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California targets budget-busting tax code

Gov. Arnold Schwarzenegger is expected to call for a special legislative session to consider a new tax reform plan. But the overhaul faces skepticism.

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It was intended to help reform California’s tax system and avert the wild revenue swings that have caused the state’s crippling deficits. But the tax overhaul plan proposed by a blue ribbon commission could just arrive dead in the water.

Just under a year ago, Gov. Arnold Schwarzenegger and state legislative leaders created the 14-member, bipartisan “Commission on the 21st Century Economy” to find ways to modernize state tax laws. The idea was to achieve a more stable revenue stream and one reflective of the world’s eighth largest economy. California’s $1.8 trillion Gross Domestic Product (GDP) is 13 percent of the US GDP, but the state makes headlines year after year for its giant budget deficits.

The commission’s final report is not yet in (it was due Sunday), but the draft reforms floated at the commission’s public hearings have already been widely criticized.

The reform plan involves phasing out the corporate and sales tax and flattening income tax to just two levels: a 2.75 percent rate for married couples making up to $56,000 annually and 6.5 percent for those making more. Itemized deductions would remain only for mortgage interest, property tax, and charitable contributions.

The resulting reduction in revenue from personal income tax – from 44 percent of revenue to 31 percent – would be made up by expanding the business tax to include new sectors such as lawyers, engineers, business consultants. The business tax is one of the more controversial proposals, in part because it is untested.

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