On October 30, 2008, the Governor signed an Executive Order creating the bipartisan Commission on the 21st Century Economy, which had its purpose to re-examine and modernize California ’s revenue laws. The Commission was to report to the Governor and the Legislature with recommendations to change laws to achieve the following goals by April 15, 2009:

1. Establish a 21st century tax structure that fits with the state’s 21st Century Economy.

2. Stabilize state revenues and reduce volatility.

3. Promote the long-term economic prosperity of the state and its citizens.

4. Improve California ’s ability to successfully compete with other states and nations for jobs and investments.

5. Reflect principles of sound tax policy including simplicity, competitiveness, efficiency, predictability, stability and ease of compliance and administration.

6. Ensure that tax structure is fair and equitable.

The Governor extended the reporting time twice to July 31, 2009, and then to September 20, 2009. The Commission delivered its final report on September 29, 2009, and recommended a five-year phase-in plan for changes to the tax structure. The five-year plan, beginning in 2012, is designed to smooth the process and limit the impact on any particular sector of the economy. Additionally, the proposal contains multiple safeguards, such as a technical review panel that would help to ensure a smooth transition in to the new system.

The report indicates the recommendations are intended to be revenue neutral. According to the press release the Commission sent out, “The reforms are designed to modernize, stabilize and simplify our tax structure and to encourage economic growth while retaining a fair and equitable distribution of the tax burden.”

The recommendations included the following:

1. Reduce Personal Income Tax (PIT) for every taxpayer. Reduce the number of tax brackets from six to two. The new tax rate would be 2.75% for taxable income up to $56,000 for joint filers ($28,000 for single) and 6.5% for taxable income above that amount. These changes would retain the PITs progressive nature but reduce income tax rates for all taxpayers. The proposal would reduce the amount of income tax paid by 29%.

2. Eliminate the corporation tax and minimum tax. Eliminate the corporate tax, which is currently at 8.84%. The $800 minimum franchise tax should also be eliminated.

3. Eliminate the state general purpose sales tax. Eliminate the current 5% state sales tax, with the exception of the sales tax on gas and diesel fuels which would continue to be dedicated to transportation. Elimination of the sales tax would phase-in over five years.

4. Establish a business net receipts tax. Establish a new tax, not to exceed 4%, applied to the net receipts of businesses. Small businesses with less than $500,000 in gross annual receipts would be exempt from this tax. This tax would have a much broader base than the sales tax (since it would apply not only to goods but also to services and to sales into the state from businesses located outside the state) and, unlike the sales tax, be deductible against federal taxes.

5. Create an independent tax dispute forum. This forum would provide taxpayers with a forum for resolving disputes with the state.

The Governor also, on September 29, 2009, called a special session of the Legislature, the Sixth Extraordinary Session, to consider and act upon legislation to address and improve the state tax system, including, but not limited to, the following: establish a tax structure that fits with the recommendations of the state Commission on the 21st Century Economy, stabilize state revenues and reduce volatility, promote the long-term economic prosperity of the state and its citizens, improve California’s ability to successfully compete with other states and nations for jobs and investment, reflect principles of sound tax policy, and ensure that the tax structure is fair and equitable.

The Legislature convened the session on October 14, 2009. At the time of this writing, no legislation has been introduced on the subject.

Taxation legislation of note that was signed by the Governor in the Regular Session included SB 91 (Correa) extending the California Fund for Senior Citizens tax checkoff to January 1, 2015; AB 11 (De La Torre) clarifying that Internal Revenue Service Notice 2008-83, 2008-42 I.R.B. 905, relating to limitation on the use of built-in losses in conjunction with corporation reorganizations does not apply for purposes of the California Corporation Tax Law; AB 94 (Evans) reauthorizing the awarding of tax credits under the Natural Heritage Preservation Tax Credit Act of 2000, until fiscal year 2014-15; AB 129 (Ma) re-enacting a statute, which was inadvertently allowed to sunset on January 1, 2009, to expand the application of the attorney-client confidential communication privilege to specified communications between a federally authorized tax practitioner and a taxpayer, where the practitioner is representing the taxpayer on a tax matter before certain state agencies; AB 292 (Yamada) extending, until 2015, the sunset date for the California Alzheimer’s Disease and Related Research Fund Tax checkoff; AB 404 (Eng) facilitating a streamlined documentation process for specified nonprofit organizations to receive an exemption from state corporation income taxes; AB 563 (Cook) modifying the statutory provisions governing the California Military Family Relief Fund; AB 824 (Harkey) allowing an assessment appeals board to hear and decide property tax appeals filed in another county by a person who has a conflict of interest with the board in his/her county; AB 1546 (Assembly Revenue and Taxation Committee) requiring a cancelled domestic limited partnership, which is seeking to revive its active status, to pay outstanding fees, file missing tax returns, and pay a service fee for any expedited revival requests; and AB 1568 (Salas) providing tax relief to those affected by the wildfires in October 2008, November 2008, and May 2009.

Vetoed taxation legislation of note included AB 311 (Ma) which would have extended the Centralized Fleet Calculation Program for statewide assessment of certificated aircraft for property tax purposes until fiscal year 2014-2015; AB 469 (Eng) which would have required, rather than authorized, taxpayers to report and pay use tax obligations on income tax returns if they failed to report and remit use tax obligations directly to the Board of Equalization; AB 659 (Hayashi) which would have provided until January 1, 2013, that specified garment cleaning businesses shall be regarded as consumers, rather than retailers, of tangible personal property they sell, provided those sales do not exceed 0.5% of their total gross receipts for the preceding calendar year; AB 692 (C. Calderon) which would have specified the circumstances when a federal regulation or federal administrative guidance is considered to be “in conflict with” the provisions of the Personal Income Tax Law and the Corporation Tax Law; AB 852 (Fong) which would have authorized county assessors to require electronic filing of annual business property statements in the format prescribed by the Board of Equalization; AB 1049 (Torrico) which would have authorized the addition of the Safely Surrendered Baby Fund checkoff to the personal income tax form upon the removal of another voluntary contribution fund from the form; AB 1087 (Ma) which would have modified the current sales and use tax exclusion for separately stated transportation charges and modified the definition of an “expatriate corporation” for purposes of the California Taxpayer and Shareholder Protection Act of 2003; and AB 1580 (C. Calderon) which would have conformed specified provisions of the California Personal Income Tax Law, and administration of franchise and income tax laws to federal income tax laws as set forth in the Internal Revenue Code as of January 1, 2009.