Schwarzenegger calls for overhaul of state tax system

Gov. Arnold Schwarzenegger endorsed a plan Tuesday to radically alter the way Californians pay taxes, calling on state lawmakers to make dramatic changes before year’s end to take the state off the “roller coaster ride” of boom-and-bust budgets.

The governor called a special session of the Legislature to consider proposals in a 415-page report from a government commission that spent nine months studying ways to modernize the state’s tax system.

Among the ideas from the bipartisan Commission on the 21st Century Economy presented in the report and draft legislation are dramatically reduced income levies and a revolutionary new business tax that would replace existing retail sales and corporation taxes.

“I would sign it immediately,” Schwarzenegger declared at a Capitol news conference. “It’s an unbelievable compromise between Democrats and Republicans.”

But the commission’s proposals quickly came under fire from all sides, including labor unions and business groups. Among the criticisms were that the plan unfairly favors the very rich while potentially hurting California businesses and exporting jobs.

The reception from lawmakers was cordial at best. Legislative leaders who supported creation of the commission were conspicuously absent from Tuesday’s news conference.

“This report coddles CEOs and millionaires while kicking California families to the curb,” said Assemblywoman Noreen Evans (D-Santa Rosa), chairwoman of the Assembly budget committee.

The report, in fact, fell well short of universal endorsement from the commission itself, winning support from nine of the 14 members. Some expressed concern that California could set a dangerous precedent.

“This is playing out to an audience of revenue-starved states,” said Richard Pomp, a University of Connecticut law professor and commission member who opposed the final proposal. “If California thinks it has found the Holy Grail, other states will follow. But the emperor has no clothes.”

Schwarzenegger vowed not to let naysayers stand in the way.

“People are scared of new things,” he said, adding that he hoped to “challenge the legislative leaders to be courageous . . . to think outside the box.”

Under the plan, the state’s half-dozen income tax brackets would be reduced to two -- a 2.75% levy on income up to $56,000 for a married couple, and 6.5% on income exceeding that threshold.

Although all Californians would pay less income tax, the wealthy would benefit most. Those making $1 million or more a year would pay $109,000 less, compared with a $3 savings for those making less than $50,000.

Boosters of the plan said that was inevitable given the commission’s key goal: to reduce volatility in state revenue. More than half of California’s income tax revenue is paid by those with incomes of $200,000 or more.

The group also called for replacement of retail sales and corporation taxes with a broader business tax that would tap practically every type of free enterprise, including service providers such as lawyers and business consultants.

That new tax would be capped at 4% of net receipts -- a firm’s gross receipts minus the cost of purchases from other businesses -- and affect companies with at least $500,000 in gross annual revenue.

The commission proposes ushering in the changes over five years.

Other suggestions include strengthening the state’s “rainy day” fund and the creation of an independent tax dispute forum.

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eric.bailey@latimes.com