chart on page 18, if we were to do the same

 7   chart with the existing sales tax, I assume the curve

 8   would be more or less the same?

 9              MR. CLINE:      I believe it would be very similar.

10   We did some initial runs that showed that similarity,

11   depending -- and so the shape would probably be similar.

12              COMMISSIONER POMP:          When Charlie McLure, who is,

13   of course, a colleague of some people on the Commission, a

14   friend of others, was here, he talked about how -- and,

15   again, we can only compare an ideal value-added tax to an

16   ideal retail sales tax, and he said that the base is the

17   same; that really, the difference is in the administration

18   of it.   And I wonder if you would agree with that.

19              MR. CLINE:      Well, I think that -- with all of

20   the qualifications one could make, it’s a useful starting

21   point for understanding what the net-receipts tax is.

22              In a closed economy, if you could remove all the

23   pyramiding from the retail sales tax --

24              COMMISSIONER POMP:          No, he said an ideal, so

25   that’s the assumption.

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 1              MR. CLINE:      You would have a net-receipts tax.

 2              COMMISSIONER POMP:          Right.

 3              MR. CLINE:      So it, in fact, would be the same

 4   base.   And so we know in concept that you could -- you

 5   might use a net-receipts tax to achieve an objective that

 6   you haven’t been able to achieve under the sales tax.              And

 7   it has two pieces, you want to tax more of household

 8   consumption, and you want to remove the sales tax on

 9   business inputs.

10              COMMISSIONER POMP:          Right.

11              MR. CLINE:      And if you accept those as your

12   objectives, then the net-receipts tax, which should have

13   roughly the same base as an ideal sales tax, might be a

14   way to meet that objective.

15              COMMISSIONER POMP:          An ideal value-added tax and

16   an ideal sales tax --

17              MR. CLINE:      Correct.

18              COMMISSIONER POMP:          -- should, in theory, come

19   out looking the same because an ideal retail sales tax

20   would exempt all business inputs and reach all

21   consumption?

22              MR. CLINE:      Correct.

23              COMMISSIONER POMP:          This net-receipts tax, when

24   it reaches all sales, including services, it excludes

25   business inputs, so that that is how we are reaching the

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 1   ideal of personal services, just the way we could if we

 2   had -- now, I don’t want to put words in your mouth --

 3   but the political will to do it more explicitly in a

 4   retail sales tax?

 5              CHAIR PARSKY:       You can scratch the word

 6   “political.”    Just “will.”

 7              COMMISSIONER POMP:          That’s fine, “will.”

 8              Now, in other words, the base is the same –-

 9              MR. CLINE:      There was a question there?

10              COMMISSIONER POMP:          Right.      Do you agree?

11   Always a question, “Do you agree.”

12              Is that basically the way to be thinking about

13   this?   I mean, we could move our retail sales tax in the

14   ideal direction by exempting business inputs and expanding

15   the base to more personal consumption.

16              MR. CLINE:      Right.      I think there’s a dimension

17   that your question addresses that’s an important practical

18   one.

19              What I’ve seen in some of the other states that

20   have looked at alternative business tax bases, whether

21   it’s gross-receipts or value-added taxes, they are

22   thinking of them as entity-level business taxes.                   They

23   might achieve an objective that’s more of a retail

24   sales-tax objective, which is removing retail sales taxes

25   from business inputs and expanding it to more household

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 1   services.    But they view it as business taxes.

 2               And so when you’re scoring a package of changes,

 3   the interesting question is, if you put a                   net-receipts

 4   tax in a package that reduced the sales tax, would you be

 5   substituting a business tax for a household tax?                     In which

 6   case, business is paying a larger share of the total than

 7   households were before the new package?                  I mean, that’s

 8   the fundamental way to think about you’re challenging

 9   yourself to think about this tax.                Will it be scored as

10   an increase in business taxes, or will it be scored as an

11   increase in sales taxes?

12               COMMISSIONER POMP:           But do you disagree with the

13   earlier public speaker who said businesses don’t pay

14   taxes?

15               MR. CLINE:       Oh, I agree that the taxes

16   ultimately are shifted to households or investors or labor

17   in one form or another.          Now, we’re talking about kind of

18   the static revenue estimates and how you think about the

19   package.

20               COMMISSIONER POMP:           Once you get into dynamic

21   modeling, we’ve lost anything we can talk about.

22               MR. CLINE:       Okay.

23               COMMISSIONER POMP:           So we’ll stay static.

24               So the incidence of this is similar to the

25   incidence of our existing sales tax, we think?

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 1             MR. CLINE:      With the qualification that the

 2   current sales tax comes up very short in terms of taxing

 3   all household consumption, and comes up too heavy on

 4   taxing business inputs.       So that’s determining the current

 5   distribution of the sales tax.

 6             So, again, are you saying, ideal sales tax

 7   versus net-receipts tax?

 8             COMMISSIONER POMP:          But that’s not a structural

 9   problem; that’s a question of will.

10             MR. CLINE:      It’s the current system versus an

11   alternative system.

12             COMMISSIONER POMP:          Right.      But nothing inherent

13   in the retail sales tax; so we’re talking about having the

14   will -- I will modify it -- having the will to move in a

15   more normatively correct direction.

16             MR. CLINE:      I tend not to --

17             COMMISSIONER POMP:          An adjustment to a

18   normatively correct.      I mean --

19             MR. CLINE:      I tend not to answer questions

20   dealing with intentions.

21             COMMISSIONER POMP:          Move in the direction of

22   this tax, which -- and the intention is to reach more

23   personal consumption and exempt more business input.

24             MR. CLINE:      I think it’s true that this is being

25   considered as an alternative way to expand consumption

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 1   taxes to services without carrying with it all of the

 2   shortcomings of the retail sales tax.

 3             COMMISSIONER POMP:           But those shortcomings which

 4   could be corrected?      This is a non-transparent way of

 5   correcting the shortcomings?

 6             MR. CLINE:       They could be corrected within the

 7   sales-tax system.

 8             COMMISSIONER POMP:           Yes, okay.

 9             MR. CLINE:       We haven’t seen states successfully

10   doing it, but it’s possible.

11             COMMISSIONER POMP:           We’ve certainly seen a trend

12   to increasing more services under a sales tax?

13             MR. CLINE:       It attempts to, but they’re limited

14   at the margin, unless you’re extending the sales tax to

15   business purchases of services.

16             COMMISSIONER POMP:           When you say “limited,” the

17   change gets made.     The revenue may not be there but --

18             MR. CLINE:       The revenue is not.

19             COMMISSIONER POMP:           But the change gets made.

20             Let’s -- I’m curious as to the revenue and the

21   projections.   You had sales in California, and some of

22   those sales in California were made by out-of-state

23   companies, because you really don’t care; right?

24             MR. CLINE:       Correct.

25             COMMISSIONER POMP:           And so those out-of-state

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 1   companies, you didn’t look at the nature of them, whether

 2   they had physical presence here, whether they were a

 3   remote vendor?     Just whether they made a sale in

 4   California?

 5             MR. CLINE:       Correct.       Because the assumption is

 6   economic nexus would be the determination of whether or

 7   not you are a taxpayer in California, which is, as I

 8   understand it, current law.

 9             COMMISSIONER POMP:           So you have resolved a

10   constitutional issue for which the U.S. Supreme Court has

11   not chimed in yet?

12             MR. CLINE:       No, I’ve simply assumed the current

13   law treatment would be extended to the net-receipts tax.

14             COMMISSIONER POMP:           Well, that current law is

15   what is said in the corporate income tax in the recent

16   changes, and has not yet been litigated.                So if this were

17   viewed as a consumption tax, and if Quill were viewed as

18   then applying, you would not be able to tax the sales of

19   remote vendors without a physical presence?

20             MR. CLINE:       Not being a lawyer, I don’t even --

21             COMMISSIONER POMP:           But you know the Quill

22   case --

23             MR. CLINE:       -- know where to begin.

24             But I will say, certainly that it’s been

25   discussed in Michigan and it’s been discussed in Ohio.

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 1   They understand that it is an issue, and that there will

 2   likely be court cases that test economic nexus.

 3             But it’s not limited to these new states.                We

 4   have a lot of corporate income tax states that are going

 5   to economic nexus, like California.

 6             COMMISSIONER POMP:          Yes, but Quill was a case

 7   that came up with a sales tax.           And the question will be,

 8   will this be viewed for constitutional purposes as the

 9   type of sales tax that Quill would apply to.                 And if the

10   answer is yes, then regardless of what California says in

11   a statute, the physical-presence rule would apply.

12             And then I’d like to know, then what do the

13   revenue estimates look like?          In other words, if we were

14   to back out -- and maybe this can’t be done -- but if we

15   were to back out vendors who, under Quill, present day,

16   cannot be made to collect the California sales and use

17   tax, what happens to the revenue projections?

18             MR. CLINE:      I don’t know the answer to that at

19   this point.

20             COMMISSIONER POMP:          Is it knowable?

21             MR. CLINE:      Well, with enough work, you might be

22   able to estimate what percentage of those total sales come

23   from a company that doesn’t have payroll and doesn’t have

24   people in California.

25             COMMISSIONER POMP:          The very company that,

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 1   today, cannot be made to collect the California sales and

 2   use tax – (telephone ringing) -- maybe that’s the estimate

 3   coming in.

 4                The border adjustments -- right now, and I will

 5   ask the people in this room, because I assume California

 6   does not levy the California sales tax on sales made to

 7   other states -- which I assume that’s right, which is a

 8   kind of border adjustment.            So that the California sales

 9   tax does not apply to exports.

10                Now, we don’t refund any sales tax on a business

11   input.   You know, that’s just buried.                But in thinking

12   about this and trying to compare advantages and apples and

13   oranges, it is true that we do have a border adjustment,

14   as most states do in the retail sales tax, and that is the

15   very common exemption for sales made in interstate

16   commerce.    So I’m not sure we can look at that as a new

17   advantage of this tax.

18                MR. CLINE:      And it’s certainly a feature of the

19   current corporate income tax for those who select -- who

20   choose to go to the single sales factor apportionment

21   formula.    So it comes with the apportionment process.

22                COMMISSIONER POMP:          Well, it’s more than

23   apportionment, if we’re talking the sales tax -- you know,

24   the current sales tax.

25                You know, talking about Ed’s question, how to

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 1   game the system, you were kind enough to attach an article

 2   that I co-authored when Michigan adopted their new tax.

 3               And I will simply say to Ed, if you look at that

 4   article, while we don’t call them “loopholes” or “gaming”

 5   or anything else, there are numerous definitional

 6   problems.    Every definitional problem to a lawyer is a

 7   tax-planning opportunity.            It is not simple to simply

 8   draft a new tax.        I admire our chairperson’s insouciance

 9   in trying to get a bill before the Legislature.                      But as

10   someone who has drafted, it is not so easy, especially a

11   new tax.    So…

12               CHAIR PARSKY:         We’ll call on you for extra help.

13               COMMISSIONER POMP:            Well, which raises another

14   question.

15               You did a lot of work.                Is this pro bono on the

16   part of Ernst & Young?

17               CHAIR PARSKY:         No, Ernst & Young has been

18   retained by the Commission.

19               COMMISSIONER POMP:            We have retained them?

20               CHAIR PARSKY:         Yes.     Not you individually, but

21   this commission has retained them.

22               COMMISSIONER POMP:            I’d just like to know how my

23   money’s being spent, so…

24               All right, in terms of -- you know, Ruben asked

25   a question about tax on business inputs, and you were

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 1   talking about how Michigan really went through various

 2   iterations about limiting its incentive to just Michigan

 3   purchases and capital investment.                And that also raises a

 4   constitutional issue.         This actually did go before the

 5   U.S. Supreme Court in a case known as Cuno v.

 6   DaimlerChrysler, and was dismissed on standing grounds.

 7   So maybe this won’t be litigated in the future.                      But this

 8   is a very tricky issue about limiting your incentives to

 9   just state-oriented activities.              And that has to be sort

10   of when we think about the question that Ruben -- I was

11   going to say the very good question but now you know

12   there’s sibling rivalry with Fred who has great questions,

13   too.   But, you know, these are all appropriate questions

14   to raise.

15                I was a little surprised that it was only in

16   response to Fred that you made what are really, to me,

17   quite telling points.

18                New Hampshire has no personal income tax.                   They

19   also have -- no broad base --

20                MR. CLINE:      Right.      An interest in dividends

21   tax.

22                COMMISSIONER POMP:          And they have no broad base

23   sales tax.     But like any tourist states, they will tax

24   hotels and restaurants.          But no broad base.             They

25   certainly consider that economic development.

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 1               And, I mean, how much better can it get?                 You

 2   have no sales tax, no personal income tax.

 3               As far as I knew -- and I was a bit player in

 4   this New Hampshire tax -- the reason they went to the form

 5   of tax they have is because they wanted to tax income but

 6   couldn’t do it explicitly with an income tax because, like

 7   Texas, you would be, you know, taken out and shot.                   So you

 8   couldn’t use the word “income.”              And so that was really

 9   the motivation for their form of modified value-added tax,

10   whatever you want to call it.             And that explains Texas,

11   too, where --

12               COMMISSIONER EDLEY:           That’s called “tax-free or

13   die.”

14               COMMISSIONER POMP:           That’s right.

15               And I think it’s great, we have New Hampshires

16   in our union.      You know, you want to go to a state and not

17   get any services and not pay taxes, that ought to be your

18   prerogative.      So that’s fine.         And I’m not ganging up on

19   New Hampshire.       But let’s understand that --

20               COMMISSIONER PRINGLE:            Oh, we didn’t know what

21   that was.

22               COMMISSIONER POMP:           -- these things evolve from

23   a particular set of constraints.                 And Texas, of course,

24   does not have a personal income tax and they had a real

25   issue with limited partnerships because of oil and gas.

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 1   And that explains why yet they have this -- I don’t even

 2   know what you want to call it, this new tax they call

 3   “margins tax.”      But, you know, it defies easy

 4   classification.

 5              I don’t mind looking at other states and saying,

 6   “Well, that’s interesting.”

 7              Michigan, it’s kind of ironic we should be

 8   talking about Michigan in the same sentence with economic

 9   development.     I mean, my goodness, what a disaster.

10              Now, you say to me, “Oh, but, God, how can you

11   blame the change in the automobile industry?”                   But that’s

12   the very point that you --

13              MR. CLINE:       I don’t think I said that.

14              COMMISSIONER POMP:           But there were suggestions

15   that these changes --

16              MR. CLINE:       I don’t think I suggested that.             No,

17   I don’t.

18              COMMISSIONER POMP:           No, no, I mean, that’s an

19   interesting extrapolation, but…

20              MR. CLINE:       You may make the statement, if you’d

21   like, but I did not.

22              COMMISSIONER POMP:           You predicted the effects of

23   taxes -- what state was it on job creation?

24              MR. CLINE:       I said in both Michigan and Ohio,

25   compared to their current tax systems, the different tax

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 1   systems showed positive economic impacts.

 2               COMMISSIONER POMP:          Okay, that’s fine.

 3               MR. CLINE:      I didn’t comment on whether or not

 4   there’s a third, better system.

 5               COMMISSIONER POMP:          It showed for economic

 6   impact.

 7               MR. CLINE:      It did.

 8               COMMISSIONER POMP:          And, of course, completely

 9   swamped by changes -- structural changes in the economy,

10   which will always swamp whatever you can do with your

11   state tax system and look at Michigan.                 So I think we have

12   to be a little cautious in thinking that there will be

13   really severe, significant, important, positive economic

14   development from a change in -- whether we replace a sales

15   tax with this -- whatever we do, you have to remain either

16   cynical, skeptical, or agnostic.                But it’s a little hard

17   to be too much of a zealot on this issue.

18               Now, you weren’t here, we had a presentation

19   from someone with the National Education Association, that

20   I thought was very balanced and very perceptive on this

21   issue.    But you know the literature as well as I do.              It’s

22   very easy to think that there’s a Holy Grail here.

23               MR. CLINE:      Right.      I would say, though, that if

24   you remember the slide that I had, it was entitled “What

25   are states trying to accomplish?”               It doesn’t say, “What

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 1   have states accomplished?”         The objectives were the

 2   objectives, like economic growth, and they certainly were

 3   making decisions that they thought would improve their

 4   economic --

 5             COMMISSIONER POMP:          Yes, so sometimes you should

 6   go back and see what actually happened.

 7             CHAIR PARSKY:       No, but I think that’s -- the

 8   recitation of what happened in other states is not

 9   intended to be, “Well, we can follow exactly what they’re

10   doing,” but more to see what their intentions were, what

11   the changes were.     And there’s no question that, seen in

12   isolation, all these issues need to be addressed.                 But,

13   again, I want to try to move as rapidly as possible today

14   to take a look at a group of proposals.

15             It’s important to understand this element

16   because it is proposed to be included in one form or

17   another in all of the packages.           And this commission may

18   decide it’s not appropriate.

19             COMMISSIONER POMP:          No.

20             CHAIR PARSKY:       Or we have a stronger will or a

21   different will.    It’s perfectly okay.

22             But, again, I don’t want to spend all of the

23   time just in isolation on this tax.              We’re going to need

24   to do a significant amount of more work if we decide we

25   want to potentially include it in an ultimate

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 1   recommendation.

 2               COMMISSIONER POMP:           I don’t know of any state

 3   that proposes a change on the grounds, “This will hurt

 4   jobs and hurt the economy.”            So every state, when they

 5   propose something, obviously hopes it will encourage

 6   economic development.

 7               Do I have more time or is that it?

 8               CHAIR PARSKY:        You do.

 9               COMMISSIONER POMP:           I do?

10               CHAIR PARSKY:        Not too much more, but…

11               COMMISSIONER POMP:           Not too much more?          All

12   right.

13               I wanted to -- I thought the questions that were

14   raised --

15               In terms of the revenue, Bob, you really had no

16   choice in modeling this to take into account a purchase

17   price; and if that purchase price, as reported, had sales

18   tax embedded in it, that’s the way you found the data.

19               MR. CLINE:       Correct.

20               COMMISSIONER POMP:           And so you didn’t have the

21   ability to really back it out?

22               MR. CLINE:       We didn’t address the issue and

23   attempt to do that, no.

24               COMMISSIONER POMP:           Right.      And that was really

25   a short answer to Curt’s question.

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 1               MR. CLINE:      Right.

 2               COMMISSIONER POMP:          On the property tax, to the

 3   extent it’s passed forward into higher rents, then it will

 4   work its way into your calculations.

 5               MR. CLINE:      Correct.

 6               COMMISSIONER POMP:          Okay, just so that we clear

 7   that up.

 8               You had mentioned a few times Public Law 86-272,

 9   which, again, this is pretty esoteric stuff, but you did

10   not mention that there is a technique called a “throwback

11   rule” in the corporate income tax that undoes that public

12   law.    That this is not an advantage of another tax that

13   avoids Public Law 86-272.          The state is perfectly capable,

14   as California has done, in having a throwback law.

15               So, again, in comparing, we’ve got to be apples

16   and apples, and not have apples and oranges or tangerines

17   here.

18               MR. CLINE:      But just remember that the states

19   like Ohio and Texas and Michigan always argue that

20   basically concluded Public Law 86-272 didn’t apply to

21   their taxes.     That’s not dealing with a current taxpayer

22   in the state whose sales you might throw back; that’s a

23   new taxpayer you don’t -- that’s a new company you don’t

24   have as a taxpayer.        The question is, do you get now to

25   declare that they are taxpayers in your state.

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 1             COMMISSIONER POMP:            The Ohio -- which group was

 2   it that came out with a very favorable report?                     It was the

 3   Ohio --

 4             MR. CLINE:        Business Roundtable.

 5             COMMISSIONER POMP:            -- Business Roundtable.

 6             The changes in Ohio were very favorable to

 7   business; were they not?          They eliminated the intangible

 8   property tax.    They eliminated the corporate income tax.

 9             MR. CLINE:        And they reduced personal income

10   taxes by 21 percent –-

11             COMMISSIONER POMP:            Yes, so not a --

12             MR. CLINE:        -- which accrued primarily to

13   household, not to business.           So it was a balanced change.

14             And they lowered -- they actually increased the

15   sales tax rate to help balance the budget.                     But there were

16   substantial changes in every one of their major changes.

17             COMMISSIONER POMP:            In the Ohio corporate income

18   tax, did they have combined reporting like California?

19             MR. CLINE:        I don’t think they did, no.

20             COMMISSIONER POMP:            Yes, and so they had a

21   problem with Delaware holding companies that was really

22   eviscerating their corporate income tax.                 California, as

23   you know, is sort of the intellectual father of combined

24   reporting, and has been --

25             MR. CLINE:        But I think Ohio, wasn’t it the

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 1   pioneer in add-back of expenses paid to Delaware holding

 2   companies?

 3                COMMISSIONER POMP:         It’s certainly a poor man’s

 4   second-best solution for combined reporting.

 5                MR. CLINE:     Okay, but they had taken that step.

 6                COMMISSIONER POMP:         No tax lawyer worries about

 7   that statute, so…

 8                All right, Mr. Chair, in deference to lunch, I

 9   will be -- I never get in the way of lunch, so…

10                CHAIR PARSKY:      Thank you.

11                I think -- first of all, Bob, I want to thank

12   you very much.     We will have some follow-on analysis that

13   we will want done.

14                I think what we ought to do is to take a brief

15   lunch break now.      I apologize for not getting to our

16   morning break.     A brief lunch break, come back -- we’ll

17   be -- let’s start again at a quarter to 1:00, and we’ll

18   move right into a presentation of the packages.                   And then

19   we’ll come back around and see if we can’t pull some of

20   this together.

21                Thank you.

22                (Lunch recess from 12:13 p.m. to 12:53 p.m.)

23                CHAIR PARSKY:      We’re going to try to now move

24   into a discussion by Mark and Phil, leading the discussion

25   on some packages that we thought that the Commission

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 1   should be considering.         And we’re going to try to pass, if

 2   you will, each of the packages through the prism of our

 3   goals, once we understand what these packages entail.

 4              And I want to start by saying, none of these

 5   packages are the recommendations of the staff.                      These are

 6   not staff recommendations.           The staff has been asked to

 7   prepare these packages for analysis.

 8              COMMISSIONER COGAN:           These babies have no

 9   mothers?

10              CHAIR PARSKY:        Well, there’s this godfather

11   floating around here; but they have no direct mothers or

12   fathers.   But we had to figure out some way to get some

13   specifics before the Commission.                So this is an attempt to

14   do that.

15              And I will say that before getting into the

16   specific packages, we wanted to have a discussion, if you

17   will, of the concept of revenue-neutrality, make sure

18   people understood the way in which the staff approached

19   the issues of a distribution of the burden or the

20   regressivity/progressivity issue.               And then we’re going

21   to apply those to each of the packages themselves.

22              We also have done -- or they have done an

23   analysis, outside of the context of the packages, but as

24   indicated on our Web site, analysis of the capital-gains

25   tax independently, and how that impacts some of our goals.

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 1   Those, if the Commission decided that you wanted to

 2   address that separately in the context of any package,

 3   you can put that forward.          Similarly, there’s an analysis

 4   of the carbon tax, a tax that has been suggested for

 5   discussion.    That tax could be included, or not, in any

 6   package.   And I know a few of the commissioners have some

 7   other thoughts that might fit into the category of

 8   additional options.

 9              So with that, Mark, why don’t you take us

10   through your slides?

11              And what I thought would be helpful is if we let

12   Mark and Phil get through their entire presentation, and

13   then we’ll come back, and we’ll go at general concepts,

14   and then each package.

15              MR. IBELE:       Thank you, Mr. Chairman.

16              While none of these packages are staff

17   recommendations or staff packages, there are certainly

18   aspects of each of the packages that we would look

19   favorably upon.      But we’ll present our material --

20              CHAIR PARSKY:        You may get pressed if you keep

21   saying that.     That’s okay, they may.

22              MR. IBELE:       We’ll present our material; and

23   then, obviously, if there’s any questions, Phil will

24   answer them.

25              I wanted to spend just a little bit of time --

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 1   we’ve talked about these three issues before:                    the

 2   progressivity of the tax system, the volatility, and the

 3   revenue-neutrality concept.            I’ll go through the first

 4   two a little bit, and then Phil will handle the

 5   revenue-neutrality aspect before we tackle the packages

 6   and describe what’s going on with each of those.

 7               The first slide here is, I think I’ve used “Tax

 8   Structure Alternatives.”           This is the fourth meeting where

 9   I’ve used that phrase.          I’m looking for something else.

10   But this is something you’ve seen before.                   This is the

11   California state revenues by source.                 And the blue bar

12   shows personal income tax -- I’m sorry, retail sales and

13   use tax over time.        And I think that goes back to ‘93.

14   I don’t have the years up here.              This was a last-minute

15   addition.    And the red bar is the personal income tax.

16               So one of the first things to note is that

17   California’s tax system, the tax structure itself, has

18   become more progressive over time.                And the basis of that

19   is simply because we’ve moved from a sales and use tax,

20   which is largely regressive, as we talked about throughout

21   the Commission’s duration, to a personal income tax, which

22   has a progressive impact on taxpayers.

23               CHAIR PARSKY:        Just pause one more second

24   there.   Pause a little bit on the distinction between

25   progressive/regressive and the percentage of the burden

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 1   shared by each of the taxes -- or contributed by each of

 2   the taxes --

 3               MR. IBELE:       Sure, sure.

 4               CHAIR PARSKY:        -- and the economist’s definition

 5   versus other definitions.

 6               MR. IBELE:       Well, the definition of

 7   “progressivity” has to do with the effective rate that you

 8   pay as your income changes.            So a progressive tax would be

 9   the effective tax rate, considering all taxes, would go up

10   as your income increased.           The tax burden -- and that gets

11   at sort of this concept of the ability to pay.

12               The tax burden -- that is, we’ve seen these

13   charts where the proportion -- I should say, the portion

14   of the tax paid by decile, by income group, changes.                 But

15   what that doesn’t reflect is whether there’s been any

16   underlying change in the amount of income that is used to

17   pay that.    So they’re related, but they are separate.

18               Go ahead, you can interrupt me.

19               MR. SPILBERG:        Just a clarification on this

20   chart.   These are five-year intervals, starting with

21   1950-1951, being the first bar chart.                 And the last bar

22   chart is 2007-2008.         So they’re five-year sort of

23   intervals, what are sort of the distribution across taxes

24   in California.

25               MR. IBELE:       And that brings me to my second

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 1   point, which is, this shift in the progressivity, the

 2   relative progressivity of the tax system has not occurred

 3   because of any policy change or, largely, not because of

 4   any policy change; it’s related to the change in the

 5   economy, it’s related to how income is distributed, it’s

 6   related to how people earn their income.               So this was not

 7   a policy decision on the part of the state.

 8             COMMISSIONER POMP:          This does not show

 9   progressivity?

10             MR. IBELE:      No, it does not.

11             COMMISSIONER POMP:          Okay.

12             MR. IBELE:      No, I should make that clear.           This

13   is simply the portion of the entire tax revenues

14   attributable to each of these taxes.

15             And to get to the progressivity, I made an

16   assertion that the personal income tax is progressive and

17   the retail sales tax is regressive.              And we’ve moved to a

18   progressive tax and away from a regressive one.

19             CHAIR PARSKY:       But I think the thing to focus

20   on, on this slide, in part, is the way in which the

21   system, as it has evolved, has increased the dependence on

22   the personal income tax as part of generating the sources

23   of revenue.

24             MR. IBELE:      I think that the second point I’d

25   like to make here is that because of this shift, there’s

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 1   nothing particularly right or correct or good about the

 2   particular -- it’s obviously a value judgment, whether

 3   you like the current distribution or you don’t like it.

 4   There’s nothing particularly magical about it because we

 5   have evolved, because the economy has changed.

 6                In sort of traditional public-finance theory,

 7   going back to Musgrave and Wallace-Oates and so forth,

 8   distribution is usually not something that states were

 9   considered as part of their regular activity.                  They were

10   involved in resource allocation but not typically

11   distribution.    And it has to do with the aspect of factor

12   mobility, particularly capital mobility.

13                Having said that, most states do engage in

14   certain redistributive policies.                They don’t tax food.

15   The two states that I’m most familiar with, Minnesota and

16   Massachusetts, they both have personal income taxes.

17   Massachusetts has a uniform rate.               Minnesota has a

18   progressive –- a mildly progressive rate structure.                 So

19   although traditional theory would suggest that this is

20   not something that states ordinarily would do, there is

21   certainly leeway there for states to do it, and many of

22   them have.

23                And I guess the question then for the

24   Commission -- one of its many questions -- is what is the

25   distribution that this state should have.

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 1               The next topic I wanted to cover briefly is

 2   also a familiar one, the volatility aspect, which is

 3   closely related.       It’s also changed over time.                  If you

 4   look at what we’ve used in the past to measure the

 5   volatility of the system, the coefficient of variation,

 6   during the 1963 to 2007 period, this coefficient of

 7   variation was under 1 for the entire tax system.                      And for

 8   the 1993 to 2007 period, it was over 1.5.                   And I think for

 9   the last -- the last decade, it’s been over 1.7, from your

10   presentation at UC San Diego.

11               And this is largely due to an increased reliance

12   on the personal income tax and it’s due to the nature of

13   the personal income tax itself changing.                  The way that

14   people receive income, changing from wages and salaries.

15   A much higher role to play for capital gains.

16               COMMISSIONER POMP:           Variable pay, in general?

17               MR. IBELE:       I’m sorry?

18               COMMISSIONER POMP:           The general theory will pay

19   bonuses, things like that --

20               MR. IBELE:       Correct, yes.

21               COMMISSIONER POMP:           -- at a much higher fraction

22   of labor?    Those are much more variable than your base and

23   salary.

24               MR. IBELE:       So it’s both the shift to the

25   personal income tax, a volatile source, and changes within

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 1   the personal income tax itself.

 2               So, again, here, like with the consideration of

 3   progressivity, this is an area that the Commission should

 4   consider.    It’s a part of the revenue system now, and it’s

 5   proper to think about whether this should be actively –-

 6   as something that should be altered or affected in some

 7   way.

 8               And I think before getting into the packages,

 9   we have -- as the chair mentioned, we have three

10   packages, the first package of which has two components

11   or two alternatives.         And what we did is to look at the

12   revenue-neutrality, we tried to model these over business

13   cycle, from 2012 to 2016.           And each package within that

14   cycle was designed, the rates were put into place and so

15   forth, to raise the same amount of revenue over that

16   period.

17               They, obviously, didn’t raise the same amount of

18   revenue each year because they have different components

19   and they grow at different rates.

20               We’ve used this forward-casting method.                  It’s

21   something that the Legislature is familiar with on a

22   scoring basis.       It’s what’s used at the federal level.

23   And that’s for the revenue-neutrality part.

24               For the volatility part, to measure each of

25   these packages in terms of what sort of change in

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 1   volatility, we actually did a back-cast and simulated what

 2   these packages would have -- how they would have performed

 3   in the past.

 4             I’m going to turn it over to Phil, who is going

 5   to talk about the revenue-neutrality calculation.

 6             MR. SPILBERG:         Thank you, Mr. Chairman.          Thank

 7   you, Commissioners.

 8             I am going to just briefly talk -- do I have

 9   these things?    Okay.

10             I am just going to briefly talk about just our

11   process that we used for doing our extrapolation and

12   specifically, the results.           And the first question to ask

13   is, is our extrapolation process reasonable.

14             We used a forecast that we received from the

15   State Chief Economist, and we used 2012 through 2016.

16   Because in 2012, we are still towards the bottom of the

17   business cycle.     And by 2016, we’re getting toward -- at

18   the top or, you know, a good level of the economy.

19             What this chart shows is basically the growth

20   rates, the annual -- average annual growth rates across

21   the most recent business cycle, going from 1994 to 2003,

22   and comparing that basically to the business cycle, going

23   from 2003 to 2014.       And we’re looking, in 2003, it’s

24   basically the mid-point of the cycle; and 2014 is also the

25   mid-point of the cycle.         So we’re looking from mid-point

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 1   to mid-point and seeing if, in fact, the growth rate that

 2   we’re seeing across those two cycles are reasonably

 3   similar.   This is just a reasonable test.

 4              And with respect to personal income, we’re

 5   seeing that the growth rate -- average growth rates are

 6   about -- are similar.

 7              Over the earlier cycle, the growth rates have

 8   been higher.     But if you look at the table below, the

 9   averages, it shows that the reason it’s higher is because

10   of the high growth rates that we had around ‘99, 2000.

11              We’re looking at capital gains.                 And capital

12   gains are substantially higher in the earlier cycle than

13   they are in our projection.

14              We basically believe that the growth rates that

15   we have observed recently in capital gains are unusual.

16   And we have a recovery of capital gains from where they

17   are right now; but we do not expect capital gains as a

18   proportion of personal income to reach the proportion,

19   the level that they achieved in the recent past.                    So this

20   is something that we thought quite a bit about, and we

21   thought it was reasonable.

22              With respect to taxable sales, which is another

23   important variable for the extrapolation, we see that,

24   again, the growth rate that we have for the projection

25   period is lower than the growth rate that we have for the

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 1   recent past.

 2              And if you look at the table below, you can see

 3   why.   We had some amazingly high growth rate in taxable

 4   sale -- this is taxable sale, this is not income -- around

 5   1999-2000, 2000-2001.       And, again, those kind of growth

 6   rates maybe are high, historically; and we do not expect

 7   those to be again repeated.          And that’s the reason why we

 8   have taxable sales growth, which is lower than we had in

 9   the previous cycle.

10              If you look at basically the last year in the

11   table below, for each of those growth rates, we see that

12   those growth rates are reasonably similar.                    More similar

13   than the averages.      So that’s basically our check to see

14   if our mid-point of the business cycle is reasonable.

15              The next table goes through an income

16   distribution that we have for basically those two

17   mid-points in the cycle.         And what we see is, in our

18   extrapolation, is that we have, in essence, a movement

19   towards the middle for the distribution.                We have, that

20   last column shows basically the changes in income

21   distribution between those two years.               And it shows that

22   we have a reduction of about 4.2 percent in the

23   lower-income categories below $80,000.

24              And then what we have is about a 7 percent

25   increase, right in the middle.            And so some of this

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 1   reduction in the lower classes was basically pulled in,

 2   into the middle class.

 3              And then what we also have is, we have about

 4   4.8 percent reduction in income, in the higher-income

 5   classes, from $300,000 to $5 million in annual income.

 6   So we have some of that pull from -- into the middle

 7   classes, into those higher classes also.

 8              In addition, we do have the 2 percent growth in

 9   the over-$5-million class.           And that’s basically a secular

10   growth that we have observed over the last -- over the

11   last couple decades, that the high-income group is

12   growing.

13              By the way, these income brackets were adjusted

14   for inflation.

15              If the commissioners would like to know more

16   about the extrapolation process --

17              CHAIR PARSKY:        We’ll give them a chance.             Just

18   get through the general discussion, and then we’ll come

19   back.

20              MR. SPILBERG:        Yes, okay.

21              MR. IBELE:       This is just a little bit of

22   overview of the tax trends of 1963 to 2008.                    This is what

23   we simulated and what we based our volatility measures on.

24   And the net-receipts tax is the -- this is actually

25   year-to-year change, growth or decline.                 And the red line

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 1   there is the simulated business net-receipts tax, which

 2   is -- some of the graph mimics the sales and use tax, but

 3   is much more stable during much of the period.

 4                CHAIR PARSKY:      Pause on this one because –-

 5                MR. IBELE:     Yes.

 6                COMMISSIONER EDLEY:         The net-receipts is the

 7   more -- of the two reddish ones – is the more stable?

 8                COMMISSIONER BOSKIN:          Yes, it is the more stable

 9   of the two red ones, yes.

10                MR. IBELE:     Yes.

11                COMMISSIONER BOSKIN:          The other one is corporate

12   tax.

13                MR. IBELE:     Correct, right.

14                You don’t like my colors, I guess.

15                CHAIR PARSKY:      Well, your colors may be a little

16   confusing.

17                MR. IBELE:     Okay, well…

18                COMMISSIONER EDLEY:         I think the green one’s a

19   mess.

20                MR. SPILBERG:      We’re going to have a debate on

21   the colors.

22                CHAIR PARSKY:      Okay, okay, we can’t debate over

23   colors.   All right.

24                MR. IBELE:     This next one, you’ll like.

25                Okay, these are the packages -- and we can

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 1   come back.    But this is really just sort of a visual

 2   presentation of how, with the current law and you’re

 3   starting off at a lower level and with faster growth in

 4   the out-year and with packages -- and I’ll sort of

 5   foreshadow this a little bit -- Packages 1A and 1B have

 6   a flat tax -- a uniform tax component, start off at a

 7   higher level but don’t grow as fast because they don’t

 8   have the structure of the current law.

 9                CHAIR PARSKY:      Okay, before we go into the

10   packages themselves, any questions about the general

11   methodology?

12                John, you’re okay on this approach to

13   neutrality?

14                COMMISSIONER COGAN:         Yes, it strikes me as

15   pretty reasonable.

16                It would be nice to -- you said that you were

17   going to back-cast the volatility numbers.                     Are you going

18   to back-cast the revenue-neutrality numbers back to 2003,

19   just so we have sort of some extra confidence?

20                MR. SPILBERG:      We can certainly do that.

21                CHAIR PARSKY:      I think that would be a good

22   idea.

23                MR. SPILBERG:      Yes.

24                COMMISSIONER BOSKIN:          That would be very

25   helpful.

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 1                The one assumption here that looks kind of

 2   strange is how slowly taxable sales are growing relative

 3   to income.

 4                Do you want to defend that?

 5                CHAIR PARSKY:      Do you have a comment about that?

 6                MR. SPILBERG:      It’s just derived from the

 7   economic forecast.       And we didn’t really go behind the

 8   economic forecast to see why it’s doing what it’s doing.

 9                It does look a little bit low compared to

10   personal income.      But just keep in mind, this is taxable

11   sales, so it assumes, in essence, that we will have higher

12   growth rate in nontaxable sales, because you will assume

13   that consumption remains a fairly constant proportion of

14   income.

15                CHAIR PARSKY:      Chris, did you have a question?

16                COMMISSIONER BOSKIN:          It’s higher, but

17   startlingly higher to account for that.                 I mean, your

18   base is almost cutting in half the propensity to consume

19   taxable items.

20                MR. SPILBERG:      I did also observe that.           But we

21   didn’t really go behind the economic forecast to see why

22   it was coming out of those kinds of --

23                CHAIR PARSKY:      We could look at it.

24                COMMISSIONER COGAN:         You know, you said this was

25   a Department of Finance forecast; right?

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 1              MR. SPILBERG:        This is from the Department of

 2   Finance forecast.       It’s through 2012.           And this just goes

 3   a couple years more than that, which is not something that

 4   we published, but it’s something that is -- it comes from

 5   the same source.

 6              COMMISSIONER COGAN:           Yes, so I’m sure their

 7   economists have an explanation that you could probably get

 8   pretty readily.

 9              CHAIR PARSKY:        I think you should circulate the

10   explanation.

11              MR. IBELE:       We can follow up with them and get

12   more of an explanation for the taxable sales component.

13              CHAIR PARSKY:        Yes, why that looks so odd.

14              Chris?

15              COMMISSIONER EDLEY:           Can I just -- I think I

16   probably asked this before and I just can’t hold the

17   answer in my head, so I apologize.               For purposes of the

18   way Sacramento scores and for purposes of the way we

19   deliberate, when we say revenue-neutrality, are we

20   thinking year by year or are we thinking over a longer

21   accounting period?

22              MR. IBELE:       Leg. Counsel does the actual

23   scoring.   And what I’ve learned -- and I think we have the

24   letter from Leg. Counsel on this, too, on the Web site --

25   but I think they go out three years or five years for

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 1   revenue-neutrality.        And it’s within that period of time

 2   that they determine whether or not it’s raising revenues,

 3   in which case it would be a two-thirds vote, or it’s

 4   revenue-neutral.

 5              COMMISSIONER EDLEY:           I’m sorry.        But within that

 6   window, though, is it year by year within that window or

 7   is it --

 8              MR. IBELE:       No, it’s the entire window.

 9              COMMISSIONER EDLEY:           Cumulative over that

10   window?

11              MR. IBELE:       It’s cumulative.

12              COMMISSIONER EDLEY:           Great.      Okay, and is that

13   what you feel, that that’s the interpretation that we

14   should assign to our charge?

15              COMMISSIONER BOSKIN:            I think it’s really

16   important to do that.        Otherwise, you would never be able

17   to deal with volatility because you’d be having to

18   reproduce lower revenue in recession years and high

19   revenue in boom years.

20              COMMISSIONER EDLEY:           Oh, no, I totally agree

21   with using a longer accounting period.                 Totally.     I just

22   want to make sure that three is the right thing.

23              COMMISSIONER BOSKIN:            The common sense is you

24   aim for revenue-neutrality -- the simplest way to think

25   about it is in a typical year, like 2003, not a recession

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 1   like 2007, not a housing bubble like 2007, or going

 2   forward.

 3                COMMISSIONER EDLEY:         I would heartily endorse

 4   that, but that is not three years.               Because a typical

 5   year, you would even out throughout the business cycle,

 6   if you mean a typical year.           But --

 7                CHAIR PARSKY:      But if you look at a period of

 8   time and then you go from there to, say, what would be the

 9   typical year over that period, you would come out with

10   these two years.

11                COMMISSIONER BOSKIN:          Yes, I think the way to

12   square the issue with how Sacramento does things is, the

13   thought is implementing this several years from now, when

14   the economy is going to be in some kind of random year in

15   the business cycle, not in the current recession.                   And

16   geared to that, I think that if we were dealing with it

17   right now, we would have a whole other set of concerns to

18   deal with.

19                COMMISSIONER EDLEY:         Got it.       That’s --

20                COMMISSIONER BOSKIN:          So I think that’s why

21   they’re doing 2012 to 2016, and saying, well, if we

22   average out about the same there, then if this were

23   implemented in some hypothetical several-years-in-the-

24   future date, we would design a tax code, if we come up

25   with a new tax code, one of these plans or something else,

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 1   that would raise the same revenue as the current one would

 2   in that hypothetical kind of business-cycle neutral year,

 3   then -- and if that code was more -- was less volatile,

 4   there would be a lot less risk of them having to make

 5   drastic changes around it.         But it still wouldn’t remove

 6   the issue or the temptation or the possibility of them

 7   raising the rates or lowering the rates or doing something

 8   else with respect to their own value judgments, spending

 9   desires or business-cycle conditions.              There would just be

10   a lot less need for it than there is now and have these

11   big swings.

12             COMMISSIONER EDLEY:          Let me just drop a footnote

13   then because I agree with everything Michael just said.

14   It’s not obvious to me, however, that if we were thinking

15   about implementation at a date into the future, it’s not

16   obvious to me how one connects that with the legislative

17   scoring rules.

18             COMMISSIONER BOSKIN:           Right.

19             COMMISSIONER EDLEY:          Because it sounds like

20   their window for analysis might not be the same as our

21   window for analysis.      And as an analytical matter, we

22   might not care; but when we get to thinking politically,

23   we probably ought to care.         So that’s a footnote for later

24   thinking, I suppose.

25             CHAIR PARSKY:       Okay.      Curt?

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 1             COMMISSIONER PRINGLE:             If I could.        I do think,

 2   though, we should all be talking somewhat the same

 3   language because there’s a lot of audiences for our

 4   product, and one of those is the Legislature.                  And I think

 5   we should talk in the language they do.

 6             As one who certainly isn’t excited about

 7   increasing the revenue volumes to the state, I know, and

 8   I think everybody knows, they will be.                 And part of what

 9   our mission is, though, is addressing tax policy for the

10   21st century economy; right?           Therefore, just the

11   principle, even if every -- if we’re exactly the same

12   generation of revenue under one plan, as the present plan

13   this year, maybe next year, because the budget is really

14   done in two fiscal years, anyway, and they add a third

15   year, we know the economy is changing.                 Therefore, what

16   we really are asked to address is how do we address that

17   future change in the economy’s makeup of the state.                  So

18   by its very nature, there may be a change that brings in

19   additional revenue.

20             And I don’t think that’s scary, but I think

21   we need to live by the established practice in the

22   Legislature; or else if we extrapolate that out to a full

23   business cycle ten-year discussion, I think that gets

24   pretty tough.    And I don’t necessarily think then bringing

25   it back to a legislator’s reality, that’s going to be how

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 1   they score it.

 2             And it’s not necessarily something that’s

 3   happened once or twice.        This whole discussion happens

 4   not only at budget time, but in scoring all other tax

 5   proposals and other principles.

 6             COMMISSIONER EDLEY:           That’s right.

 7             COMMISSIONER PRINGLE:            So I think we really

 8   should adhere to what the practice is as opposed to

 9   maybe -- maybe that’s a better way and a smarter way, but

10   that’s not necessarily the way it’s being done.                    So we

11   should do it the way it’s being done.               And I think it’s a

12   safer place.

13             COMMISSIONER EDLEY:           But then how would we do

14   that -- I’m sorry, but then how would we do that if our

15   proposals would not become effective until outside the

16   window?

17             COMMISSIONER PRINGLE:            Well, you take three

18   years -- you create the window -- the window’s open when

19   the window’s open if the proposal’s established at this

20   point in time.

21             COMMISSIONER EDLEY:           But is that the way it

22   would be scored?

23             MR. IBELE:       We’re going to have to -- I mean,

24   this clearly is evidence we’re going to have to

25   cross-walk these.      Because from our perspective, we want

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 1   to make sure that we’re capturing the business cycle for

 2   revenue-neutrality purposes.            We’re going to have to

 3   figure out a way to translate that into what the

 4   Legislature looks like and --

 5                COMMISSIONER EDLEY:         What’s weird about this is,

 6   if the legislation that we draft -- strike that.

 7                If legislation is dropped now, presumably it’s

 8   going to be scored for fiscal ‘10, ‘11, and ‘12.                  If what

 9   we draft becomes effective in fiscal ‘12 and out, then

10   I’m just a little bit confused about how we -- do you

11   see the --

12                MR. IBELE:     Yes.

13                COMMISSIONER EDLEY:         One issue is, “Is it three

14   years,” and the other issue is “Which three years,” and

15   “Is it the same three years that leg. counsel would use,”

16   so…

17                MR. IBELE:     I see the dilemma.           Unfortunately,

18   I don’t see the way out right now.               But clearly, we’re

19   going to have to --

20                CHAIR PARSKY:      Fred, did you have a comment?

21                COMMISSIONER KEELEY:          Yes, I do.

22                I think on Mr. Edley’s point, following up on

23   Mr. Pringle’s point, at least when I sat on the budget

24   committee for six years, the way the budget committee saw

25   things was in three years.           And these years made sense to

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 1   them, about how they would think about things.                     There’s

 2   the year that they’re in literally now with an adopted

 3   budget.   And that gets dealt with in terms of revenue

 4   estimates and caseload estimates and the variation from

 5   those in the actual year for which there’s an adopted

 6   budget through a process at the Joint Legislative Budget

 7   Committee of the administration submitting certain letters

 8   to the budget committee which make adjustments, up, down,

 9   or sideways, both on the revenue side and the caseload

10   side and so on.     They have a whole process for how they

11   deal with that.

12              For the year that they’re in right now, they

13   then are working simultaneously on a budget proposed in

14   January to go into effect the following July 1st, all the

15   way around the horn to June 30th of the next year; and

16   they use the Department of Finance forecast that, all the

17   way back in about November, before the Governor even

18   submits the budget in January, which is why then there is

19   a forecast revision of both revenues and caseloads in May,

20   the so-called “May Revise.”          That’s for what they call the

21   “budget year.”

22              Then in budget year plus 1, which the

23   departments and agencies are literally preparing budgets

24   now, not for ‘09-10, but ‘10-11, and they are given

25   certain assumptions by the Department of Finance in terms

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 1   of projections of revenue and caseload.                 So that’s the

 2   established world in Sacramento.

 3              If you understand, like, how do they see it?

 4   They see it the year they’re in, the year for which they

 5   are budgeting, and budget year plus 1.                 And they have a

 6   long history of being comfortable with those numbers and

 7   those processes.      And the true-up occurs in three

 8   different places.      During the year where you’re actually

 9   operating within an approved budget, you have the

10   section 27, section 28, like we’ve got all this business

11   that allows you to make adjustments going along.                   In the

12   budget you’re planning for, you get the May Revise.                  And

13   for budget year plus 1, the departments and agencies are

14   given assumptions, as is the Legislature, through a

15   combination of the Department of Finance, Franchise Tax

16   Board, Board of Equalization, and the Legislative

17   Analyst’s Office.

18              The reason I say all that is, that’s the fixed

19   system in there.      “Fixed” meaning agreed-upon and used

20   historically.

21              So for the purposes of looking at this, I’m not

22   sure it’s as important -- as Mr. Edley would say, “strike

23   that.”   My sense is that it’s fine to pick -- to use that

24   practice of the three years, because I don’t think it’s

25   our call on -- if we come up with a package, I don’t think

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 1   it’s our call.      It’s going to be the Governor and the

 2   Legislature’s call on if and when they were to try to

 3   adopt that package.        And then they’ll have the opportunity

 4   to do their own forecasting in whatever way they want to

 5   do it.   If they want to do it outside the context of a

 6   recession, then they can do that.               If they want to see --

 7   if they are desirous of a tax system which has

 8   significantly changed because they like what they see of

 9   the benefits of the proposal we send them, they may want

10   to drop that in right away.           So I don’t know that we ought

11   to get real hung up on that issue about reconciling the

12   two things that we were just talking about.

13              I think it may be fine to work within the

14   established custom and practice that both the executive

15   and the legislative branch use for doing business with

16   each other about revenue and caseload projections.

17              CHAIR PARSKY:        Since we have the Director of

18   Finance here, do you want to make a comment, Michael,

19   about --

20              MR. GENEST:       Yes.     It’s actually going to be a

21   little bit simpler than all that.               Because what’s going

22   to happen is, this bill, at least as I understand it,

23   would take effect in ‘12-13, or ‘12.

24              So what the Leg. Counsel will do is they’ll get

25   FTB and Finance and others to analyze the revenue stream

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 1   from the law as changed by this bill, from ‘12 forward,

 2   three to five years, and then they’ll look at the current

 3   law in the same period.        And if the current law generates

 4   more revenue, it is a tax cut.            If it generates less,

 5   it’s a tax increase.

 6             COMMISSIONER PRINGLE:            Or it’s neutral.

 7             MR. GENEST:       So the only thing is that this

 8   bill --

 9             CHAIR PARSKY:        Right, and it was in that context

10   that this analysis was prepared.

11             MR. GENEST:       Right.

12             It would be quite -- as Mr. Keeley says, it

13   would be quite different if the bill was to take effect

14   July 1 of this year.       Then you’d be into a budget thing,

15   and it wouldn’t make much sense.               But since the bill is

16   going to take effect in the future --

17             CHAIR PARSKY:        And the underlying concept is,

18   it wouldn’t take effect in the current year.                  This is

19   looking forward.     So we’ve picked the years that would be

20   naturally looked at by the Legislative Analyst’s Office.

21             COMMISSIONER EDLEY:           That’s good, that’s good.

22   So we would have time to get out of town, is what you’re

23   saying?

24             CHAIR PARSKY:        Or to adopt a transition,

25   whatever you want to say.

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 1               COMMISSIONER EDLEY:           Okay.      Good.

 2               COMMISSIONER HAUCK:           Well, it’s related to --

 3   correct me if I’m wrong here, Mike, but all of this is

 4   related to the forecast for the state budget over the next

 5   three years or so, all of which is negative.                    So you

 6   wouldn’t want to start this during that period of time.

 7               MR. GENEST:       Well, in some sense, it doesn’t

 8   matter because all you do is, whatever period of time,

 9   you model the new bill versus the existing law.                      And in

10   the same period, they’ll each have different effects.

11   And then the question is, does this give you more revenue,

12   it’s a tax increase, two-thirds; if it doesn’t, it’s not.

13               So it almost -- from that perspective, it

14   doesn’t matter what part of the business cycle you’re in.

15               COMMISSIONER BOSKIN:            From our perspective, if

16   we’re trying to decide something that is less volatile

17   over the business cycle, and we’re kind of roughly

18   designing this to be business-cycle-neutral, that would

19   have -– that replacement, if it was less volatile, would

20   raise more revenue in a recession year and be called a tax

21   increase.    So we just have to be aware of that, that’s

22   all.

23               COMMISSIONER COGAN:           Yes, the point of these

24   calculations, as I see it through 2013, is that 2013 is,

25   in fact -- it looks like the middle of a cycle, which is

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 1   a nice feature of this.

 2             CHAIR PARSKY:       Exactly.

 3             COMMISSIONER COGAN:          Having said that, at the

 4   end of the day, when      we make our recommendations and have

 5   a budget-neutral package, by the time the Legislature gets

 6   around to enacting it, all of the economic forecasts will

 7   change, and there might very well be a net tax increase

 8   or a net tax reduction in it.          But that’s sort of –-

 9   that’s outside of our purview.

10             CHAIR PARSKY:       Our purview.         Right.

11             Okay, let’s move to the packages so that

12   everyone can kind of understand.

13             And what I’d like you to do on this, we have

14   Package 1A and B, Package 2, and Package 3.                  So why don’t

15   we make sure that we get through them, and then we’ll come

16   back and examine each.

17             Okay, proceed ahead, gentlemen.

18             MR. IBELE:      Each of the packages has a personal

19   income tax component.      And we thought it would be useful

20   just to go through with the definition of “adjusted gross

21   income,” which is the basis for the calculation on the

22   personal income tax.

23             You start with gross income, income from all

24   sources, unless it’s exempt.          This would include salaries,

25   wages, commission, tips, dividends, interest earnings,

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 1   pensions, realized capital gains, et cetera.                  And deducted

 2   from that would be contributions to individual retirement

 3   accounts, Keogh plans, 401(k)s, self-employed health

 4   insurance payments.      And that would give you AGI, which

 5   is, again, the basis for -- the starting point for the

 6   personal income tax component.

 7             All the packages, based on what we heard from

 8   the Commission members during the hearings and with

 9   individual commissioners, seek to lower the rates for the

10   existing taxes.    They all bring in, to a greater or lesser

11   extent, a new business net-receipts tax.                And they all --

12   because of that, they all move towards a -- some more than

13   others -- move towards a consumption basis for taxation.

14             And when we go through these packages, keep in

15   mind that the distributions that we’ll show you are all

16   relative to –- we’re comparing this package -- the

17   distribution under the package with the distribution under

18   current law.

19             COMMISSIONER MORGAN:            A quick question.

20             CHAIR PARSKY:        Becky?

21             COMMISSIONER MORGAN:            Give me an example, if you

22   would, please, of income that would be exempt.

23             MR. IBELE:       Federal securities -- interest on

24   federal securities.      We can’t tax that.

25             COMMISSIONER MORGAN:            Okay, and bond money from

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 1   munis?

 2             MR. IBELE:      I’m sorry?

 3             COMMISSIONER MORGAN:           And income from municipal

 4   bonds, for instance, that kind of thing?

 5             MR. IBELE:      Yes, under the state, California

 6   Lottery winnings.

 7             COMMISSIONER MORGAN:           There are so many of

 8   those.

 9             CHAIR PARSKY:       But the last point that Mark made

10   I think is important to bear in mind, because the analysis

11   that will be done on both progressivity/regressivity,

12   volatility, is in comparison to the existing system.              And

13   we start with a presumption or an assumption that the

14   existing system is something we’re trying to reform.              And

15   we’ll see whether we get there at the end, but that’s what

16   we’re operating from.

17             Go ahead.

18             MR. IBELE:      And we did model the incidence and

19   the distributions for the purpose of lowering expectations

20   and hoping to exceed them.

21             California doesn’t have an incidence model.              It

22   would be nice if the state did have an incidence model.

23   We’ve relied on the Minnesota incidence study in

24   attributing taxes to households, taxpayers, and then

25   using the Minnesota incidence model to attribute the

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 1   business portions of the sales tax, the business

 2   net-receipts tax, and the corporation tax.

 3             So what you’ll see in that is a reflection of,

 4   I think, probably what has been used by many states in

 5   lieu of their own incidence model.

 6             So for Package 1, we called it Version A, this

 7   is a uniform income tax, at a rate of 6 percent.                  There

 8   are no deductions, no credits.

 9             This particular package would also eliminate the

10   corporation tax.

11             Feel free to chime in whenever you feel like.

12             CHAIR PARSKY:       He will.

13             MR. IBELE:      I know.

14             It would also eliminate the state general fund

15   sales tax, the 5 percent rate.           And it would institute a

16   business net-receipts tax.         This would be -- if you go

17   back to the slide -- this one right here, this is

18   Package 1A.   It would raise a little bit more -- it would

19   raise more in the first year and less in the final year

20   than the current law.

21             With this particular version, Package A, it

22   would be raising about 20 billion more dollars under the

23   personal income tax than under current law.                  And we’d have

24   a business net-receipts tax of about 1.56 percent based on

25   the tax base that we were provided by Ernst & Young.

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 1             COMMISSIONER KEELEY:           Question?       Mr. Ibele, I

 2   want to make sure I understood what you just said with

 3   regard to the personal income tax.

 4             So on Tax Package 1A, “Effective Tax Rate, Share

 5   of Total-Selected Taxes,” so on this, the entirety of all

 6   the changes in Package 1A are reflected on this graph?

 7             MR. IBELE:      On this graph?

 8             COMMISSIONER KEELEY:           That graph, right there.

 9             MR. IBELE:      Yes.

10             COMMISSIONER KEELEY:           And that –-

11             MR. IBELE:      And so –-

12             COMMISSIONER KEELEY:           I’m sorry, please go

13   ahead.

14             MR. IBELE:      I was just going to say, this is not

15   a full incidence of all the state’s taxes.                   This is

16   showing the change from current law under the taxes that

17   we are changing, corporation taxes.

18             CHAIR PARSKY:       That are in the packet?

19             MR. IBELE:      Yes.

20             COMMISSIONER PRINGLE:           Can I ask a question on

21   that point?

22             COMMISSIONER KEELEY:           Please do.

23             COMMISSIONER PRINGLE:           So the green line, which

24   reflects current, doesn’t take into account the bank and

25   corp. tax; is that right?

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 1             MR. IBELE:      It does take into account the bank

 2   and corp. tax.

 3             COMMISSIONER PRINGLE:           So is there a similar

 4   formula that is applied, or is it a different formula to

 5   the business --

 6             MR. IBELE:      The business net-receipts tax.

 7             COMMISSIONER PRINGLE:           The business net-receipts

 8   tax?

 9             MR. IBELE:      We use the incidence that’s

10   basically the retail sales and use tax for the incidence

11   of that, which is a combination of the consumer portion

12   and the business portion.

13             COMMISSIONER PRINGLE:           I see.

14             MR. IBELE:      The corporation tax has a slightly

15   different incidence.

16             COMMISSIONER PRINGLE:           But both of those taxes

17   are applied here and distributed to each of the income

18   groups; is that right?

19             MR. IBELE:      Yes, yes.       What this doesn’t

20   include, and the reason why it’s different from other

21   distributions you’ve seen, it doesn’t include property

22   taxes, it doesn’t include excise taxes, which are --

23             COMMISSIONER HALVORSON:             Gasoline taxes?

24             CHAIR PARSKY:       No taxes that aren’t changed.

25             MR. IBELE:      No taxes that are not changed.

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 1   Gasoline --

 2              CHAIR PARSKY:       They would be not in this.

 3              COMMISSIONER COGAN:          That was too many “nots.”

 4              CHAIR PARSKY:       I’m sorry, this only includes the

 5   taxes that are changed, namely the personal income tax,

 6   the corporate tax, the sales tax, and now the net-receipts

 7   tax are incorporated.

 8              MR. IBELE:      Right.

 9              COMMISSIONER HAUCK:          Mr. Chairman?

10              CHAIR PARSKY:       Yes, Bill?

11              COMMISSIONER HAUCK:          I think not necessarily a

12   question for Mark.      But when you eliminate the five-cent

13   state sales tax, the immediate question would be in terms

14   of the bill that might be proposed, are you going to

15   authorize local government to relevy by vote, perhaps, any

16   portion of that five-cent reduction in the state sales

17   tax?   The difficulty here, you have state and local

18   taxation so intricately intertwined, and never reconciled

19   since the passage of Prop. 13, that it’s hard to look at

20   these questions without also understanding the interaction

21   and the impact in terms of local governments.                  And that

22   would immediately be a question that would be raised in

23   the Legislature.

24              MR. IBELE:      Well, this proposal would not touch

25   the local portion of the sales tax, the Bradley Burns or

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 1   the special-district taxes.

 2             Obviously, the Board of Equalization, which

 3   administers the general fund portion and the special funds

 4   and the local taxes and so forth would have to continue to

 5   administer this.    And there would be additional costs for

 6   local governments.

 7             COMMISSIONER HAUCK:          I understand.

 8             And I’m saying that when you already have local

 9   governments in the state that are screaming about not

10   having adequate resources to do largely what the State has

11   required them to do, that’s particularly true when it

12   comes to counties.     And so they would immediately see the

13   potential for a revenue source here.              Even if it would

14   have to be imposed by vote, it would probably be a

15   two-thirds vote if it was for specific purposes.                  And if

16   that were true, you would have some counties that probably

17   would enact some additional sales tax, let’s say.                 And

18   you’d have many counties, any number of counties that

19   never would because they never could get the vote.

20             And that’s the point I’m trying to make with

21   respect to -- I understand you haven’t included that here.

22   But one of the first questions that would be raised in

23   Sacramento would be, are you going to permit some or all

24   of this reduction in the state sales tax to go back to

25   local government?     And I think we’d need to be prepared to

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 1   answer that in some fashion.

 2                CHAIR PARSKY:      You mean, by allowing them to

 3   increase the taxes they now charge?

 4                COMMISSIONER HAUCK:         Yes, yes.

 5                COMMISSIONER HALVORSON:             Through the mechanisms

 6   ordinarily used to do that?

 7                COMMISSIONER HAUCK:         Yes.

 8                COMMISSIONER KEELEY:          Mr. Chairman, I think I

 9   still have the floor.

10                So, Mr. Ibele, the chart that we’re looking at,

11   what I thought I heard you say was this package, in its

12   entirety, Package 1A, is revenue-neutral as previously

13   described.

14                MR. IBELE:     Yes.

15                COMMISSIONER KEELEY:          And the effect of it with

16   regard solely to the personal income tax is that it would

17   increase the personal income tax revenue to the state by

18   $20 billion.

19                MR. IBELE:     Roughly.

20                COMMISSIONER KEELEY:          Although the package in

21   its entirety is revenue-neutral.                And so where that would

22   happen is, from looking at this bar chart, it would happen

23   by pushing down the income scale, the payers of that

24   personal income tax.        So, for example, the $200,000 and

25   over, the $100,000 and $200,000, those groups of

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 1   taxpayers, although individual taxpayers within that --

 2   who knows what they would do -- but those groupings of

 3   taxpayers would pay less as a group.                And then when you

 4   got into the $75,000, $50,000, $20,000, in those bars,

 5   those folks would pay more as a group.                 Not as

 6   individuals, necessarily, but as a group.

 7                CHAIR PARSKY:      Their share would be higher.

 8                COMMISSIONER KEELEY:          Mr. Chairman, I value your

 9   opinion, but I’m asking the question to Mr. Ibele.

10                CHAIR PARSKY:      Go ahead.

11                MR. IBELE:     The share of the tax burden for

12   those four lower groups would increase and their effective

13   tax rate would increase, if you look at the red line,

14   which is the effective tax rate.                It’s not surprisingly a

15   little bit higher than 6 percent.               It’s a uniform tax.

16                Keep in mind that, you know, we tried to

17   approach this in ways that would get at many of the goals

18   of the Commission.

19                COMMISSIONER KEELEY:          I understand, I

20   understand.

21                MR. IBELE:     And one of the them was this --

22                COMMISSIONER KEELEY:          I understand.        Thank you

23   very much.

24                Thank you, Mr. Chairman.

25                CHAIR PARSKY:      We’re going to need to go through

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 1   those goals just with respect to each package so that

 2   everyone understands.

 3               Now, the other thing I think you should bear

 4   in mind, Mark mentioned it, but the rate that would be

 5   applied on the business net-receipts tax to maintain

 6   neutrality would be 1.56 percent.               That’s not on the

 7   screen.    Obviously, the rate could be different.

 8               Inherent in this proposal is a proportional

 9   rate, or a one uniform rate, and the elimination of the

10   corporate tax and the general sales tax as part of the

11   package.

12               COMMISSIONER POMP:          Mr. Chairman.

13               Just so I understand, Mark.              The red is PIT plus

14   the net-receipts tax; is that right?

15               MR. IBELE:      That’s correct.

16               COMMISSIONER POMP:          And the green light is PIT

17   plus corp. plus sales?

18               MR. IBELE:      Right.      PIT, corp., sales, yes.

19               COMMISSIONER POMP:          And when the chairman was

20   trying to clarify -- let’s just take the lowest group --

21   that their share of total taxes goes up –- well, it’s hard

22   to say, but let’s just say 2 percent to 4 percent, you

23   were trying, I think, to distinguish that observation

24   with the statement that taxes will increase on people in

25   that group?

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 1                CHAIR PARSKY:      Right.

 2                COMMISSIONER POMP:         And explain why that won’t

 3   be true.

 4                CHAIR PARSKY:      Well, no, I wasn’t -- I was

 5   saying that if you look at the bars, you will see, as

 6   indicated by the title, the impact of the share of total

 7   taxes borne by different groups.

 8                COMMISSIONER POMP:         Right.

 9                CHAIR PARSKY:      That’s a little different

10   analysis than the economist’s analysis of the

11   progressivity/regressivity issue, which is much more

12   applicable to the marginal rates that are being paid.

13                COMMISSIONER POMP:         Okay, but you don’t disagree

14   that the taxes on these groups will increase in these

15   lower level –- that you agree with?

16                CHAIR PARSKY:      Inherent in a decision to alter

17   or to address the way in which our system has moved to a

18   dependence on the personal income tax as currently

19   structured.    Or said another way, a desire to address the

20   fact that a small percentage contributes a high percentage

21   of the personal income tax would be a move in this

22   direction.    That’s inherent in wanting to address those

23   issues.

24                You may not want to do it as dramatically; you

25   may want to do it differently.             But if you believe that

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 1   part of the problems created -- or said another way, part

 2   of the issues relating to volatility and some of these

 3   other issues is a combination of the over -- of the

 4   reliance on the personal income tax and the nature of that

 5   tax, you’ll have to make changes in that of some kind.

 6   That will move the contribution made by groups from right

 7   to left.

 8                COMMISSIONER KEELEY:          I couldn’t have said that

 9   last part better.

10                COMMISSIONER POMP:         I think that’s a very clear

11   statement.

12                This has nothing to do with progressivity, so is

13   there an equivalent chart?

14                CHAIR PARSKY:      Well, the effective tax rate

15   does.

16                COMMISSIONER POMP:         Well…

17                MR. SPILBERG:      Yes.

18                MR. IBELE:     Yes.

19                CHAIR PARSKY:      The effective tax rate does.

20                COMMISSIONER POMP:         Oh, yes.       That’s right.

21                So the break-even point is about a hundred and

22   what then?

23                COMMISSIONER EDLEY:         105.

24                COMMISSIONER POMP:         I don’t know, you know

25   the --

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 1             MR. IBELE:      The scale?          I’ll get the exact

 2   figure for you.

 3             COMMISSIONER POMP:          Okay.      Now, this is no

 4   better, of course, than the assumptions on incidence.                 And

 5   where do we learn what those assumptions are?

 6             MR. IBELE:      I can --

 7             COMMISSIONER POMP:          I mean, you don’t have to do

 8   it now, but I mean, that is very important.

 9             CHAIR PARSKY:       Circulate --

10             MR. IBELE:      I can give you the incidence

11   assumptions that we used.

12             COMMISSIONER POMP:          And we are relying on what

13   the state of Minnesota assumed to be true about, what,

14   their sales tax?

15             MR. IBELE:      Yes.

16             COMMISSIONER POMP:          And then we adjust our sales

17   tax for their sales tax differences?              And you’ve done

18   that?

19             MR. IBELE:      We’ve done that.

20             COMMISSIONER POMP:          And you do the same thing,

21   corporate tax?

22             MR. IBELE:      Well, ideally we’d have the

23   California incidence study, but we don’t.

24             COMMISSIONER POMP:          But we don’t.          So we take

25   their incidence study, which was done by whom?

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 1               MR. SPILBERG:        Minnesota.

 2               MR. IBELE:       Yes, I think it was originally done

 3   by the economics faculty at the University of Minnesota,

 4   and I believe it’s done in-house now.

 5               COMMISSIONER POMP:           I see.      And they do that

 6   every year now or periodically?

 7               MR. IBELE:       Every two years.

 8               COMMISSIONER POMP:           Every two years.            So this

 9   is complicated.

10               MR. IBELE:       It’s very –-

11               COMMISSIONER POMP:           You take our sales tax and

12   you sort of compare it to theirs.

13               And how do you make an adjustment?                  Do you use

14   their assumptions and --

15               MR. IBELE:       We’ve used their incidence

16   assumptions and made adjustments for rates and so forth;

17   but nothing more elaborate than that.

18               CHAIR PARSKY:        Just so we get everybody through

19   these packages, take Package 1A, measure it against, in no

20   particular order, volatility.             Give some indication on the

21   issue of volatility.

22               MR. IBELE:       Let me skip ahead if this doesn’t

23   make you dizzy.

24               CHAIR PARSKY:        I’m sorry, did you want to ask a

25   question?

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 1                COMMISSIONER ITO:        Sure.      And it’s just a

 2   clarifying question about these graphs.

 3                At the bottom, when you had these income

 4   distribution -- these income brackets, maybe I missed

 5   this, but is this by household and by business entity?

 6   Or is this just the household?

 7                MR. IBELE:     This is by –-

 8                COMMISSIONER EDLEY:         It’s got to be by

 9   household.

10                MR. IBELE:     This is by household.

11                COMMISSIONER EDLEY:         Right, because your

12   incidence in analysis was to get it to pass through to the

13   household.

14                MR. IBELE:     Correct.

15                COMMISSIONER ITO:        Okay.

16                CHAIR PARSKY:      Okay, I know you skipped ahead a

17   little bit, but I think each of the proposals, let’s

18   measure against volatility, efficiency, potential for

19   economic growth, simplicity, and shifting the tax burden.

20                MR. IBELE:     Okay, I think we’ve --

21                COMMISSIONER EDLEY:         These are great charts, by

22   the way.   A lot of stuff.

23                MR. IBELE:     Thanks.

24                CHAIR PARSKY:      The staff has done a lot of work

25   in this area.

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 1             But go ahead.

 2             MR. IBELE:       Volatility.

 3             Let me skip ahead.

 4             Here’s the volatility measure that we’ve used,

 5   the coefficient of variation.           Package 1A, not

 6   surprisingly, substantial percentage drop from the current

 7   system, from 1.47 to .91.

 8             COMMISSIONER POMP:           And the source of that is

 9   really in the PIT?

10             MR. IBELE:       That’s the PIT at the flat rate.

11   And it’s the net-receipts tax, too.

12             COMMISSIONER BOSKIN:            A combination

13             MR. IBELE:       You know, if you go back to the --

14             COMMISSIONER BOSKIN:            Services are much more

15   stable than goods.

16             MR. IBELE:       You know, if you go back to this

17   chart, right here, it’s really --

18             CHAIR PARSKY:        That will get you dizzy, but…

19             MR. IBELE:       Sorry.

20             CHAIR PARSKY:        Okay, efficiency.              What’s your

21   view of efficiency on Package 1A?

22             MR. IBELE:       Well, I think you’re lowering rates,

23   in an economic sense.       On the PIT rate, you’re lowering

24   the top end.   You’re getting rid of -- or you’re lowering

25   dramatically the sales and use tax rate.

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 1             We’ve heard before, from an economic standpoint,

 2   you’re disproportionately lowering the inefficiency of

 3   taxation by lowering those rates.               I think it would score

 4   reasonably well in those areas.

 5             I think in efficiency, bringing in services with

 6   a net-receipts tax, treating businesses equivalently in

 7   that regard, it would score higher on the efficiency.

 8             I think simplification, which we’ve talked about

 9   periodically.    You’re getting rid of, under this proposal,

10   deductions, credits.        You’ve got one rate.               You’ve got

11   potentially a large number of taxpayers that would simply

12   be getting income from wages.            And it would have

13   simplified returns.

14             CHAIR PARSKY:         Can you just pause on that for a

15   minute?

16             Phil has done a little bit of analysis of that

17   that might be of interest to the commissioners.

18             If all of your income under this proposal was

19   from wages, about what percentage of California taxpayers

20   would be in that category?

21             MR. SPILBERG:         Well, if you adjust it just a

22   little bit, by allowing taxpayers $100 of non-wage

23   income -- $100, just $100 -- then you would have over

24   50 percent of the taxpayers would basically not have to

25   file a tax return because their withholding would be

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 1   sufficient to meet their tax liability.

 2              CHAIR PARSKY:        Keep going.

 3              COMMISSIONER POMP:           So you said no interest, no

 4   dividends above $100?

 5              MR. SPILBERG:        Right.      That’s right.          So about

 6   50 percent of the tax returns do not have more than $100

 7   of non-wage income.

 8              CHAIR PARSKY:        In California.

 9              COMMISSIONER POMP:           Yes.

10              CHAIR PARSKY:        Go ahead.

11              MR. IBELE:       I think on the --

12              CHAIR PARSKY:        You’ve covered the distribution,

13   so I think we’re okay there.

14              MR. IBELE:       Yes, we’ve covered the distribution.

15              Economic growth, I’m not going to venture a

16   guess on what it would do.           But you do have the immediate

17   expensing on the business net-receipts tax, which is a

18   plus.   You’re getting rid of a corporate income tax rate,

19   which is a pretty high rate.

20              So do you have anything more you want to add?

21              MR. SPILBERG:        No.

22              COMMISSIONER KEELEY:            Mr. Ibele, could I ask –-

23              CHAIR PARSKY:        Sorry.

24              COMMISSIONER KEELEY:            Mr. Chairman, would you

25   prefer I not?

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 1             CHAIR PARSKY:         I’d just like them to get through

 2   1B.

 3             Now, inherent in 1A is taking on whatever

 4   interests may be involved in not permitting itemized

 5   deductions for interest on your mortgage, property taxes,

 6   charitable contributions, or some extension of that.

 7             One comment back from some people I’ve talked

 8   to was, well, allow those battles to be fought at the

 9   federal level, not at the state level.                 That may not be

10   an answer, but, obviously, Package 1 does not allow

11   itemized deductions.

12             Package 1B.        Go ahead, Mark.

13             COMMISSIONER BOSKIN:             It also deals with the

14   distribution in 1B.       The exemption, at the bottom,

15   dramatically lowers the tax rate on lower and lower

16   middle-class.

17             CHAIR PARSKY:         And that exemption could be

18   shifted to 1A to as well as 1B?

19             COMMISSIONER BOSKIN:             Yes.

20             CHAIR PARSKY:         Okay, go ahead.

21             MR. IBELE:        And that actually is a good lead

22   into Package 1B, which we fashioned -- you see the

23   dramatic shift in the Package 1B effective rate.                  We’ve

24   modeled something that includes a $5,000 exemption for

25   non-itemizing taxpayers.          And the way we did that is, if

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 1   we gave them the $5,000-per-person exemption and had them

 2   not itemize unless it was better for them to itemize under

 3   our simulation.

 4              And then as the Chair mentioned, we included in

 5   this deductions from mortgage interest, charitable

 6   contributions, and property taxes.

 7              This also included the elimination of the

 8   corporation tax, and it eliminated the state general fund

 9   sales tax, and a business net-receipts tax.

10              You give up a lot more money, a lot more revenue

11   in this particular package, obviously, because of the

12   additional deductions and credits.               So the -- and, again,

13   we’re using the net-receipts tax as kind of a balancer

14   here.   The rate is about 2.77 percent for this particular

15   package.

16              COMMISSIONER HAUCK:           That’s back on the income

17   tax on this one?

18              MR. IBELE:       The income tax --

19              CHAIR PARSKY:        About plus 10 billion.              About

20   half.

21              Is that right?

22              MR. IBELE:       Right, it’s about $10 billion more

23   than under current law.

24              CHAIR PARSKY:        Right.

25              Okay, go ahead.

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 1                MR. IBELE:     You know, I think some of the

 2   take-aways here are similar to the first one, with

 3   perhaps --

 4                CHAIR PARSKY:      Shift over to volatility charts.

 5                MR. IBELE:     Yes, the volatility is actually very

 6   similar.   There’s a little bit of increase over

 7   Package 1A.    It’s just about 1, the coefficient of

 8   variation.    But substantially below where we are now.

 9                CHAIR PARSKY:      Efficiency, any differentials?

10                MR. IBELE:     You know, you had these additional

11   deductions and credits and so forth.                I think that means

12   you’re putting more emphasis on a higher business

13   net-receipts tax if you’re keeping the personal income

14   tax at 6 percent.       So it’s probably not as an efficient

15   system.

16                There’s probably more distortions going on

17   there.    You lose some of the simplicity.               Potentially, for

18   some taxpayers, you lose quite a bit of the simplicity.

19                COMMISSIONER POMP:         Does the cost of adopting

20   and administering a new tax enter into efficiency?                  Or has

21   that entered into the category?

22                MR. IBELE:     Well, it doesn’t enter into, I

23   guess, how I’ve been using the term, which is economic

24   efficiency.

25                COMMISSIONER POMP:         Which --

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 1               MR. IBELE:       It’s an administrative efficiency

 2   question.

 3               COMMISSIONER POMP:           What’s the definition

 4   of “economic efficiency”?

 5               MR. IBELE:       Well, it’s basically defined as, you

 6   know, are the right price signals being sent and received

 7   in the market?       And the taxes, by their very nature, in an

 8   efficient market, create a wedge and create a difference

 9   between the perceived price and the real price.                      And

10   that’s where you get the inefficiency.

11               COMMISSIONER POMP:           So in that definition --

12               MR. IBELE:       Unless there’s some other corrective

13   tax.

14               COMMISSIONER POMP:           So in that definition, any

15   lowering of a tax rate is going to be more efficient

16   because the wedge will be smaller?

17               MR. IBELE:       In traditional theory, that’s

18   correct.

19               COMMISSIONER POMP:           Well, in terms of the

20   definitions you are applying.

21               MR. IBELE:       In terms of the definition that I am

22   applying, that’s what I’m assuming.

23               COMMISSIONER BOSKIN:            And the greater the --

24   there will be more relatively efficient to the extent that

25   rates are lowered on things that are most responsive to

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 1   taxes and less improvement in efficiency if they’re

 2   lowered on things that are not very responsive to taxes

 3   or tax-inclusive prices, like cigarette consumption, for

 4   example.

 5                CHAIR PARSKY:      Right.

 6                COMMISSIONER BOSKIN:          On the administrative

 7   side, remember that in 1A -- in some of these proposals

 8   we’re abolishing other taxes.            So you have to net -- I

 9   mean, you’ll have to -- the cost of setting it up and the

10   cost of shutting it down.          But at some point, you don’t

11   have the apparatus for some of the taxes you’ve had to

12   shut down.

13                COMMISSIONER PRINGLE:          Mr. Chairman, could I

14   ask a quick question?

15                CHAIR PARSKY:      Yes.

16                COMMISSIONER PRINGLE:          In both of the

17   presentations on Tax Package 1A and B, what -- how does

18   this modification change existing capital-gains treatment?

19                CHAIR PARSKY:      You all can answer it.              Go ahead.

20                MR. IBELE:     It doesn’t change the treatment of

21   capital gains.      It treats capital gains the way all other

22   income is being treated.

23                CHAIR PARSKY:      But inherent in 1A would be, at

24   a 6 percent rate, it would be lower.

25                COMMISSIONER PRINGLE:          So it does modify the

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 1   rate?

 2                CHAIR PARSKY:      The rate would come down for all

 3   personal income, including capital gains.

 4                COMMISSIONER PRINGLE:          Okay.

 5                COMMISSIONER POMP:         So the reduced volatility

 6   is, in part, just a lower rate on a volatile base?                 It’s

 7   going to give us less volatility?

 8                MR. IBELE:     That’s true.

 9                CHAIR PARSKY:      Becky?

10                COMMISSIONER MORGAN:          This is more political,

11   perhaps, but…

12                CHAIR PARSKY:      These two people are not

13   political.

14                COMMISSIONER MORGAN:          I know, but if you take

15   this, is there any consideration on if you’re going to

16   deduct mortgage interest doing something for renters?                    I

17   just know that that’s an issue usually in Sacramento.

18                Maybe they’re not the ones to answer, but I

19   think it’s a question we have to deal with.

20                CHAIR PARSKY:      It was not included in this

21   alternative.    But people have suggested that if you’re

22   going to allow interest on your mortgage for –- obviously,

23   on a home you own -- that you should allow a deduction for

24   rent on your primary residence as a parallel.                  That is

25   something that can be considered.

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 1             There are a number of people that would advocate

 2   that.

 3             CHAIR PARSKY:        John?

 4             COMMISSIONER COGAN:           Curt, you asked a question

 5   about capital gains, and a question about homeowners, the

 6   sale of a house.     How is that treated under this proposal?

 7             MR. SPILBERG:        It would not be changed from

 8   current law.

 9             COMMISSIONER COGAN:           It would be changed; right?

10             MR. SPILBERG:        It would not be changed from

11   current law.

12             COMMISSIONER COGAN:           Not changed?

13             MR. SPILBERG:        Not changed.         So you would still

14   recognize a capital gains on the sale of your house if

15   your increase in the price of the home is over a half a

16   million for a joint return.

17             COMMISSIONER COGAN:           Okay.

18             CHAIR PARSKY:        Okay, let’s keep going.

19             CHAIR PARSKY:        Tax Package 2.

20             MR. IBELE:       Tax Package 2 is a package that’s

21   probably -- of the three packages, the most similar to

22   our current system.      We lowered the brackets, reduced the

23   number of brackets, put in a zero bracket amount, up to

24   $10,000 for joint filers.         The remaining brackets are

25   4 percent for joint filers up from -- up to --

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 1               COMMISSIONER EDLEY:           That’s got to be

 2   individuals up to 50?

 3               MR. IBELE:       Joint filers up to 50, and 7 percent

 4   for those over 50.

 5               We also put in an investment tax credit which

 6   is similar to something the state had some years ago, a

 7   manufacturer’s investment credit, but it’s broader.                      It

 8   doesn’t just cover manufacturing equipment, but also

 9   vehicles and other investment purchases.

10               COMMISSIONER DE LA ROSA:              Like what?         Computers,

11   software?

12               MR. IBELE:       Computers is probably after vehicles

13   and other machinery, the biggest -- those are the three

14   biggest components.

15               We reduced the corporation tax rate to

16   7 percent, or equivalent to the top rate under the

17   personal income tax, and also instituted a business

18   net-receipts tax.

19               COMMISSIONER BARRALES:               Where was that?

20               MR. IBELE:       That was at -- again, as a filler,

21   that was at 1.16 percent.

22               COMMISSIONER BOSKIN:            Is the investment tax

23   credit for such things wherever purchased from or from

24   purchases from California?            I mean, is it designed to

25   offset the sales tax on business purchases?

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 1             MR. SPILBERG:       Yes.     The investment tax credit

 2   would be basically a --

 3             COMMISSIONER BOSKIN:           A California --

 4             MR. SPILBERG:       Yes, a refund of the sales tax,

 5   that would have been paid on those purchases.                 So it would

 6   be only for purchases in California.

 7             CHAIR PARSKY:       Under this proposal.

 8             Okay, okay, and proceed ahead in terms of --

 9             MR. IBELE:      The distribution, not surprisingly,

10   is very similar, at least in profile, to what we have now,

11   except at the top end.       And there’s a shift in the tax

12   burden towards the middle, if you look at the effective

13   rate.

14             Again, I mean, it does some of the -- it

15   accomplishes many of the same things that we saw in

16   Packages 1 or 2, but to not as great a degree.                    We’ve

17   reduced the higher rates somewhat.

18             It is somewhat more stable.              Less volatility.

19             COMMISSIONER BOSKIN:           Very slightly less.

20             MR. IBELE:      Very slightly less, yes.                Not a lot

21   because of the graduated rate structure.               And under this

22   particular package, the personal income tax would raise

23   about $4 billion less than it does under current law.

24             CHAIR PARSKY:       But the 1.16 gives you the

25   neutrality fill-in; is that what you’re saying?

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 1                MR. IBELE:     Yes, that was used as a balancer

 2   under this.

 3                CHAIR PARSKY:      Okay.

 4                MR. IBELE:     It doesn’t do much for simplicity.

 5   One thing to keep in mind here is it does add a tax

 6   without getting rid of any taxes.               So it does arguably,

 7   for some companies, actually add to the complexity of the

 8   existing system.

 9                COMMISSIONER COGAN:         A question.

10                CHAIR PARSKY:      John?

11                COMMISSIONER COGAN:         Mark, a question, on the

12   personal income tax change, the zero-bracket amount, is

13   that on top of the current deductions and credits for all

14   taxpayers?

15                MR. IBELE:     Yes, that’s for all taxpayers.             So

16   one way to recoup some of that would be to either phase

17   it out or to have it only for non-itemizers.

18                COMMISSIONER COGAN:         Right.

19                MR. IBELE:     And we have to do that calculation,

20   to see how much we could recoup.                So that does go to the

21   higher income as well.

22                COMMISSIONER COGAN:         Right, okay.          And then how

23   much does the reduction of the corporate tax rate lose?

24                MR. IBELE:     About $1.4 billion.

25                CHAIR PARSKY:      The overall corporate tax

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 1   contribution under current law is a little under

 2   $10 billion; is that right?

 3             MR. SPILBERG:       Yes, that’s right.

 4             COMMISSIONER MORGAN:           And so a company would

 5   have to calculate the corporate tax of 7 percent, and then

 6   also go back and calculate the business net-receipts tax?

 7             MR. IBELE:      Let me correct something.               The

 8   reduction in the corporation tax would be $2.4 billion.

 9             COMMISSIONER COGAN:          2.4?

10             MR. IBELE:      $2.4 billion.

11             The investment tax credit is about $1.4 billion.

12             I should not have changed to the smaller font.

13             COMMISSIONER POMP:          And that’s leaving in place

14   elective single-factor apportionment and everything else?

15             MR. IBELE:      That’s under current law, yes.

16             COMMISSIONER MORGAN:           So my question was, so the

17   corporations would calculate two taxes?

18             MR. IBELE:      Yes.

19             COMMISSIONER MORGAN:           The corporate tax and the

20   net-receipts tax?

21             That’s complicated and expensive.

22             CHAIR PARSKY:       That led to his comment about how

23   it’s more complicated.

24             COMMISSIONER MORGAN:           I see.

25             CHAIR PARSKY:       Okay.

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 1             MR. SPILBERG:       It’s definitely more complicated.

 2   However, it would be done basically in the same -- can be

 3   done on the same tax return.          The same kind of information

 4   that you would need for your income tax would also be

 5   needed for calculating this net-receipts tax.                 So it does

 6   increase complexity for corporations.              It wouldn’t be

 7   another order of magnitude of complexity.                It would be an

 8   increase in complexity, though.

 9             COMMISSIONER PRINGLE:           I have a noncomplex

10   question, though.

11             What is the current corporate tax rate?                 8.7?

12             CHAIR PARSKY:       It’s 8.8.

13             MR. SPILBERG:       It’s 8.84 percent for

14   C-corporations, and it’s 1.5 percent for S-corporations.

15             COMMISSIONER PRINGLE:           Thank you.

16             CHAIR PARSKY:       Okay, Package 3.

17             MR. SPILBERG:       Should we talk about efficiency,

18   though, or just go on?

19             CHAIR PARSKY:       Oh, I’m sorry.          No, no, you

20   should cover everything.

21             Efficiency.

22             MR. IBELE:      Go ahead.

23             MR. SPILBERG:       In terms of efficiency, it does

24   improve efficiency some because, first of all, it reduces

25   the wedge between taxation on the sales tax of tangible

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 1   sales and services if you think of the net-receipts tax

 2   as sort of a consumption tax.            It also reduces the top

 3   rates across the board.         So that, in itself, increases

 4   efficiency.

 5              COMMISSIONER BOSKIN:            But a lot less than 1A or

 6   1B?

 7              MR. SPILBERG:        Yes.     Less so than 1A or 1B.

 8              CHAIR PARSKY:        Increased -- what about economic

 9   growth, or potential for economic growth?                  Any thoughts on

10   that goal in this context?

11              MR. IBELE:       Well, I mean, I think that the

12   investment tax credit is kind of going after this idea

13   that the Commission has been interested in, in not taxing

14   business inputs; and it’s a way to do it without putting

15   as much revenue in play.          And that would certainly help

16   in that area.

17              COMMISSIONER POMP:           What’s the rate of the

18   credit?   I didn’t hear before.

19              MR. IBELE:       We put that in at a 6 percent rate.

20              CHAIR PARSKY:        Okay, and I think you’ve

21   commented on simplicity.          And we understand the shift in

22   tax burden.

23              Okay, let’s go to Package 3.

24              MR. IBELE:       Package 3?

25              Similar to Package 2, the biggest change here

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 1   are that the changes in the brackets -- the slight changes

 2   in the brackets.    This issue with giving this zero bracket

 3   for both high-income and low-income is still in there; but

 4   we can get a number for you.

 5             The biggest change is in the change in the

 6   exemptions and the deductions.           This would have deductions

 7   just for mortgage interest, charitable giving, and

 8   property taxes.

 9             Another big change is that this particular

10   package gets at, I think, one of the areas of interest for

11   a lot of members, which is eliminating the sales tax for

12   business purchases.      This would not eliminate it for all

13   business purchases but for capital investment.

14             And similar to Package 2, it would reduce the

15   corporation rate to the top PIT rate, putting

16   pass-through entities in equivalence with C-corporations.

17             The business net-receipts tax would be imposed

18   at a 1.4 percent rate.

19             This also has -- let’s go back to the -- I’m

20   not sure how the distribution here compares with 2.

21   It’s a little bit better at the low end because of the

22   exemptions.

23             Similar in the middle and at the upper end in

24   terms of distribution.

25             I think the strongest parts of this, or the

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 1   things that work in its favor are the exemption for the

 2   business investment purchases, and it does retain what

 3   some of you might consider the essential deductions on the

 4   personal income tax side.

 5                CHAIR PARSKY:      Okay, and on volatility?

 6                MR. IBELE:     Volatility, it’s very similar to

 7   Package 2.

 8                CHAIR PARSKY:      Okay, and on the other indices

 9   here, on efficiency?        Economic efficiency?

10                MR. IBELE:     Efficiency, it is very similar to

11   2.    It’s an improvement over our -- again, using

12   Commissioner Pomp’s admonition, compared to where we are,

13   in looking at the market as a basis for efficiency, it’s

14   certainly an improvement.          You’re getting rid of some

15   of the higher rates on the corporate income tax side and

16   on the personal income tax side.                And the business

17   net-receipts tax is imposed at a very low rate.

18                COMMISSIONER POMP:         Is there a lot of complexity

19   from multiple rates in an income tax?                Is that a great

20   simplification, when you go from three rates to one rate,

21   or…

22                MR. SPILBERG:      Well, certainly, if you have, in

23   1A, when you can actually have a system that would work

24   automatically for people with just wages, that is a major

25   simplification.      Beyond that, the additional deductions

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 1   and the other sort of elements of the tax code are more

 2   complicated to deal with than having more than one tax

 3   rate.

 4             COMMISSIONER EDLEY:          If you have a flat rate,

 5   TurboTax charges you less.

 6             May I ask a question?

 7             CHAIR PARSKY:       You can elaborate on that if you

 8   want, or ask a different question.

 9             COMMISSIONER EDLEY:          Well, I do.

10             Do we have any way of thinking about what the

11   effect on volatility would be of income-averaging?

12             I mean, let me spell out what I’m thinking.

13   These strategies largely revolve around trying to reduce

14   volatility by reducing the share of revenue attributable

15   to highly volatile high-income -- I’m sorry, highly

16   volatile sources of income for high-income taxpayers.

17   So let’s just focus on capital gains, for example, and as

18   the underlying volatility of those sources of income that

19   then drive volatility of the revenue.

20             So just logically, smoothing the reported

21   income, the taxable income, rather than focusing on

22   revenues would -- focusing directly on revenues would give

23   us at least half a loaf.

24             So if you took a long-enough accounting period

25   for these capital gains -- and maybe it’s just impossible

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 1   to avoid the gaming that would be invited by that sort of

 2   structure -- but do you have any reactions to that?

 3                MR. IBELE:      I don’t know about the gaming.            I

 4   mean, I think this came up at our initial meeting.                   And

 5   I think there are issues with just the record-keeping,

 6   potentially.

 7                It would certainly -- depending upon how long a

 8   period you chose, it would certainly smooth things out.

 9                I think it’s -- you know, the volatility is

10   not just -- it’s people moving in and out with a lot of

11   capital gains and its reliance on the personal income tax

12   itself, so it’s not –- you know, in fashioning these,

13   that may have been the result.              We were trying to move

14   away from the personal income tax and also move the rates

15   down, but…

16                MR. SPILBERG:       Just to elaborate on that, I

17   think there’s two problems.            I think there’s really a

18   transition problem and an administration problem.

19                The transition problem is that you lose money in

20   the first couple years, depending on how long an averaging

21   you have.

22                Let’s say you started averaging, and you have

23   someone that his income goes up from let’s say $50,000 to

24   $1 million.     Well, if you start off averaging at that

25   point in time, for people that have increases in income,

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 1   then you, obviously, lose revenue from that particular tax

 2   return in the first year.        So that’s a transition problem.

 3             The administration problem is that what happens

 4   to someone who basically leaves the state and they still

 5   have some averaging income left over?              You probably don’t

 6   have really the ability to continue taxing that person

 7   once that person leaves the state.

 8             I mean, you should be able to average by

 9   basically saying, well, even though you may have now zero

10   California income when you left the state, you should

11   average that with the income that you had when you left

12   because you’re sort of averaging income.               But being able

13   to actually administer that --

14             COMMISSIONER EDLEY:          Let me be clear, for

15   example –- and I hope I’m not wasting everybody’s time

16   here -- but conceptually, for example.               If you focus on

17   the capital-gains component of individual income and you

18   just straightforwardly said, “Look, what you’re going to

19   pay is the average of the last three years of capital

20   gains as reported on your federal income tax.”

21             MR. SPILBERG:       Right.

22             COMMISSIONER EDLEY:          No matter where you lived,

23   whatever, just what you reported on your federal income

24   tax.

25             COMMISSIONER BOSKIN:           I don’t think you can do

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 1   that because you have people who have moved to California

 2   in year 2.

 3                MR. SPILBERG:      Yes.     And also, you have --

 4                COMMISSIONER BOSKIN:          And that includes

 5   year 1 -- includes year 1, where they paid somewhere else.

 6                MR. SPILERG:      And you have a starting --

 7                COMMISSIONER EDLEY:         But so what?

 8                COMMISSIONER BOSKIN:          They will let them

 9   average.

10                COMMISSIONER EDLEY:         I mean, even if they paid

11   somewhere else and we -- if they filed a federal tax --

12   unless they moved from out of the country, from outside

13   the jurisdiction of the U.S., they had a federal tax

14   return, they filed something for capital gains.

15                COMMISSIONER BOSKIN:          You’re going to get --

16                COMMISSIONER EDLEY:         There’s no constitutional

17   prohibition on --

18                COMMISSIONER BOSKIN:          But you’re going to get

19   into a jurisdictional battle with other states.

20                MR. SPILBERG:      Yes, he would.

21                COMMISSIONER EDLEY:         Wait a minute.         I’m not

22   taxing them in -- I’m only taxing them in a year in which

23   they are in California.         I’m varying the rate applicable

24   to you, admittedly, in part based upon where you used to

25   live.

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 1              Did you live in California?              Did you live in

 2   Utah?   But I don’t see -- I don’t see that that’s --

 3              MR. SPILBERG:       Yes, I see these issues now.

 4              Now, back to the transition problem.                    Let’s say

 5   you started in year 1.        And in year 1, you have capital

 6   gains of, let’s say, a million dollars.                But in year --

 7   just before that -- year zero, let’s call it -- you had a

 8   capital gains of $10 million, but you paid the tax in

 9   year zero for that capital gain, you’re not going to tax

10   that person again by averaging the capital gain he had in

11   the year zero with his gain in year 1.                So you have to

12   basically start your averaging in year 1.

13              COMMISSIONER EDLEY:          Well, you’d have to have a

14   transition rule.     You’d have to have a transition rule –-

15              MR. SPILBERG:       And you would lose –-

16              COMMISSIONER EDLEY:          -- where you would smooth

17   that kind of gap.

18              MR. SPILBERG:       Yes, and you would lose revenue

19   during the transition.        Just -- the mechanics of the

20   transition, we’ve worked with.            And we could go through

21   with examples -- in the transition, you lose revenue.

22              COMMISSIONER EDLEY:          Okay, let me just say, I

23   think a lot of these transition issues are going to be

24   complicated no matter what.          That’s point number 1.

25              Point number 2 is, so we have to compare the

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 1   complexity of different transition rules that’s point

 2   number 1.

 3               Point number 2, though, is, I have to say that

 4   when I look at these charts and I see, towards the

 5   left-hand side of the chart, lots of gold bars that are

 6   taller than the blue bars -- and I like the blue and gold,

 7   by the way -- but lots of gold bars.

 8               MR. IBELE:       It was intentional.            I’m a Berkeley

 9   grad.

10               COMMISSIONER EDLEY:           Lots of gold bars that are

11   bigger than the blue bars, I get a little bit agita, both

12   personally and politically.            And if some transition

13   complexity is the price to pay for reducing kind of the

14   systemic agita, that it might be worth thinking about.

15   But, again, I’m just -- people are going to ask, well,

16   instead of just saying decrease the tax burden on

17   capital-gains, they’re going to ask, did we consider a

18   strategy for smoothing the income flow so that revenues

19   wouldn’t be bouncing up and down.

20               CHAIR PARSKY:        Well, that maybe --

21               COMMISSIONER BOSKIN:            It would have to be more

22   general because stock options are very volatile in every

23   large --

24               COMMISSIONER EDLEY:             It would have to be more

25   general than capital gains.            A lot of it would have to

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 1   be --

 2             CHAIR PARSKY:       That may be a good way to segue

 3   into making sure everyone understands that also contained

 4   in this package is an analysis of capital gains, and it

 5   will lead us to a little bit of a discussion --

 6             COMMISSIONER EDLEY:          I’m sorry, you’re right.

 7             CHAIR PARSKY:       -- what component of the personal

 8   income tax on volatility --

 9             COMMISSIONER EDLEY:          Right.

10             CHAIR PARSKY:       -- is oriented around capital

11   gains and what is the nature of those gains.                 So just

12   spend a few minutes on the analysis that you did on

13   capital gains.

14             MR. IBELE:      Sure.

15             This was one of the options that we looked at.

16   And I think, you know, we can skip through this very

17   substantially.    Everybody knows that, increasingly

18   concentrated, et cetera, et cetera.              This just shows how

19   variable it can be.      This is the share of capital gains in

20   personal income over the last 25 years or so.

21             This is an indication of the concentration of

22   capital gains by income class, and how it’s shifted.

23             I think one thing that, in terms of the

24   volatility, the one thing to keep in mind here, as I

25   indicated, it’s not just the rate that’s applied to

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 1   capital gains, it’s that capital gains are volatile, they

 2   go up and down.       So you don’t get a huge reduction in

 3   volatility simply by reducing the rate.                  We reduced it

 4   from -- looking at different steps, for example, a

 5   3 percent decline was a 7 percent decline in volatility.

 6   A 5 percent decline was a 13 percent decline in

 7   volatility.     So you still had a great deal of volatility

 8   simply because the income goes up and down.                     So it doesn’t

 9   matter a lot if you tax it at 8 percent or 6 percent.

10               CHAIR PARSKY:        Now, what do you think the impact

11   of what Chris suggested?           Put aside the difficulties of

12   administration.       But I gather what you are suggestion is,

13   instead of focusing on applying whatever rate you wanted

14   to a given year, you would permit the individual to

15   average before the rates apply over a period of time; is

16   that what you were suggesting?

17               COMMISSIONER EDLEY:           Yes.      I don’t know if I

18   would make it an option or if I would require it and then

19   impute.   But something -- but, yes, something along those

20   lines.

21               MR. IBELE:       Well, that would certainly move the

22   income –-

23               COMMISSIONER EDLEY:           It’d smooth it.

24               MR. IBELE:       -- spread out the income.               Yes.

25               COMMISSIONER EDLEY:           Right.

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 1                COMMISSIONER POMP:         Well, it’s a rate reduction.

 2   Then the question is, how much reduction do you get for

 3   that rate reduction.        How much reduction in volatility for

 4   that rate reduction.

 5                COMMISSIONER EDLEY:         But it’s not a rate

 6   reduction.    It’s just a --

 7                COMMISSIONER POMP:         If we have progressive

 8   rates.   I’m thinking the existing system with the

 9   progressive rates.

10                COMMISSIONER EDLEY:         Right.

11                COMMISSIONER POMP:         And you’re saying we’ll

12   smooth it out, so maybe you’re not in the highest bracket.

13                MR. IBELE:     I see, I see.          You would be doing

14   two things if you did that.           If you spread it out, you’d

15   be spreading out the income.            And if it puts you in a

16   lower bracket, you’d be lowering the rate as well.

17                COMMISSIONER POMP:         Right.      It would be like

18   slightly --

19                COMMISSIONER BOSKIN:          For many people, it would

20   be a slight cut.

21                COMMISSIONER POMP:         Yes, that’s right.         That’s

22   right.

23                A reduction rate, that helps a little bit.

24                CHAIR PARSKY:      Okay, we’ll come back to the

25   capital-gains component.

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 1             COMMISSIONER EDLEY:          Okay.

 2             CHAIR PARSKY:       Just mention what you have done

 3   on the carbon tax, and then we’ll come back.                  I’d like

 4   Michael to make some comments, because I know he has to

 5   leave before others.

 6             MR. IBELE:      The carbon-tax option we looked at.

 7   We simply modeled this as a $20-per-ton carbon tax, which

 8   was suggested at the hearing in Berkeley by Severin

 9   Borenstein.   This would raise between $3.2 billion and

10   $3.3 billion annually over our forecast period.

11             The reduction -- we looked at sort of what we

12   could reduce the rate by if we had this additional source

13   of revenue.   And under current law, we could reduce the

14   top rate by about 1.65 percent, just as an example.

15             And under Package 3, we could reduce the top

16   rate by about .7 percent.

17             COMMISSIONER EDLEY:          How much could you expand

18   the zero bracket?

19             MR. IBELE:      We can look at that.               We can look at

20   that.

21             THE VIDEOGRAPHER:         Could you put the slide up?

22             COMMISSIONER EDLEY:          Do you have a guesstimate?

23   I mean, that’s just like, can you make something up?

24             MR. IBELE:      We’re trying not to make anything

25   up.

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 1                COMMISSIONER EDLEY:         Well, let me ask Boskin.

 2   He could make something up.

 3                No, but seriously, I’m just wondering if I could

 4   get -- if I could deal a little bit with the relative size

 5   of these yellow and blue bars, if I spent it at the zero

 6   bracket or at the lowest marginal rate rather than --

 7   okay, that’s what I was thinking.

 8                CHAIR PARSKY:      Well, I’m not quite sure how

 9   much revenue you’re getting at the lowest rate, anyway,

10   because --

11                MR. IBELE:     Yes, yes.

12                CHAIR PARSKY:      -- you may reduce it, but it

13   doesn’t make up a big component of the tax.

14                MR. IBELE:     I’m very uncomfortable doing that

15   on the fly, Commissioner.

16                COMMISSIONER EDLEY:         I’m looking at Tax

17   Package 2, for example -- or maybe 1B.                 If you look at

18   1B, and you invested the $3 billion of a carbon tax in

19   providing some kind of tax relief at 50K and below --

20                COMMISSIONER BARRALES:             So the people that are

21   paying these taxes on carbon are getting it back?

22                COMMISSIONER EDLEY:         Well, you get it back in a

23   different way.     So you’re still maintaining the energy

24   incentive.

25                MR. IBELE:     1B?    I’m sorry, 1B?

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 1             COMMISSIONER EDLEY:            I was looking at 1B.     And,

 2   again, just looking at the blue and gold bars there.                  So

 3   the idea would be to do something tinkering with --

 4   tinkering with the PIT.

 5             CHAIR PARSKY:         Well, the other thing you may

 6   want to think about is either 1A or 1B does not have a

 7   dramatic exemption.

 8             COMMISSIONER EDLEY:            You’ve added --

 9             CHAIR PARSKY:         You could add an exemption at a

10   higher level that I don’t think you would find would have

11   a dramatic impact –-

12             COMMISSIONER EDLEY:            On revenue.

13             CHAIR PARSKY:         -- on revenue.

14             COMMISSIONER EDLEY:            But it would help the

15   distribution.

16             CHAIR PARSKY:         But would help the distribution.

17             You can do that in either way, with or without

18   the carbon tax.

19             COMMISSIONER EDLEY:            Right.      And I was just

20   thinking that the $3 billion is not a huge amount of

21   money, but you might, in distributional terms, get a lot

22   of bang for the buck if you put it into the lower end of

23   the --

24             CHAIR PARSKY:         Okay, well…

25             MR. IBELE:        Can we look at that?

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 1              CHAIR PARSKY:        You can.

 2              The capital-gains component option and the

 3   carbon-tax option are options that could be incorporated

 4   in or not incorporated in.           A different treatment of

 5   capital gains, adding a carbon tax, that could be

 6   incorporated in any one of the above options.                   And this

 7   concept of increasing an exemption to affect the

 8   yellow/blue bar impact can also be incorporated in any

 9   of the options.

10              Michael?

11              COMMISSIONER BOSKIN:            Let’s take a few comments

12   on all these things and then raise one other issue if

13   you’re looking for some other source of revenue that would

14   be controversial and not on economic grounds, would be the

15   only source of revenue I know of that no taxpayer would

16   complain about.

17              With respect to the carbon tax, I think it

18   would be -- I know people have strong feelings about this

19   for environmental reasons, so it would be kind of strange

20   to be saying some people should be shielded from taking

21   their environmental responsibility in that regard.                  But

22   if the distributional thing is overwhelming, you could

23   jerry-rig something on top of it, and I think that’s

24   correct.

25              With respect to the carbon tax, I think that it

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 1   is important to understand, we already have AB 32.                 And

 2   while it may or may not make any sense to have either of

 3   those things, it certainly doesn’t make sense to have

 4   them both.

 5                Third, the third thing I would say about a

 6   carbon tax is that anything we do where we’re

 7   contemplating doing something on our own in California

 8   de novo, even things I might generally oppose or

 9   generally support, we ought to build in the flexibility

10   to meld it with or merge it with what might happen at

11   the federal level so we don’t wind up with a mess later

12   on where we’re kind of in great conflict, et cetera.

13                I think economists would say, if you’re going to

14   have a carbon tax, it should be broad.                 It shouldn’t be –-

15   it should be on all sources of carbon.                 That’s the issue,

16   carbon.   And it shouldn’t just be narrowly confined to a

17   small number of things.         That gets into all the issues

18   these guys have been talking about for the last hour and

19   a half, about the inefficiencies of differentially taxing

20   different things.      In this case, it’s a source of

21   potential externality.         So that’s with respect to that.

22                There is one thing that has not been considered

23   that I think needs to be mentioned, it’s going to be

24   very controversial, and I don’t mean to get into an

25   environmental argument, I just think it’s something we

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 1   ought to at least think about a little bit.                   And since I

 2   have to leave, I’m just going to throw it on the table.

 3   Don’t argue about it now, but it’s something we ought to

 4   get materials on it, the staff has started to work

 5   something on it.     People have very strong reactions to it.

 6   But we are about the only place on earth that doesn’t

 7   utilize our energy resources, and actually prohibits

 8   utilizing them.    Such environmentally friendly places as

 9   the British and the Dutch and the Norwegians are

10   progressively pursuing their energy resources.

11             We have, by very ancient estimates, with low

12   oil prices relative to today and all being projected

13   into the future, and relative to using old technology,

14   12 billion barrels of economically recoverable oil sitting

15   offshore California, a modest amount on state land, a

16   larger amount on federal land.            The Feds have just

17   instituted a program several years ago to substantially

18   share the royalties on federal oil in the Gulf, with the

19   Gulf states.   And so there’s really -- we’re talking about

20   conservatively $150 billion, maybe much more than that, of

21   oil royalties potentially available for divvying up over

22   the next twenty-some years.

23             It’s something we ought to think about.                   And

24   one way to go about it is, if you’re thinking about a

25   carbon tax, we’re basically saying we’re going to have an

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 1   infinite tax on this stuff you can never get at.                    And it

 2   seems to me that’s kind of a silly thing to do.

 3              Modern drilling technology has a much smaller

 4   imprint.   You have one rig that goes out 7 miles in all

 5   directions horizontally.          It should -- if it was done,

 6   obviously it should be done under extremely restrictive

 7   environmental care.        But it just seems for us not to even

 8   discuss that, it seems to me to be kind of a little

 9   off-limits to -- a little off-balance to not even discuss

10   it.

11              We may decide that we’re too -- the state is too

12   environmentally sensitive to think about that possibility,

13   whatever it happens to be.           But it’s the only source of

14   revenue for the state that I can think of that the payers

15   of the revenue would not complain.               And you should think

16   seriously about that if you’re a serious tax commission,

17   in my opinion.

18              COMMISSIONER POMP:           And we could combine it with

19   a severance tax.

20              COMMISSIONER BOSKIN:            That’s right, the state

21   could get a lot of revenue that way.                It could accomplish

22   a lot of these other good things, with or without a carbon

23   tax.   It doesn’t preclude having a carbon tax, but…

24              COMMISSIONER EDLEY:           Just for the record, I’d

25   like to note, Mr. Chairman, that Professor Boskin has

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 1   recommended a crime against nature.                And I agree with him

 2   completely.

 3                CHAIR PARSKY:      Okay.

 4                COMMISSIONER BOSKIN:          It’s something we ought to

 5   think about either in the context of our proposals or in

 6   the context of a set of other things that the state ought

 7   to seriously consider in general, let alone its fiscal

 8   condition.

 9                Let me just say something in general to make

10   sure I get my comment in, in general.

11                You heard my comments about the net-receipts tax

12   in my questions.      It has a lot of conceptual appeal in an

13   idealized form by a general tax on consumption, more

14   neutral in that sense than the existing tax, et cetera.

15   It is a new tax.      It is not well understood.               It will be

16   complicated for people, let alone the Legislature, to get

17   their hands around exactly what it is.

18                The presentation that we had from the

19   Ernst & Young expert was kind of bouncing back and forth

20   like a pinball machine between calling it a business tax

21   and a consumption tax.         And so you can imagine the typical

22   legislator having to deal with that can be kind of rough.

23   But, in any event, I think, in general, it’s conceptually

24   very appealing.     I think we ought to give it the most

25   thorough scrub we can in the next week or two with

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 1   answering some of these additional questions and getting

 2   this additional material.          And we should all kind of

 3   search ourselves, do we want to do something -- do we want

 4   to have the centerpiece of our Commission’s report and

 5   proposal be introducing a new tax?

 6               I, myself -- the only way I could go there is

 7   if other major taxes were abolished.                I couldn’t add this

 8   on without getting rid of the administrative and other

 9   automatic growth of government potential issues if we

10   just scaled the other ones back and let it rip.

11               I would be happy to have the state have a better

12   tax system that, again, on balance, raises around the same

13   rate of revenue.      But I’m very, very nervous about the

14   idea of just tinkering with the other taxes and adding

15   this.    I think we could wind up with a lot of problems in

16   doing that.    And I think we do have, among California,

17   which has a lot of great things going for it, among our

18   major disadvantages is, on balance, our tax system worsens

19   our competitiveness.        We can argue how much, but I think

20   that’s for sure, whether it’s a little or a lot, and which

21   components of it we disagreed with in our hearings.

22               So I think that Packages 1 ought to be on the

23   table.

24               I myself would have a very hard time going for

25   some of these other things, going to all the trouble of

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 1   introducing a new, complex, not well-understood, major

 2   revenue source, just playing around the edges of the other

 3   taxes.   I think it would only be worth the gain if we were

 4   really doing something major, like abolishing some of the

 5   other taxes.

 6               CHAIR PARSKY:        I think maybe before Michael

 7   leaves, then we may take a little bit of a break and then

 8   come back here.

 9               Commissioners, any questions of Michael’s last

10   comments?

11               COMMISSIONER EDLEY:           I have one short one.

12               Michael, would you agree -- you said that it

13   would be -- we’d be knuckleheads if to --

14               CHAIR PARSKY:        He didn’t quite use that word.

15               COMMISSIONER EDLEY:           -- to adopt a carbon tax

16   alongside AB 32.       But wouldn’t you agree that that’s true

17   only if we think, just in economic terms, that’s true only

18   if you think that AB 32 alone or the carbon tax alone

19   would actually produce efficient market signals?                     In other

20   words, if both of them –- do you see where I’m going?

21               COMMISSIONER BOSKIN:            I think there’s some

22   debate of whether either of them does.                  You can have too

23   large a tax as well as too small a tax if there’s a

24   potential externality, for example.

25               COMMISSIONER EDLEY:           Right.      But I think that,

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 1   at least my sense was, that the commentary was that

 2   neither AB 32 nor anything likely to emerge from

 3   Washington would have a sufficient impact on prices to

 4   arguably incorporate the externalities.                I mean, the

 5   experience in Europe is that they were too timid to

 6   actually force the price changes big enough to do anything

 7   that --

 8             COMMISSIONER BOSKIN:            This isn’t a place to be

 9   arguing about how large --

10             COMMISSIONER EDLEY:           You made an extreme

11   statement that given AB 32, we shouldn’t even think about

12   doing the carbon tax.       And it’s not clear to me that --

13             COMMISSIONER BOSKIN:            It’s less about that,

14   than the fact that we have extremely high electricity

15   prices, which has been helping, among other things, to

16   drive manufacturing out of the state.               And I think it’s

17   very difficult to be a low middle-income, middle-income

18   factory work type in California, and it’s getting harder

19   and harder.    And the more of this we do, the harder it’s

20   going to be.    You’ll see it’s a big hit to manufacturing.

21             COMMISSIONER EDLEY:           Okay, all right.

22             COMMISSIONER BOSKIN:            Our manufacturing has

23   been declining.     We have a large number of our enterprises

24   say they would not, for tax and regulatory reasons, expand

25   their production in California.            Every Silicon Valley

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 1   chip producer says that, for example.                So I think there

 2   are a lot of negative economic consequences of driving up

 3   those prices --

 4                COMMISSIONER EDLEY:         Okay, but that’s a general

 5   argument --

 6                COMMISSIONER BOSKIN:          -- whatever those

 7   potential environmental benefits may or may not be.

 8                COMMISSIONER EDLEY:         But that’s a general

 9   argument against California having its own energy policy,

10   its own global-warming policy.

11                COMMISSIONER BOSKIN:          Yes, that’s correct.

12   That’s correct.

13                Well, let me just say, its own policy in that

14   regard that dramatically worsens the competitiveness of

15   the state.    I think being on record as to how important

16   this is and pressing the federal government to do things,

17   I think that’s all great.

18                CHAIR PARSKY:      Curt?

19                COMMISSIONER PRINGLE:          Actually I was asking

20   the question if this proposal on the carbon tax was

21   exclusively a fuel-based tax or a broader carbon tax

22   discussion.    And Mr. Keeley told me that this proposal is

23   just a fuel tax; is that correct?

24                CHAIR PARSKY:      Yes.     As requested, it is.

25                COMMISSIONER PRINGLE:          Thank you.

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 1             CHAIR PARSKY:       Fred?

 2             COMMISSIONER KEELEY:           Thank you, Mr. Chairman.

 3             With regard to Mr. Boskin’s comments, I tend

 4   to agree with some and disagree with others.

 5             I actually -- I very much agree with the idea

 6   that as you go through the package and you look at the

 7   coefficient of variation, that as you get higher and

 8   higher on that scale as you go through the packages

 9   farther and farther, it is an awful lot of gymnastics and

10   reengineering of the entire California revenue-collection

11   system and so on for relatively small gain, if any.               And

12   I think that Packages 1 and 2, I think, are a good basis

13   for our further discussion.

14             Where I part company with Professor Boskin is

15   on the issue of the so-called carbon tax, which I did

16   propose at our first meeting, and have been proposing it

17   at every meeting since then.          And I do appreciate

18   Professor Borenstein having been at our meeting at

19   Berkeley to present on that issue.

20             It isn’t -- purely speaking, of course -- a

21   carbon tax.   And I think you’re right, Professor Boskin,

22   that it’s a fuel tax for those fuels that are

23   carbon-based, maybe is a better way to say it.

24             I had at one point considered suggesting that

25   we have a broader carbon tax involved, which would, for

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 1   example, include natural gas, which is one of the major

 2   generators of electricity, and use that in the base.              And

 3   that would broaden the base.            My issue there was, I think,

 4   quite similar to yours, which is having been in the

 5   Legislature during the energy crisis but not in the

 6   Legislature that voted to, quote, “deregulate electricity”

 7   in California, I was left with others to accomplish, shall

 8   we say, part of the cleanup on that.

 9                I’m not interested in seeing electricity rates

10   increase, although I’m interested in seeing the fuel that

11   produces electricity changed.            I’m not sure that the tax

12   system is the way to do that.            So the extent to which I’m

13   interested in a carbon tax at this point is as a fuel tax.

14                I do think that in the same way that California

15   took a very bold step with regard to Assembly Bill 32,

16   and enacted that, and is now going through the steps of

17   implementation -- and I think it’s fair to say that it’s

18   the single-most significant legislation in the nation on

19   the topic.    Whether it’s good legislation or not, we --

20                COMMISSIONER BOSKIN:          It’s substantial, there’s

21   no doubt about that.

22                COMMISSIONER KEELEY:          It is very substantial

23   legislation on that topic.           There’s a lot of it, and it’s

24   very aggressive and very ambitious.

25                My own sense is that what is going on, both in

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 1   Sacramento with regard to the Western Climate Initiative,

 2   with several states and a few provinces in Canada, as well

 3   as what’s going on in Washington, D.C., both of those

 4   relating to cap-and-trade systems, that I think it’s

 5   unlikely that those come about very quickly; or if they

 6   come about, that they will look anything like people have

 7   envisioned them in the past, because it’s not going to be

 8   essentially a trading floor which was the initial thought

 9   on cap-and-trade.     It will be something quite different

10   and, I think, not nearly as effective.

11             So in that part of the Governor’s order to us

12   to have a tax system that reflects the 21st century

13   economy, and if it is true that the Legislature and the

14   Governor, in terms of having a direct impact on shaping

15   the economy going forward, have sent a message that they

16   would like to see California be a place that both by our

17   tax structure, our policies, the quality of our higher

18   education system, the concentration of intellectual

19   capital in the Silicon Valley and elsewhere, that we want

20   to be a part of the greening of the world’s economy, then

21   I think we’d lead     in a couple of ways.

22             One of the ways you would do that is leading by

23   example in terms of how we conduct ourselves as a state.

24   And I do think that a fuel tax with a carbon base as the

25   foundation of it does make sense to include in here.

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 1             I like the idea that Dean Edley suggested, which

 2   is, is there some portion of a carbon tax that could be

 3   used to offset both -- to some extent, not completely --

 4   but to reduce the regressivity of these packages, 1A and

 5   1B, in terms of their shift of the current tax burden from

 6   a progressive tax burden, to a less progressive tax burden

 7   by quite a bit, shifting it into the middle and

 8   lower-income groups.      Is that something possible to do?

 9   And I think there’s some real merit to looking at that.

10             And, Mr. Chairman, I’ll just close with this.

11   I’m really happy that we are at this stage of the

12   Commission’s work, because my guess is, in a few minutes

13   where we’re going to go is, we’re going to start that part

14   of the Commission’s work where we are providing direction

15   and asking questions for the purpose of assembling a

16   package, as opposed to what we’ve talked about in the

17   past, the expanding universe of what are all possible

18   options on the table, and now we’re narrowing that.

19             CHAIR PARSKY:       Exactly, exactly.

20             COMMISSIONER KEELEY:           I’ll say that I’m not

21   thrilled by taking an existing tax structure, having it

22   be revenue-neutral, and in order to try to solve this

23   problem of volatility, saying that what we’re going to do

24   is push things down the income ladder.               That’s basically

25   the effect of these two packages.

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 1               I do think, though, that having said that, that

 2   there are some real merits to this.                 I think this is at

 3   least potentially a game-changing proposal.                     I think this

 4   is absolutely worth examining and seeing if we can balance

 5   it right.

 6               I would reiterate something I’ve said before --

 7   and I apologize to the Commission for repeating it at

 8   virtually every Commission meeting -- but I don’t believe

 9   that the issue of revenue volatility, which is treated at

10   this commission as if it is purely a tax issue, if that is

11   really what revenue volatility is about.                  I would argue

12   that, instead, it is about 25 percent a tax issue and

13   about 75 percent a lack of political discipline and will

14   on the part of the Legislature and the Governor to set

15   aside money on the upside of the business cycle, so that

16   you can cushion yourself on the downside of the business

17   cycle.   So I don’t think we ought to wrap ourselves in

18   too many contortions about trying to solve revenue

19   volatility through the tax code, as if the tax code is

20   the problem.      But I do think that it prevents -- this

21   whole tax commission opportunity presents us with the

22   opportunity for a game-changing set of decisions that

23   could, in fact, at the end of it make California a more

24   competitive place.

25               I’ll say this, too, if I could, Mr. Chairman,

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 1   while Mr. Boskin is still here:           There is not, in my view,

 2   a solid body of evidence which shows -- not anecdotal

 3   information, but a solid body of evidence which shows that

 4   upper-income folks are fleeing California in huge numbers

 5   to avoid California’s tax system.             In fact, there are

 6   several reports out within the last 18 months which show

 7   that the opposite is true, is that the outmigration in

 8   California has to do with folks who can no longer afford

 9   to buy a house here, who can’t rent a home here, who the

10   higher education has gone out of their reach or the

11   medical system is outside their reach and there’s not

12   sufficient coverage.      There are a whole range of issues

13   of why people leave California.           But there’s very little

14   evidence that this 144,000 upper-income wage earners and

15   capital-gains beneficiaries are somehow leaving California

16   because of our tax system.         It has been made a part of

17   California’s political mythological dialogue.                 But it is,

18   I think, not borne out by actual evidence and thoughtful

19   academic rigorous research.

20             I think, in fact, it tells you the opposite when

21   you look at that.     But even that’s okay with me.               If we

22   want to pretend that that’s why we’re doing this or we’re

23   pretending that we’re doing this because it’s going to

24   get rid of tax and volatility, that’s okay even with me,

25   provided that the end product here is one which we are

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 1   the counter-side of what is going on in Sacramento right

 2   now.   We are the counter-side of the tact of the -- what

 3   is going on in Sacramento right now in my view is this:

 4   Is that there is a complete dismantling of the last

 5   40 years of building up a health and human service system,

 6   building up a public education system, building up a

 7   higher education system, building up a transportation and

 8   transit system; and there is an exercise going on there

 9   to take four decades of work and dismantling it.

10              And I think our commission has the opportunity,

11   while they are doing that, to offer a very positive way

12   that you can end up with a California that people, in

13   fact, want to live in.

14              And I’m willing to suppress some of my political

15   beliefs and values in this in order to accomplish that.

16   And I would hope that’s what other folks are going to be

17   willing to do at the remainder of this meeting and our

18   meeting next time, is to do exactly that.                 That this is --

19   Mr. Pringle as Speaker and Senator Morgan, all three of us

20   have served in the Legislature.            And the perfect is the

21   enemy of the good all the time.

22              And so what I’m asking for is, and committing

23   myself to, is, I’m committed to making a principled

24   compromise here.     Nobody should ever be asked to

25   compromise their principles, but I’m asking that people

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 1   reach for a principled compromise.

 2               And, Mr. Chairman, thank you for your

 3   forbearance.      I know I’ve gone on too long.

 4               Mr. Boskin, thank you so much for your usual,

 5   keen, thoughtful insights.

 6               CHAIR PARSKY:        Thank you.

 7               Becky, you had something you wanted to say?

 8               COMMISSIONER MORGAN:            You had asked a question

 9   about people’s response to Professor Boskin’s ideas.                 And

10   I just --

11               CHAIR PARSKY:        I do that regularly.

12               COMMISSIONER MORGAN:            I know.      And so here you

13   go.   And I think it also maybe starts the informal voting

14   process that you may be leading into.

15               But I would agree with Professor Boskin, that

16   if we’re going to try a new tax system with net-receipts

17   tax, that that not be additive; that it be in place of

18   current corporate tax.          Because that’s, I think, the only

19   way that I could accept it.            I’m open to new ideas and a

20   new tax policy, but not if it’s on top of.

21               COMMISSIONER HALVORSON:              Mr. Chair, if I could?

22               CHAIR PARSKY:        Yes, George.

23               COMMISSIONER HALVORSON:              A comment on the carbon

24   tax -- and I agree, I think having an additive tax would

25   be a mistake.      But relative to the carbon tax, I don’t

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 1   think we should be thinking about a carbon tax if we think

 2   about -- we should be thinking about a gasoline tax.

 3   Because an overall carbon tax does too many bad things to

 4   the economy, does change the nature of the electricity

 5   bill in California.      And if we had a higher gasoline tax,

 6   use that money to help subsidize cars for low-income

 7   people, it would change the economy of purchasing cars,

 8   change the economy of purchasing, and ultimately actually

 9   give us less-expensive electricity.              Because we’d be

10   spending -- there would be less competition for the energy

11   source on the streets and roads, I think the nature of

12   that -- I don’t think we can get there and I don’t think

13   this Commission can get there.           And the whole

14   cap-and-trade sorts of things are so complex and remote,

15   they actually have no immediate impact on anything that’s

16   relevant to us.    But in terms of something that is

17   relevant, the opportunity to do -- change the price of

18   gasoline and then use that money to subsidize cars for

19   low-income people I think could change the economy and be

20   better for all of California.

21             CHAIR PARSKY:       Okay, Curt?

22             COMMISSIONER PRINGLE:           If I could just add one

23   thing in regards to what we’re going to talk about after

24   our break and what Dr. Boskin brought up.

25             But I think that your point of if you do

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 1   establish a new tax, the elimination of taxes has to be

 2   something as opposed to just a tinkering of reduction.                I

 3   don’t think it has as much impact.               I don’t want the

 4   Commission to be misled, though, by the words that were

 5   accurately portrayed in proposals regarding sales tax.

 6   The life of the sales tax in California, even with the

 7   elimination of the state sales tax, there will still be a

 8   sales tax.

 9                There is a constitutional requirement,

10   Prop. 172, which is for public services -- or public

11   safety services.      The local sales tax is 1 percent.             And

12   in many counties, there’s -- self-help counties, there’s

13   the transportation sales tax component.

14                So, all of those –- so, one, those people who

15   may be concerned about the proposal, none of those would

16   be affected by what we’re talking about.                 It would be the

17   elimination of the 6+ percent state sales tax component

18   that is within the State Legislature’s jurisdiction, not

19   any of those other elements.

20                But still, we would have an apparatus to collect

21   the sales tax in each of the jurisdictions, and that would

22   still be in place.       So I think it would be good to

23   eliminate the state sales tax component, but it doesn’t

24   mean that we will not have sales taxes in California

25   because those local taxes are established.

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 1                And Mr. Hauck’s point, as he referenced earlier,

 2   I think there’s always a pressure that local governments

 3   may seek to find ways to augment their budgets.                    And as

 4   he suggested, if there’s a reduction of 5, 6 percent on a

 5   state sales tax, would local governments clamor to impose

 6   sales tax to fill that different -- to take up some of

 7   those dollars.

 8                First off, statutorily, there’s only so many

 9   places where a sales tax can go, like transportation and

10   other purposes.     So the Legislature would have to act.

11   But also there is a two-thirds requirement of the local

12   body and the voters before that could be imposed.                   And

13   those principles would still be in place.

14                So I don’t necessarily think that that

15   5 percent, plus or minus, would be consumed by local

16   governments.    That, picking that up, one, they can’t right

17   now.   But, two, even if the Legislature allowed them to

18   pick up a few pennies of that, they certainly would not be

19   able to do it without a vote of the people to a two-thirds

20   level.

21                COMMISSIONER HAUCK:         That’s what I said.

22                COMMISSIONER PRINGLE:          Just to reiterate what

23   Mr. Hauck said.

24                CHAIR PARSKY:      Edward, did you want to say

25   something?

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 1             COMMISSIONER DE LA ROSA:               Mr. Chairman, I just

 2   wanted to quickly say that I agree with some of the

 3   comments that were raised about volatility being only part

 4   of the problem -- or part of the challenge, the way I

 5   would put it.    And it’s interesting -- I know that we’ve

 6   been focusing on the tax structure.                But in several of the

 7   discussions that we’ve had, we’ve come up with various

 8   approaches which possibly we might all have a consensus

 9   on this already, which is the idea of budgeting around

10   the 12-year time-line, or spending                  one-time revenues

11   for one-time expenditures, or even the establishment of a

12   rainy-day fund.     And so I was going to ask that perhaps we

13   can set aside some time at the end of today’s session or

14   at the next meeting to address that side of our challenge.

15             CHAIR PARSKY:         Well, I think I said, as part of

16   my introduction, that I think it is important for the

17   Commission to keep focused on what the Commission was

18   established for.

19             But with respect to those issues and some other

20   elements of reform, it would be quite appropriate to

21   include in our report a reflection of the Commission’s

22   views as to those issues that need to be addressed.

23             And I think I mentioned California Forward is

24   an organization that we have some representatives on.

25   They are going to specifically address some of those

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 1   reform issues.       The Commission really wasn’t established

 2   to address that.       But we have every opportunity to include

 3   in some section of our report a recognition that those

 4   issues need to be addressed.

 5                Let’s take about a ten-minute break, and then

 6   let’s come back and see if we can pull this together in

 7   some form.

 8                (Recess from 2:59 p.m. to 3:26 p.m. )

 9                (Commissioner Boskin left the meeting room

10                for the day.)

11                CHAIR PARSKY:       I think we’ve had a busy day,

12   with a lot of analysis.          And let me see if I can perhaps

13   make some suggestions in terms of future work, to see if

14   we can’t get to a proposal that we all can ultimately

15   agree on.

16                Although I think that there have been a number

17   of questions -- serious questions -- raised about what

18   we’ve referred to as the business net-receipts tax as a

19   new form of tax -- and there are risks involved in making

20   any proposal for a new tax that we haven’t experienced --

21   I would suggest that we not abandon this concept.                    That

22   we ask the staff, with perhaps the help of, if I can

23   twist his arm, Richard Pomp, to assist us in exploring in

24   some depth -- and we obviously will want to ask Bob to

25   continue in his effort, to see if we can’t, in much more

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 1   detail, describe out how this tax would work.                  And so I

 2   would strongly recommend to the Commission that we not

 3   abandon this concept.

 4             Commensurate with that, it seems to me, my

 5   suggestion would be, we focus in on all the packages that

 6   we looked at -- one package that would include the

 7   business net-receipts tax.         And I’d focus us in on

 8   Package 1B.   1B does eliminate the taxes -- eliminate the

 9   corporate tax, eliminate the state general fund sales tax,

10   and include the business net-receipts tax.                   It would have

11   a uniform rate for purposes of discussion at the 6 percent

12   level, but it would have an exemption amount -- I’ll come

13   back to in a minute -- deductions for mortgage interest,

14   charitable contributions, and property taxes.

15             COMMISSIONER MORGAN:           And then some.

16             CHAIR PARSKY:       We probably want to take a look

17   at what impact it would have to also allow a deduction for

18   rent if the rent was off of your primary residence.

19             COMMISSIONER POMP:          On 1B, could I ask you, what

20   is the sum of the increases on people up to the $100,000,

21   and what is the sum of the decreases on everyone else?

22   That seems to be a pretty critical bit of information

23   that’s missing from each of these charts.

24             CHAIR PARSKY:       While they’re looking that up,

25   I just wanted to also mention that there’s the -- I think

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 1   we should look at various levels of exemption, perhaps

 2   increase the levels of exemption to address some of the

 3   concerns that commissioners have expressed about the

 4   significant impact on the lower-income groups.

 5              Now, do you have -- I know that the package

 6   itself as a whole would have increased by $10 billion,

 7   approximately, the contribution in a revenue-neutral way

 8   of the personal income tax, about $10 billion --

 9              MR. IBELE:       About $10 billion.

10              CHAIR PARSKY:        -- and would have assumed a

11   2.77 percent rate on the business net-receipts tax --

12              MR. IBELE:       Correct.

13              CHAIR PARSKY:        -- to make it revenue-neutral.

14              MR. IBELE:       Correct.

15              CHAIR PARSKY:        And I guess your question,

16   Richard, is within the brackets --

17              COMMISSIONER POMP:           That 10 billion, 10 billion

18   could be 90 and 100, it could be 20 and 10.

19              How does it break down, Mark?

20              MR. IBELE:       For those in AGI brackets, zero to

21   100, there’s a total increase of $8.7 billion.                      And for

22   those --

23              COMMISSIONER POMP:           8.7 billion?

24              MR. IBELE:       Billion.

25              COMMISSIONER EDLEY:           This is in 1B?

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 1                CHAIR PARSKY:      1B.

 2                MR. IBELE:     1B.

 3                And for those 100 and above, it’s a decrease of

 4   $11.8 billion.

 5                COMMISSIONER MORGAN:          That doesn’t come up to

 6   10.

 7                CHAIR PARSKY:      Yes, well, I don’t think --

 8                MR. IBELE:     No.    The 10 is just off the personal

 9   income tax, this personal income tax and net receipts.

10                COMMISSIONER POMP:         Everything?

11                MR. IBELE:     Yes.

12                COMMISSIONER POMP:         Gotcha.

13                CHAIR PARSKY:      And the exemption that was

14   assumed?

15                COMMISSIONER PRINGLE:          5,000.

16                COMMISSIONER COGAN:         5,000 exemption?

17                MR. IBELE:     Yes, right, per person.

18                COMMISSIONER POMP:         That’s the standard

19   deduction.

20                MR. IBELE:     Yes.     For non-itemizers.

21                COMMISSIONER POMP:         So it’s like a standard

22   deduction?    Or is it –-

23                MR. IBELE:     Well, it was –- yes.               That’s a way

24   of --

25                COMMISSIONER COGAN:         Yes, yes.       It’s just a

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 1   standard deduction that varies with family size.

 2             MR. IBELE:      Right, that’s correct.

 3             COMMISSIONER PRINGLE:           Mr. Chairman, could I ask

 4   specifically on that?      So you were contemplating

 5   increasing -- or at least modeling the increase in that

 6   exemption; correct?

 7             CHAIR PARSKY:       Yes.     I’d like to --

 8             COMMISSIONER PRINGLE:           And that exemption is a

 9   universal exemption that would take place -- or would take

10   place if you have a non-itemized return; correct?

11             MR. IBELE:      Yes.

12             COMMISSIONER PRINGLE:           So if you do itemize your

13   deductions, then the assumption is that you have more than

14   $5,000 worth of --

15             MR. IBELE:      We’re presuming that people look at

16   that and say, “I’m better off itemizing.”

17             COMMISSIONER PRINGLE:           So the same theory would

18   be applied to what you are looking at.               Therefore, you

19   were talking about rent being a part of that?

20             CHAIR PARSKY:       Well, with the itemized

21   deductions.

22             That package, unlike 1A, allowed certain

23   itemized deductions.      You start with adjusted gross

24   income, but you allow deductions, itemized deductions for

25   mortgage interest, charities, and property tax.

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 1             COMMISSIONER PRINGLE:            So you’re asking that to

 2   be modeled so we can see it?

 3             CHAIR PARSKY:        See it, yes.

 4             COMMISSIONER PRINGLE:            Only because it’s an

 5   interesting concept, as we are trying to flatten this out,

 6   we’re creating new deductions that the Legislature in

 7   their wisdom over the last 56 years have not put in place;

 8   we’re creating one for them.

 9             CHAIR PARSKY:        Well, that is a different one,

10   that’s true.

11             COMMISSIONER PRINGLE:            I see.

12             No, no, no.       I just wanted to see what the

13   definition of flat --

14             COMMISSIONER POMP:           But there is wisdom in 1A,

15   for that reason.

16             CHAIR PARSKY:        Yes.     1A basically starts from

17   scratch after all this history up in Sacramento of the

18   need for certain itemized deductions, that’s true.

19             MR. IBELE:       May I ask a question about the

20   rental deduction?

21             CHAIR PARSKY:        Yes.

22             MR. IBELE:       I mean, for the mortgage interest,

23   there is a -- I see the economic argument there.                  For

24   the rental deduction, if the goal is to address the

25   regressivity at the low end, we could increase the

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 1   exemption.    I’m missing the link to the rental deduction.

 2                CHAIR PARSKY:      I think you make a good point.

 3   There is a view floating around that one shouldn’t be

 4   penalized because he or she has decided to rent the home

 5   versus buy the home if it’s your primary residence.

 6                I’m not quite sure that logic extends.                 But if

 7   the primary focus of the Commissioners on the issue of

 8   rent is to deal with the lower-income groups, that can be

 9   dealt with with an increase in the exemption.

10                Would that be all right from --

11                COMMISSIONER MORGAN:          I think I raised the

12   rental question, and that trade-off would be fine.                   I

13   just think that the low-income, both psychologically,

14   politically, and actually, should feel somewhat equally

15   treated.

16                COMMISSIONER POMP:         You can phase these out,

17   like the Feds do.

18                CHAIR PARSKY:      Okay, is that okay then?

19                COMMISSIONER PRINGLE:          It’s okay with me.

20                CHAIR PARSKY:      So, I mean, there’s a lot more

21   work that needs to happen on the business net-receipts

22   tax, and we want to look at various levels of exemption.

23   But my suggestion is, with those caveats, we leave 1B

24   alive and kicking.

25                COMMISSIONER KEELEY:          Mr. Chairman?

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 1              CHAIR PARSKY:       Yes, sir?

 2              COMMISSIONER KEELEY:           Thank you, Mr. Chairman.

 3              Mr. Chairman, I know we are still doing things

 4   informally, without motion.

 5              CHAIR PARSKY:       Right.

 6              COMMISSIONER KEELEY:           So what I would like to

 7   do, I’m very comfortable with the way you’ve outlined

 8   that.   And so I’ll just refer to my previous comments

 9   about how much I don’t like the regressivity.                  But I think

10   that there’s enough merit in this.              I would like to add a

11   couple of items to this.

12              CHAIR PARSKY:       I was going to add another

13   alternative.    But if you want to add it within that

14   package, that’s fine.

15              COMMISSIONER KEELEY:           It’s that package.

16              CHAIR PARSKY:       Okay.

17              COMMISSIONER KEELEY:           So Package 1B, I wonder

18   if we could add the following, and have this modeled?

19              A tax levied at the refinery level on the

20   refinement to gasoline, diesel fuel, and jet fuel, at

21   refineries in California at the equivalent of $20 per ton

22   of CO2; that those revenues would be general fund

23   revenues, with a direction to staff to explore if some

24   portion of those revenues could be used to offset the

25   regressive impacts of the lowest end of PIT, personal

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 1   income tax payers.

 2             Secondly, that we direct staff to include,

 3   when they come back with us on Package 1B, a

 4   $25-per-recordation fee or tax on all recordations on

 5   real property, 100 percent of the proceeds after the cost

 6   of collection and administration, to be directed to the

 7   Resources Agency for their public trust stewardship

 8   responsibilities.

 9             CHAIR PARSKY:       I was going to suggest -- I

10   hadn’t in my mind focused on that last point.

11             I was going to suggest that concept applied

12   to -- potentially applied to each of the two suggestions

13   that   I was going to make that would stay on the table.

14             So it would -- this, as an alternative, would

15   apply -- what impact would it have on 1B; and then I was

16   going to suggest one other package which you just said

17   would apply to, as well as an option.              So I was going to

18   have it apply to both, not just to one.

19             COMMISSIONER KEELEY:           Okay.     Let me see if I

20   understood what you just said.

21             Is that, to you, Mr. Chairman and to other

22   members of the Commission, is that agreeable that those

23   two elements -- one on what we’ve been referring to as a

24   carbon tax, but admittedly is a fuel tax on three fuels,

25   and the recordation to support the public trust

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 1   responsibilities of the Resources Agency, is that

 2   agreeable that that could be, at this stage in the

 3   process, included?

 4               CHAIR PARSKY:        Yes.     I think -- I would say it

 5   could be included.        I would urge everyone to think of it

 6   perhaps more in the context of what I will say about the

 7   second alternative.         But it could be included in either.

 8               COMMISSIONER KEELEY:            Okay, Mr. Chairman.      Thank

 9   you, sir.

10               COMMISSIONER COGAN:           Gerry, I was just going to

11   say that I think Fred’s first idea is a very good one.

12               I’d like to have it couched a little bit

13   differently -- that is, I’d like the staff to maybe

14   explore for us the efficacy of imposing a fuels tax at

15   the refinery level relative to at the retail level.                  They

16   are two different -- one way you can have a fuels tax, of

17   course, is at the refinery level.                The other is at the

18   retail level.

19               And I’d like you to at least maybe get somebody

20   from the Department of Finance or from the resources group

21   to educate us a little bit on the efficacy of the two.

22               MR. IBELE:       You’re thinking about just the

23   administrative aspects of it or --

24               COMMISSIONER COGAN:           Uh-huh, and the revenues

25   raised.

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 1                MR. IBELE:     Yes, yes, right.

 2                COMMISSIONER COGAN:         Because they’re going to be

 3   different.

 4                MR. IBELE:     Right.      Right now, our gas tax, the

 5   way we levy it, is at the point of first distribution --

 6   at the rack, as it’s known, as opposed to at the pump.

 7   But this would be moving it one step further back then.

 8                COMMISSIONER COGAN:         Right.

 9                CHAIR PARSKY:      Maybe let me just finish one --

10   because I wanted to suggest that that -- Package 1B

11   doesn’t have to be looked at just this way, would be the

12   package that contained one or two, but I was focusing on

13   one new form of tax and the elimination of several

14   existing taxes.     That’s one possibility.

15                The second possibility would be to take

16   Package 2, and eliminate from Package 2 the business

17   net-receipts tax.      As a new form of tax, we would

18   eliminate that from consideration there -- again, for

19   purposes of discussion here -- we would eliminate for the

20   moment the investment tax credit component and we would

21   include the fuels tax as you described it.

22                Again, it is a different form of new tax, but

23   it would retain a more simplified and lower personal

24   income tax rate, you would reduce the corporate rate but

25   not eliminate it; you would reduce the sales and use tax,

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 1   but you wouldn’t extend it to services; and you would have

 2   a fuels tax.    And you would use the revenues off of the

 3   fuels tax to, in part, address some of the distribution

 4   issues.

 5             COMMISSIONER KEELEY:            Mr. Chairman, let me make

 6   sure I understand the very last thing.

 7             So the fuels tax rate would be determined by

 8   netting out the reductions everywhere else, and then you

 9   would set a fuel tax so that the revenue-neutrality goal

10   is achieved; is that what you’re suggesting?

11             CHAIR PARSKY:        Exactly.

12             COMMISSIONER KEELEY:            Thank you, Mr. Chairman.

13             COMMISSIONER PRINGLE:            Mr. Chairman, therefore,

14   a lot of the available funding that would be generated --

15   Mr. Keeley, in his previous proposal, wanted to ensure

16   that that was directed to the lower-income brackets to

17   take care of regressivity.          And since the fuel tax is the

18   most regressive of all these taxes, how high does that

19   have to be to correct that level of regressiveness?

20             CHAIR PARSKY:        How high would the –- it would

21   be --

22             COMMISSIONER PRINGLE:            That probably, too, was a

23   rhetorical question.

24             CHAIR PARSKY:        We’re still smiling.            I like

25   that.

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 1             COMMISSIONER KEELEY:           He smiles a lot.

 2             COMMISSIONER PRINGLE:           No, no, no.         I would like

 3   to see how, in fact, that does play out if the purpose is

 4   to ensure that you’re addressing the regressive nature of

 5   the other elements of the tax structure.

 6             CHAIR PARSKY:       John?

 7             COMMISSIONER COGAN:          Gerry, one other thought on

 8   Tax Package 2.    Right now, the way it’s structured,

 9   there’s a little bit of ambiguity on what the zero

10   bracket -- to whom the zero bracket applies.

11             CHAIR PARSKY:       Right.

12             COMMISSIONER COGAN:          And in Package 2, we’re

13   retaining all of the current deductions and credits.

14             CHAIR PARSKY:       How would you clarify that first

15   point on the zero bracket?

16             COMMISSIONER COGAN:          Well, it seems to me that

17   any zero bracket should only apply to non-itemizers;

18   right?

19             MR. IBELE:      Right.

20             COMMISSIONER COGAN:          Everybody who itemizes gets

21   their deduction, it’s a variable deduction.                  So I would

22   say keep whatever zero bracket you have or exempt amount

23   to the non-itemizers, just as you did in Package 1.

24             It also seems to me that maybe it’s worthwhile

25   to consider, under Package 2, to eliminate all of the

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 1   deductions and credits except for the big three that we

 2   retained in Package 1, and then replace those, in effect,

 3   with an exempt amount, as we did in Option 1, and clean up

 4   the tax code, if you will -- simplify things quite a bit.

 5                So modifying Package 2, we would do so by saying

 6   we would retain only the deductions from mortgage

 7   interest, charity, and property taxes as we did in

 8   Package 1.

 9                CHAIR PARSKY:      Well, you’re getting close to

10   Package 1.

11                COMMISSIONER COGAN:         Right.

12                CHAIR PARSKY:      Would you move to one

13   proportional rate?

14                COMMISSIONER COGAN:         No, keep the variable

15   rates.   Keep the variable rates.               Because I think we’re

16   going to have less of a distribution problem that way, and

17   have an exempt amount.

18                CHAIR PARSKY:      Okay, we can certainly --

19                COMMISSIONER COGAN:         So it will affect the

20   two-rate structure as opposed to the one-rate structure.

21                CHAIR PARSKY:      So the variation would be not

22   having the new form of tax, keeping the variable rates,

23   eliminating the itemized deductions -- or reducing the

24   itemized deductions to a limited number, reducing the

25   corporate tax rate, reducing the sales and use tax rate.

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 1               COMMISSIONER COGAN:           I would not, in this

 2   option.

 3               CHAIR PARSKY:        You would not?

 4               COMMISSIONER COGAN:           It just seems to me that

 5   if the focus is on economic growth, the focus should be

 6   on reducing the corporate rate and the personal income

 7   tax rate.    Those are the two that pare economic growth the

 8   most.

 9               It seems to me that reducing the sales and use

10   tax by 1 cent is kind of a waste of revenues.

11               CHAIR PARSKY:        But since it is the most

12   regressive, how do you address the regressivity with this

13   package?

14               COMMISSIONER COGAN:           With the zero-bracket

15   exception, more progressive rates than we have in 1.

16   That’s sort of the idea.

17               COMMISSIONER POMP:           I would like to add a

18   severance tax.       We are the only state in the country --

19   we may be the only jurisdiction in the world that does not

20   have a severance tax.         And I would like to see what that

21   would raise, and that’s another source of money to deal

22   with the regressivity issue.

23               And we have also lost our interest in cleaning

24   up tax expenditures.         And I don’t know if you read what

25   I had Mark distribute.          Real briefly, nine corporations

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 1   will receive tax cuts averaging $33 million due to the

 2   adoption of elective single-factor apportionment.

 3   80 percent of the benefits go to 1 percent of California

 4   corporations with gross incomes over a billion dollars.

 5   And this is scandalous.       This is all a source of potential

 6   revenue for lowering the rate.           And we seem to sort of

 7   have ignored our list of tax expenditures along the way.

 8             COMMISSIONER MORGAN:           But isn’t that covered by

 9   the net-receipts tax?

10             COMMISSIONER POMP:          If you eliminate the

11   corporate income tax, but we may not.

12             CHAIR PARSKY:       Well, but Package 1B would.

13             COMMISSIONER POMP:          Yes, but that may not be

14   the package we adopt.      We may decide to be a corporate

15   income tax.

16             CHAIR PARSKY:       Well, we want you to be an

17   advocate of one or the other, that’s okay.

18             COMMISSIONER POMP:          An advocate of one that has

19   not been tested and tried yet, is really -- and then to

20   talk about -- I have to disagree that we at ought to be

21   bold and replace what we have with a new tax whose revenue

22   estimates are soft at best; that hasn’t really stood the

23   test of time, which Michigan adopted only because they

24   have a constitutional cap on their sales tax.

25             This is really not –- this is shooting crap.

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 1   We’re the seventh largest economy in the world, so go

 2   slow.

 3             CHAIR PARSKY:        Now, now, but we’ve been going

 4   slow for about 30 years and we’re where we are.

 5             The whole purpose here is to --

 6             COMMISSIONER POMP:           Not make things worse.

 7             CHAIR PARSKY:        -- move a little faster.

 8             COMMISSIONER POMP:           There’s always a downward

 9   spiral.

10             COMMISSIONER COGAN:           Gerry, if I understand

11   Richard’s suggestion, as a generic suggestion, we would

12   reduce the corporate tax rate to 7 percent, and we’d take

13   a look at all of the credits and deductions that apply to

14   corporate -- in a corporate code, just as we’re doing on

15   the individual side?

16             COMMISSIONER POMP:           Yes, but we’ve got to get

17   into this elective single-factor apportionment, too.

18   Which as these statistics show, what, do you just give

19   away money to three corporations?              I mean, that’s not

20   efficient spending.

21             COMMISSIONER COGAN:           Well, for my part, I’m

22   certainly willing to keep that on the table.                  I don’t see

23   any reason to take one particular little corporate tax

24   provision off the table at this point.

25             COMMISSIONER PRINGLE:            1B takes it off the

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 1   table.

 2               COMMISSIONER COGAN:           Pardon me?

 3               CHAIR PARSKY:        1B does.        But you’re talking in

 4   Package 2 --

 5               COMMISSIONER COGAN:           In Package 2.

 6               CHAIR PARSKY:        -- to take a look at the --

 7               COMMISSIONER COGAN:           Rate reductions and broaden

 8   the base.

 9               CHAIR PARSKY:        Of the corporate tax?

10               COMMISSIONER COGAN:           Of the corporate tax.

11               CHAIR PARSKY:        Okay, let’s include that

12   analysis.

13               COMMISSIONER ITO:          Just another comment or a

14   request.

15               CHAIR PARSKY:        No, that would be my suggestion,

16   that we fully go at analyzing those two packages as

17   something that we would bring to this group to decide in

18   July.

19               Jenny?

20               COMMISSIONER ITO:          And just another request.           I

21   can’t help but be concerned about the overall shift of the

22   burden for the lower and middle-income.                  So I think what

23   would be helpful is just some kind of analysis about

24   per-income group, the percent of taxes, overall taxes in

25   each scenario as a share of the income on each one of

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 1   those.

 2             CHAIR PARSKY:        I think that’s a very good point.

 3   And I should have mentioned, I think we need to include

 4   the impact of all taxes, not just the taxes that we are

 5   proposing to change, in terms of its impact on various

 6   income groups.

 7             COMMISSIONER PRINGLE:            Of all state taxes.       All

 8   state taxes.

 9             CHAIR PARSKY:        Phil?

10             MR. SPILBERG:        Yes.

11             CHAIR PARSKY:        Don’t look with consternation at

12   me.

13             MR. SPILBERG:        No, no.         That’s just the way --

14             CHAIR PARSKY:        Only because -- it is important

15   just to look at the taxes we’re changing.                 But then you

16   have to step back and take a look at, if you make these

17   changes and you have the existing state taxes also

18   impacting people --

19             MR. SPILBERG:        I see.

20             CHAIR PARSKY:        -- what impact does it have?

21             COMMISSIONER EDLEY:           If Minnesota doesn’t help

22   you, try North Dakota.

23             MR. IBELE:       You’re going in the wrong direction.

24             MR. SPILBERG:        And such things will not change

25   very much over the analysis we’ve already done because

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 1   about 95 percent of the revenues for the state general

 2   fund comes from the personal income tax, the sales tax,

 3   and the corporate franchise tax.

 4             MR. IBELE:       It would be slightly more

 5   regressive.    We’d be including basically the excise taxes.

 6             COMMISSIONER COGAN:           Mr. Chair?

 7             But the change will still be the same.

 8             MR. IBELE:       Right, right.

 9             COMMISSIONER COGAN:           Would you be looking, in

10   effect, at disposable income, which is really what we want

11   to look at, income after taxes?

12             COMMISSIONER BARRALES:               Mr. Chairman, is staff

13   also looking at -- and I don’t know how they get this --

14   but the effects on job retention or creation in the state?

15             CHAIR PARSKY:        With each of the packages,

16   it’s -- I think comments that were made about the ability

17   to quantify or analyze people leaving the state, coming

18   to the state, businesses come in-state are somewhat

19   problematic.

20             COMMISSIONER BARRALES:               Right.

21             CHAIR PARSKY:        But we do need to make a comment

22   with respect to any proposal that we put forward on how we

23   feel about its impact on potential job creation.                  That’s

24   part of our -- we will have set out all our goals.                 It

25   would be important to come forward with at least somewhat

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 1   of a judgment on that subject.

 2                COMMISSIONER BARRALES:             Okay.   Well, it seems

 3   as though there’s a lot of research that has been done and

 4   that’s been requested.

 5                Mr. Keeley has mentioned a number of times that

 6   there’s no actual evidence that people are leaving the

 7   state or high-income earners are leaving the state, or

 8   necessarily for that matter, jobs are necessarily leaving

 9   the state.    And one of our charges is to try to develop a

10   21st century tax structure that encourages job creation

11   and retention here in California.               So I’d like to be able

12   to get at that as realistically as possible.

13                Also, I know staff is just dying to dive into

14   all this and get working on this.               I assume then --

15                CHAIR PARSKY:      I wouldn’t put it that way with

16   them.

17                COMMISSIONER BARRALES:             I assume, though, with

18   the fuels-tax proposal, is that somewhat modular in the

19   sense that Package 1B and Package 2 will be -- you’ll look

20   at those and then you’ll look at those with and/or without

21   the fuels-tax component; is that the idea?

22                CHAIR PARSKY:      Yes.     Well, I would focus heavily

23   on Package 2.    But we could adjust it for either.

24                COMMISSIONER KEELEY:          Well, Mr. Chairman, if I

25   might on that point.        We had talked about -- if I

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 1   understand where the bidding is at this point, you had

 2   outlined a modified Tax Package 1B.

 3             CHAIR PARSKY:       Right.

 4             COMMISSIONER KEELEY:           Then you had outlined a

 5   modified Tax Package 2.

 6             CHAIR PARSKY:       Yes.

 7             COMMISSIONER KEELEY:           I want to make sure that

 8   I understand where we are.

 9             With regard to both of those on the issues that

10   I have raised, you have agreed that the staff would put

11   in to that package, to both of those packages, the fuels

12   tax as we’ve described and talked about earlier in both

13   of those packages.     We would also put in both of those

14   packages this proposal for the recordation charge for

15   the Resources Agency.      We would also -- as I recall, you

16   made some other amendments to it, and that’s fine, I’m

17   agreeable to all the amendments that you made.                    That

18   somehow we are going to deal with both the renter question

19   in terms of fairness relative to how housing is treated

20   with regard to a deduction or an exemption, that we are

21   somehow going to deal with that; that the staff is also

22   going to deal with the regressive nature of it overall in

23   response to Commissioner Ito’s question, which may involve

24   a way to do that, would be to increase the zero-obligation

25   folks, that that may be a way to do it, but there might be

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 1   other ways.

 2                CHAIR PARSKY:      I would make an amendment in

 3   that.   Everything you said up until “the renter,” I took

 4   that off the table because I thought --

 5                COMMISSIONER KEELEY:          Oh, because you can deal

 6   with it --

 7                CHAIR PARSKY:      -- I can deal with it in the

 8   context of the exemptions.

 9                COMMISSIONER KEELEY:          Okay, fine.         Fair enough.

10                And then if I could continue with this.                With

11   regard to Commissioner Barrales’ comment about sort of the

12   component-part nature of this,             I would see that being the

13   case in every component part.            That what we will see for

14   every component part --

15                CHAIR PARSKY:      Yes, we would.

16                COMMISSIONER KEELEY:          -- is that.         And so then

17   we can adjust dials and knobs as to rates and bases and

18   pulling things completely out or not; right?

19                So you weren’t singling that out?

20                COMMISSIONER BARRALES:             No.

21                COMMISSIONER KEELEY:          You meant, everything can

22   be looked at that way.         Fair enough.

23                COMMISSIONER BARRALES:             No.

24                COMMISSIONER KEELEY:          I’m fine with that.

25                Now, as to Mr. Spilberg’s looking -- what was

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 1   the word that was used?       He looked…

 2             What did they say, Phil?             What was it?

 3             MR. SPILBERG:       Consternation?

 4             COMMISSIONER KEELEY:           Consternation.

 5             CHAIR PARSKY:       Consternation.          He was looking at

 6   me with consternation.

 7             COMMISSIONER KEELEY:           No, no.      I’ll just say,

 8   because I know Mr. Genest -- if you’ll look at Mr. Genest,

 9   that he has same look.       It is required, to be employed by

10   the Department of Finance.         You have to have that –-

11             Is that right, Mr. Genest?

12             MR. GENEST:      (Nodding head.)

13             COMMISSIONER KEELEY:           That’s what I thought.

14   Okay, thank you, sir.

15             COMMISSIONER PRINGLE:           Mr. Parsky?

16             CHAIR PARSKY:       Yes?

17             COMMISSIONER PRINGLE:           I really don’t know what

18   we’re doing here.     I thought that you started to try,

19   after a few hours’ worth of discussion of four proposals

20   that were presented, to ask staff to dust a couple off,

21   take one similar to how it’s presented in our book, 1B –-

22            CHAIR PARSKY:        Right.

23             COMMISSIONER PRINGLE:           -- craft another one that

24   addresses many of the myriad of other suggestions other

25   people have, and have two proposals.              It’s hard to have

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 1   every proposal fluid, so there will be two proposals with

 2   valuations there.      It can’t be the dials are all turned

 3   for every one of them.

 4                CHAIR PARSKY:      Right.

 5                COMMISSIONER PRINGLE:          And then in fact have

 6   other proposals and ideas that could be added or taken out

 7   of different things.        But you have to have two things to

 8   be able to compare, to start with, to see which path we

 9   walk down.

10                CHAIR PARSKY:      Right.

11                COMMISSIONER PRINGLE:          Am I too far off of what

12   you were saying?

13                CHAIR PARSKY:      No, that’s exactly what I had in

14   mind.   And I guess the only thing I would ask Fred -- the

15   only amendment I would suggest to Fred’s commentary would

16   be that the -- I hadn’t contemplated under Version 1B that

17   in addition to having the business net-receipts tax, it

18   would have the fuels-tax component.

19                COMMISSIONER KEELEY:          I think I see what both

20   you and Mr. Speaker are saying.

21                So you would have essentially Package 1B the way

22   it was presented?

23                CHAIR PARSKY:      Exactly.

24                COMMISSIONER KEELEY:          And then all of the other

25   ideas that have been surfaced and around which we’ve

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 1   gotten enough nods that, yes, those have sufficient

 2   support on the Commission to be considered, those would be

 3   considered and presented as parts of a newly reconstructed

 4   Tax Package 2?

 5              CHAIR PARSKY:        Exactly.

 6              COMMISSIONER KEELEY:            Is that correct, sir?

 7              CHAIR PARSKY:        Yes.

 8              COMMISSIONER KEELEY:            I’m fine with that.

 9              COMMISSIONER POMP:           And is Package 2, adjusted

10   gross income or adjusted gross income minus those

11   deductions?    I lost track.

12              CHAIR PARSKY:        We were going to remove the

13   itemized deductions.

14              COMMISSIONER POMP:           I think that’s a great

15   change.

16              CHAIR PARSKY:        Okay, yes, Chris?

17              COMMISSIONER EDLEY:           I didn’t quite follow all

18   of that.   But it does seem to -- there will be something

19   that looks like 1B that has -- with Gerry’s fixes, where

20   we fold in the fuels tax and spend the money to fix the

21   regressivity or something.           I mean, we’ll get a

22   presentation with a chart that shows what the

23   distributional --

24              MR. IBELE:       (Nodding head.)

25              COMMISSIONER EDLEY:           Okay, fine.

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 1             When I look at Chart 1B, at the graph in 1B, and

 2   I look at sort of the better-off/worse-off, the BO/WO

 3   factor at $100,000 and above, it strikes me that this is

 4   dead on arrival in Sacramento.

 5             And let me make the same point a different way.

 6             I think a proposal which has the air of

 7   volatility reduction as stalking horse for rate reduction

 8   is just very problematic.        So in that spirit, I’d like to

 9   propose a variant here, sort of 1B2 or maybe it’s 1B3,

10   that would take 1B but introduce a higher bracket at 100,

11   150, something like that, and do income-averaging for the

12   amounts at that bracket level.

13             And so here’s my thesis:             My thesis is that this

14   troubling wedge that you see on the graph here for 1B will

15   narrow substantially, which I think will improve both the

16   fairness and the politics of the proposal; the volatility

17   will reduce substantially because of the income-averaging

18   on things like these highly volatile elements of income,

19   like capital gains and bonuses and so forth, and then do

20   as much rate reduction as you can do.              So that’s sort of

21   where I’m going.

22             CHAIR PARSKY:       Well, I would -- again, in order

23   to keep us on a path of some clear alternatives --

24             COMMISSIONER EDLEY:          Yes.

25             CHAIR PARSKY:       -- if you wanted to impose

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 1   different brackets, Package 2 is a different bracket

 2   approach.

 3               COMMISSIONER EDLEY:           Fine.      But I mean, it’s

 4   just a question of -- I’m happy to make it sort of 2A or

 5   2B; but in which case, I like the business net-receipts

 6   tax.

 7               CHAIR PARSKY:        Right.

 8               COMMISSIONER EDLEY:           Eliminate the corporate tax

 9   and the state sales tax.

10               CHAIR PARSKY:        But what is troubling you is that

11   the package, as a whole, is creating this shift in burden

12   on the overall package?          That’s what is bothering you?

13               COMMISSIONER EDLEY:           Yes.      Because remember, you

14   guys can’t have it both ways; right?                 You can’t say the

15   thing that we’re really trying to deliver for the Governor

16   is --

17               CHAIR PARSKY:        Wait a minute now.

18               COMMISSIONER EDLEY:           -- volatility reduction for

19   the people of California.

20               CHAIR PARSKY:        No, no.         We’re delivering for the

21   Governor and the Legislature and the Democratic leaders

22   and the entire state.

23               COMMISSIONER EDLEY:           Great.      Well, if we’re

24   delivering for those folks, too, then I don’t think we can

25   give them a proposal that looks like 1B at the top end,

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 1   because there’s just a -- this is a shift in tax burden

 2   from the very high-income to middle-income.

 3              Fix the exemption, right, that’s going to take

 4   care of the lower-income.          Very happy with our discussions

 5   of that.   But we’ll still be left with a package that is

 6   going to have the optics, and I think the underlying

 7   reality, of being a substantial reduction in taxing paid

 8   at the higher income, in favor of the middle income.

 9              Now, I know there are a lot of people who think

10   that’s very good public policy because a small fraction of

11   taxpayers are paying a very large share.                 That’s not an

12   argument about the 21st century and that’s not an argument

13   about volatility; that’s an argument about not liking the

14   distributional character, the progressive character of

15   today’s tax system.        So I’m trying to kind of split the

16   difference here:      Provide a lower rate, but at the same

17   time, not have a package that looks like such a, frankly,

18   crass transfer of burden from the 200K-plus folks to the

19   middle income.

20              CHAIR PARSKY:        Well, to some extent, maybe the

21   staff can help out here because, in looking at the shift,

22   you have to look at the shift over time, not at the point

23   in time -- this chart compares current law on a static

24   basis with the change.

25              COMMISSIONER EDLEY:           Right.

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 1             CHAIR PARSKY:        If you look at what has happened

 2   over time, and you say, well, let’s take a look at what

 3   this burden shift would really look like, pick a date that

 4   was less -- closer in time to the average, or something

 5   there, I think you may be more comfortable.

 6             COMMISSIONER POMP:           But we don’t know.

 7             CHAIR PARSKY:        We don’t.        I think we’ve got to

 8   see it.

 9             Because I think what is clear is that we have,

10   in California, had an ever-increasing dependence on the

11   personal income tax and, as a result of the way the tax

12   is structured, a heavy increasing dependence on a fewer

13   number of people.      That’s over time.

14             So you’re right, I mean, if you pick one

15   specific point in time, the year two-thousand-and-X, you

16   will see that.     But the concept of income-averaging is a

17   concept that the staff may have some comments about.                    I

18   have no objection to work being done on it.                   But I’m

19   not -- I wouldn’t say necessarily that the challenges we

20   are faced can be addressed without recognizing there needs

21   to be a shift in the other direction.

22             COMMISSIONER EDLEY:           I appreciate that.          I

23   appreciate that very much.          But I suppose where we part

24   here is that analytically, I think -- or perhaps I should

25   say logically, I think the way to deal with a shift that

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 1   you mention, secular increase in the burden on the income

 2   tax, while having overall progressivity, is to put wealth

 3   back on the table, and that means property taxes.

 4              But if we’re taking property taxes off of the

 5   table because of the third rail of Prop. 13, which I

 6   understand most of the commissioners want to do as a

 7   political matter -- if you’re taking that off the table,

 8   going after wealth, then I don’t think that liberals are

 9   going to let you decrease the overall progressivity of our

10   system.

11              COMMISSIONER POMP:          Because of really a false

12   issue of volatility.

13              COMMISSIONER EDLEY:          Exactly.

14              Do you see what I mean, Gerry?               It’s like, I

15   agree with you that there would be kind of growth gains,

16   efficiency gains, et cetera, by decreasing reliance on the

17   personal income tax.       But for overall progressivity, I

18   would want to replace -- I’d be willing to cut your

19   taxes -- your income taxes -- if I could get more out of

20   you on your property taxes.          But you’re not giving me that

21   option.   And, therefore, what I’m suggesting instead, is

22   that we do the rate reduction that we can, we reform the

23   business taxes, but that we deal with the volatility issue

24   by having a top bracket and some averaging.

25              COMMISSIONER POMP:          Or lock it up, so it can’t

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                Commission on the 21st Century Economy – June 16, 2009


 1   be spent somewhere.

 2                COMMISSIONER EDLEY:         Yes, that would be an

 3   alternative to averaging, but…

 4                CHAIR PARSKY:      Well, I do think one thing:               I

 5   don’t think -- I don’t think the issue of volatility is a

 6   false issue.     I mean, you can’t have lived in California

 7   over the last X-period of time and not feel that there’s

 8   volatility in the system.

 9                COMMISSIONER POMP:         States would love the

10   problem.   I would love it as an individual.                   I’d love my

11   income to spike several years.             What I won’t do is spend

12   on the assumption it will always be that high.                      That’s the

13   problem here.

14                CHAIR PARSKY:      It’s not the only problem.

15                COMMISSIONER POMP:         Otherwise, it’s wonderful.

16   You’ve got wealthy people with a lot of income, and it

17   fluctuates.    That’s not a bad problem.

18                CHAIR PARSKY:      But your answer -- your answer to

19   your issue -- put aside the property tax -- is income

20   averaging?

21                COMMISSIONER EDLEY:         Yes.

22                COMMISSIONER MORGAN:          Just for the top quartile

23   or decile or whatever?

24                COMMISSIONER EDLEY:         Yes.      I don’t know what the

25   specific parameters would be.            I want to get some -- I do

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                 Commission on the 21st Century Economy – June 16, 2009


 1   want to get some reduction in the rate for most people.

 2   Got that.

 3               But I want to -- but then I want to retain the

 4   requisite amount of progressivity by having a top bracket

 5   as Option 2 tried to do.           And I want to reduce the

 6   volatility created by that top bracket by doing averaging.

 7               Now, if you don’t want to average the income,

 8   I’d be happy to let the rates fluctuate countercyclically.

 9               COMMISSIONER ITO:          Can we look at different

10   income brackets?

11               CHAIR PARSKY:        Well, in one sense -- in one

12   sense, maybe -- and, again, let’s think a little bit about

13   it.   But the original Package 2 had business net-receipts

14   tax in it and it had brackets and it had some reductions.

15               It didn’t eliminate -- the reason I suggested

16   moving off of that was the concept which is certainly

17   worth -- it’s got some merit to it –- of if you’re going

18   to really go at this new form of tax, it ought to replace

19   other taxes.

20               COMMISSIONER EDLEY:           I’m with you on that.

21               CHAIR PARSKY:        There’s some merit with that.

22               COMMISSIONER EDLEY:           I’m with you on that,

23   right.

24               CHAIR PARSKY:        But let’s see if working with the

25   staff -- I’m just not sure how to deal with this

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               Commission on the 21st Century Economy – June 16, 2009


 1   income-averaging concept.

 2              Do you have any thoughts, Phil, before we --

 3              MR. SPILBERG:       I’m not sure how to do it,

 4   either.   So that’s something that I would need to talk

 5   over with Commissioner Edley or the Chair, however the

 6   Chair would like to handle this.

 7              CHAIR PARSKY:       No, no.         I think we should talk

 8   with Chris, for sure.

 9              MR. SPILBERG:       Okay.

10              COMMISSIONER MORGAN:           Can I raise another issue?

11              CHAIR PARKSY:       Yes.

12              COMMISSIONER MORGAN:           Mr. Chairman, I’m just

13   wondering, for those of us that would like to merge the

14   two tax agencies and set up an appeals court, when is that

15   an appropriate discussion?

16              CHAIR PARSKY:       Well, I think there was a

17   comment, and we should include it in this report -- there

18   was a comment made that in addition to forms of tax, and

19   how the tax -- the nature of the taxes, our report should

20   include not necessarily in the same piece of

21   legislation --

22              COMMISSIONER MORGAN:           No.

23              CHAIR PARSKY:       -- but in a recommendation form,

24   suggestions about tax administration.

25              COMMISSIONER MORGAN:           I hope so.

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                Commission on the 21st Century Economy – June 16, 2009


 1              CHAIR PARSKY:        And we’re going to circulate,

 2   based on comments that have been made, suggestions for

 3   tax administration.        That would even be included in the

 4   report.

 5              COMMISSIONER MORGAN:            Okay.     And my second thing

 6   that hasn’t been talked about much was the most volatile

 7   within the personal income, as we all know, are the

 8   capital gains.

 9              CHAIR PARSKY:        Right.

10              COMMISSIONER MORGAN:            And I have heard some

11   support from commissioners about trying to lock in the

12   reserve more strongly than it has been in the past,

13   perhaps.

14              What would the reaction be for the state to take

15   the capital-gains tax and put it into the reserve up to a

16   certain percentage of the annual budget?

17              CHAIR PARSKY:        Well, again, I would strongly

18   recommend that given the fact that, to date, the

19   Legislature hasn’t been able to agree and the voters seem

20   to have rejected the concept, that the notion of a

21   reserve -- which has merit, and probably a number of

22   commissioners would want to include in a suggestion for

23   others to address, it’s not really the charge of this

24   Commission.    The charge of this Commission really is to

25   address the tax system and the generation of revenues.

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482        276
              Commission on the 21st Century Economy – June 16, 2009


 1             We can, and should, suggest that organizations

 2   like California Forward are addressing this, and need to.

 3   But I think we’ve got our hands full in trying to come up

 4   with a coordinated tax package.

 5             With the challenge left to me on how to deal

 6   with Chris’ last comment, if it’s all right, we will move

 7   forward on these two packages.

 8             COMMISSIONER EDLEY:          I’m sorry, Gerry, I didn’t

 9   understand the thing that Fred mentioned about the –-

10   there was a recording fee and a Resources Agency earmark

11   for them or something?       What are we doing?              Why are we

12   doing this?

13             COMMISSIONER KEELEY:           At the meeting --

14             COMMISSIONER EDLEY:          Can we change it to the

15   university?   That the revenue go to the universities

16   instead of…   We’re a public resource.

17             COMMISSIONER KEELEY:           When the Chair asked

18   commissioners at our second meeting if we had ideas or

19   suggestions that we wanted the staff to examine, I put

20   eight suggestions together and submitted them, and the

21   staff has provided responses on all of them.                  One of those

22   was this notion of the Resources Agency.

23             And the issue here from the tax commission, from

24   my perspective, the way that this fits in, is that we have

25   an exercise going on in Sacramento, which has been going

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              Commission on the 21st Century Economy – June 16, 2009


 1   on for quite some time -- not just this year, not just the

 2   last few weeks, but for some time -- which is dismantling

 3   various parts of fundamental, basic government as we’ve

 4   come to understand it in California.               And one of the areas

 5   that the public has made commitments to, time and time and

 6   time and time again, has been the resources issues in

 7   California that are all, at this time, covered under the

 8   Resources Agency of the state.            And these are public-trust

 9   resources for which the state has both accepted and

10   encouraged an intergenerational responsibility for

11   stewardship.

12             And so in that regard, in discussions with the

13   Secretary of the Resources Agency, and others in the

14   Administration, the idea is that there -- this has been

15   something that for over a decade, over two Republican

16   administrations and one Democratic administration, there

17   has been discussion about how to accomplish this.                 And it

18   seemed to me that if we’re looking to the state’s economy

19   in the 21st century, that one of the quality-of-life

20   issues that this state is very proud of has been its

21   stewardship of its natural resources.

22             The park system, for example, is the second

23   largest park system in the United States, second only to

24   the United States federal park system.                The same is true

25   with regard to forestry and fire protection, fish and

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              Commission on the 21st Century Economy – June 16, 2009


 1   game, and the other entities that are under that umbrella.

 2   They receive virtually no funding from the general fund of

 3   the state, and have been dying on the vine.

 4             And so my sense is that in keeping with the

 5   Governor’s direction here, which essentially has some

 6   aspirational quality to it, about what kind of California

 7   we would like to see, I think for a very de minimis amount

 8   we can keep that pledge that we have made

 9   intergenerationally.

10             I would point out that President Teddy Roosevelt

11   visited Big Basin Park in Santa Cruz County and said that

12   we should preserve this place and these places in

13   California for our great-great-grandchildren.

14             We are that generation.             That is who we are.

15   We are the great-great-grandchildren of the Teddy

16   Roosevelt generation.

17             And so my thought is that we should have a

18   de minimis fee tied to recordations on real property,

19   because the public trust resources and stewardship

20   responsibility are about real property resources that are

21   in state ownership.

22             Thank you, Mr. Chairman.

23             COMMISSIONER EDLEY:          So I gather, Mr. Chairman,

24   each member of the Commission gets an earmark in our

25   recommendation?    Because I have some other programs I’d

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              Commission on the 21st Century Economy – June 16, 2009


 1   like to suggest that are critical to the future of

 2   California.

 3                CHAIR PARSKY:      But before we are finished --

 4   before we finish, we will give voice to any individual

 5   requests that are made.

 6                Again, I’d like to have us focus in on the

 7   proposal we want to make, convert it to legislation that

 8   we want Sacramento to act on, and other recommendations

 9   that we want Sacramento and the entire state to consider,

10   and other ideas that we may have for generations to come,

11   all of which can be included in our report.                    And this is

12   not to denigrate any of those categories.

13                COMMISSIONER KEELEY:          Thank you, Mr. Chairman.

14                CHAIR PARSKY:      And with that, I’d say we’re

15   adjourned.

16                 (The meeting concluded at 4:20 p.m.)

17                                     --oOo—

18

19

20

21

22

23

24

25

                     Daniel P. Feldhaus, CSR, Inc.   916.682.9482            280
         Commission on the 21st Century Economy – June 16, 2009



                    REPORTER’S CERTIFICATE


          I hereby certify:

          That the foregoing proceedings were duly

reported by me at the time and place herein specified;

and

          That the proceedings were reported by me, a

duly certified shorthand reporter and a disinterested

person, and was thereafter transcribed into typewriting;

and

          That the foregoing transcript is a record of

the statements of all parties made at the time of the

proceeding.

          IN WITNESS WHEREOF, I have hereunto set my hand

on the 18th day of June 2009.




                              _______________________________
                               DANIEL P. FELDHAUS
                               California CSR #6949
                               Registered Diplomate Reporter
                               Certified Realtime Reporter




              Daniel P. Feldhaus, CSR, Inc.   916.682.9482
                                                                  281

				
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