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Business Net Receipts tax could mean less Business

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on Aug. 14, 2009

Next month, the California Commission for the 21st Century Economy is expected to report to the legislature it’s proposal(s) for reforming California’s tax code.  While the general themes for the Commission’s work has centered on the need to address the volatility in California’s existing tax system, proposals to attempt to achieve this objective are as potentially dangerous with far-reaching impacts on California taxpayers as they are revolutionary.

One proposal could actually mean less business in California and its getting traction, the Business Net Receipts Tax.  The BNRT would basically replace all or part of existing sales and corporate taxes, but casts a much broader net to include service sector jobs that currently do not pay sales taxes in the state.   As a result, the BNRT proposal has been dubbed a "stealth tax" by one of the Commissioners, as the tax accomplishes what no one else has been able to do with existing sales tax law, apply a tax on services provided in the state.

While casting a broader net may ultimately prove to be the right decision for California, the BNRT proposal under consideration lacks the necessary detail and proper vetting necessary when considering such a massive overhaul of the tax system for the 8th largest economy in the world.  

For instance, the current proposal penalizes employers for any producing activity in the state by taxing the activity regardless of profit or loss.  This alone could wipe out some of the innovative start ups that usually operate at a loss in the seminal years, especially some of those pioneering green companies we need so badly.

Under the BNRT proposal, employers would have more incentive to hire or contract with employees out of the state. This conflict is further compounded by the potential for eliminating deduction for employees (essentially discouraging hiring in the state), investment credits for California lifeblood activities like research & development and various other deductions in the current tax code that provide some basic level of incentive for employers to operate in the state. 

In essence, the Commission’s push to broaden the base for taxation has the potential to be the ultimate recipe for the final destruction of California’s production economy.

At a time when businesses and all taxpayers continue their struggle to survive in this economy,  any "tax stabilizing proposal" must retain and grow our job base.  We encourage the Commission to take a much harder and comprehensive look at the real impacts of a  Business Net Receipts Tax.

Rome was not built in a day, nor was California’s existing tax code.  We shouldn’t expect to overhaul the system in one either.



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