Politics

SACRAMENTO (CBS 5 / AP) ― A proposal to dramatically reshape California's tax system drew criticism Tuesday from across the political landscape, even before the Legislature begins considering the plan.

The state would repeal its sales and corporate taxes, flatten the income tax rate, and tax a wider variety of businesses under Tuesday's recommendations from the Commission on the 21st Century Economy. It would include a nearly unprecedented "business net receipts tax" that would apply to all companies doing business in California, including many based in other states.

Gov. Arnold Schwarzenegger immediately endorsed the proposal by the tax commission he created with Democratic legislative leaders a year ago. He called lawmakers into special session, asking them to approve the plan this year.

But business and labor organizations alike urged slow and careful consideration of what the California Chamber of Commerce cautioned is "an unproven experiment."

"What's really extraordinary about it is this new tax is unprecedented anywhere in the world," said University of Connecticut professor Richard Pomp, a national tax expert who sat on the California commission. "It's got lots of potential problems. Maybe they're remediable, maybe not."

Pomp was one of five on the 14-member commission who refused to support its final recommendations. The centerpiece business receipts tax has been tried only on a limited scale in Michigan, he said, with uncertain results.

"This tax wouldn't be good for the economy," said Pomp, an international tax consultant and author who directed the New York Tax Study Commission from 1981-87. "I think this is shooting dice."

The business tax is among several ideas intended to end a boom-and-bust system that relies heavily on personal income taxes to fund state government. The top 10 percent of income earners paid more than 53 percent of the personal income tax last year, according to the commission's report.

"It is a system that just didn't work. It is heavily flawed and it is absolutely disastrous," Schwarzenegger said at a Capitol news conference. "All of these services go on this extraordinary roller coaster ride, up and down, up and down."

Had the recommendations been in place this year, they would have saved $9 billion in emergency budget cuts, said Stanford University professor John Cogan, a commission member who endorsed the report.

Commission chairman Gerald Parsky said if the proposal were adopted, Californians' overall tax burden would be reduced by $6.8 billion, mostly by shifting the burden to the federal government and residents of other states through the business receipts tax.

However, he described the proposal as a bipartisan compromise that will need legislative study.

Because there could be unintended consequences from some of the changes, the commission recommended they be phased in over five years beginning in 2012. Parsky said the plan is revenue neutral, so lawmakers could adopt the tax code changes with a majority vote. Raising taxes requires a two-thirds vote.

Assembly and Senate leaders said legislative tax committees would hold hearings to review concerns raised by the business community and advocates for middle-class families and low-income workers.

"Californians deserve a fair and full assessment of the ways these recommendations would affect them — whether positive, negative or neutral," Assembly Speaker Karen Bass, a Democrat from Los Angeles, said in a statement.

Bass and Senate President Pro Tem Darrell Steinberg, D-Sacramento, did not say when they planned to call the Legislature into special session to take up the recommendations.

Robert Stern, president of the Center for Governmental Studies in Los Angeles, said the commission's report appears to be dominated by its conservative wing, while it is liberals who control the Legislature.

"That bodes ill. If it had been unanimous it would have had a tough time. If it's not unanimous it's even more difficult," Stern said. "We will not see this version enacted, but we may seem some version enacted."

Stern predicted legislators will need to tinker with the state's tax system, however, because it is so broken.

"I think the public is very concerned about tax fairness and recognizes that our system is old and perhaps needs some upgrading," Stern said. "I think they have to show they're not cutting taxes on the wealthy. They're either just making it simpler or fairer."

The plan was panned by tax groups on the left and the right.

Jean Ross, executive director of the nonpartisan California Budget Project, said overall revenue would grow more slowly under the commission's plan. She also objected that the plan would shift the tax burden away from the wealthy while penalizing businesses that provide high wages and good benefits.

"Based on the broad-based opposition to the commission's recommendations, they deserve to be rejected," Ross said.

Jon Coupal, president of the Howard Javis Taxpayers Association, opposes the business receipts tax.

"We believe that taxes should be obvious and painful. When you bury the tax in the ultimate cost of the service or product, people just don't know," Coupal said. "Everybody who's looking at this has no idea what the impact will be. ... If you don't know what it's going to do, you're far from building political momentum. It's just half-baked."

California Taxpayers' Association President Teresa Casazza said the state could get most of the same benefits simply by creating a rainy day fund to capture tax receipts during good economic times to be spent when the economy sours.

"To completely switch to a whole new taxing structure with so many unknowns is something you need much more time to consider," Casazza said.

Schwarzenegger said he wasn't surprised by all the criticism.

"People are scared of new things. Sometimes they feel more comfortable with a system that is in place that is disastrous," Schwarzenegger said.

(© 2010 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)