SACRAMENTO, Calif. (AP) -- A state commission is expected to submit a report Tuesday to Gov. Arnold Schwarzenegger and lawmakers that recommends bold changes to California's tax system. But it's being met by political skepticism before the ink dries.
The Commission on the 21st Century Economy is expected to recommend repealing the sales and corporate taxes, flattening the income tax rate and taxing businesses in a way that has never been tried on a wide scale in the United States.
A draft copy of the report obtained by The Associated Press showed the commission will recommend that the cash-strapped state change its personal income tax structure to reduce the burden on the wealthy.
It also recommends replacing the state sales and corporate taxes with a new business levy that taxes net receipts, in an attempt to tax the value of all goods and services businesses produced in the state.
"Improvements to the tax system, if made, can be an important factor in how quickly and strongly the state rebounds and grows," the report states.
Schwarzenegger has called for a special legislative session to take up the commission's recommendations but lawmakers could pick the plan apart. Union leaders worry the policies might drive down wages and businesses fear being unfairly taxed. Critics also argue that the plan has not been well studied.
"The reception will be somewhere between cool and arctic," said Jack Pitney, a political science professor at Claremont McKenna College in Southern California. "At a time of economic distress, the legislators are going to be very reluctant to embrace big changes in the tax code."
One Democratic lawmaker is already criticizing the report for failing to include revenue reforms.
"The super-wealthy will be off the hook from paying their fair share, and more middle-class Californians could fall into poverty with a heavier tax burden," said Sen. Dean Florez, who is running for state Lieutenant Governor.
The 14-member commission appointed by Schwarzenegger and Democratic legislative leaders spent a year looking for ways to stabilize California's tax system, which it found was dated and putting the state at a competitive disadvantage.
Since the tax system was established in the 1930s, when farms and factories drove the economy, the state's tax policies have not kept up with the technology and service industries that now dominate.
The system also has made the state's finances more volatile. California used to get most of its revenue from the sales tax.
Now personal income tax makes up the majority of money coming in, and that makes California vulnerable to the booms and busts of Wall Street. The shift has led to a series of budget crises since the state now relies heavily on the top 10 percent of income earners, who paid more than 53 percent of the personal income tax last year, according to the report.
Instead of a progressive income tax structure where millionaires are taxed up to 10.55 percent of their income, the commission recommends a simpler system with just two rates: 2.75 percent for individuals making up to $28,000 a year and couples making $56,000, and 6.5 percent for those who make more.
If the Legislature adopted the commission's recommendation, joint filers would have a standard deduction of $45,000, or $22,500 for single filers, much higher than the current rates. The practical effect of that means joint filers who make up to $101,000 would still be taxed at the 2.75 percent rate.
Everyone else above that would be taxed at 6.5 percent.
At the heart of the commission's proposal is a plan to phase out the state sales and corporate taxes over a five-year period starting in 2012. It recommends replacing that revenue -- about $36.4 billion or 40 percent of all state revenue -- with a new business tax that some commissioners compare to taxes applied in Europe.
While a sales tax is levied on the total value of a product to the consumer, most European nations use some form of value-added tax, a consumption tax that is levied on the value added to a product at every stage of the manufacturing cycle.
The so-called "business net receipts tax" differs because it would apply to all companies doing business in California, including sectors that are not taxed today, such as legal, engineering and accounting services.
To calculate the tax, a business would subtract the cost of its purchases from all its incoming payments. A tax rate not to exceed 4 percent would be applied to the net amount.
The recommendations come with a warning that more study needs to be done before the state moves ahead with the business net receipts tax.