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California panel proposes tax overhaul

Gov. Arnold Schwarzenegger called for a special legislative session to consider reforms that include a new business tax and ending the state sales tax.

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A long-awaited report on a tax overhaul for California is finally in, with recommendations that include flattening the tax code, eliminating state sales tax, and levying a wide-ranging business tax.

Now comes the hard part: getting lawmakers behind it.

California's bipartisan "Commission on the 21st Century Economy," formed just under a year ago, on Tuesday released its report suggesting ways to modernize the state's tax laws and end the budget deficits that have plagued the state for decades. Gov. Arnold Schwarzenegger welcomed the commission's report and called for a special session of the legislature to discuss the proposal before the end of the year.

"The commission answered the question posed to them by the governor, which was: Can you come up with a system to reduce the state's boom-and-bust cycle of revenue flow?" says Mark Baldassare, president of the Public Policy Institute of California (PPIC). "The question now is will any of this have any political legs?"

Some of what the commission proposes has not been seen or tested in California or any other state, and has already been criticized.

Key recommendations of the plan include reducing the number of tax brackets from six to two, eliminating the corporate tax and the state sales tax, and establishing the business net receipts tax (BNRT). The commission recommends a five-year phase-in to smooth the transition and limit negative impacts on any particular segment of the economy. It also suggests the creation of a independent tax dispute forum for resolving disputes.

A controversial business tax

"California's top wage earners would be the clear winners under the commission proposal," says Jessica Levinson, political reform director for the Center for Governmental Studies in Los Angeles.

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