California legislature to take up tax changes

SAN FRANCISCO (Reuters) - California Govenor Arnold Schwarzenegger will call lawmakers into a special session to overhaul the state's tax system, which relies heavily on personal income taxes that are at the root of its budget crisis.

The Republican governor signed a bill into law on Tuesday that closed a more than $24 billion budget gap opened by a steep drop in revenues, especially revenues from personal income taxes.

No new taxes were included in the budget plan, which Schwarzenegger and the Democrat-led legislature balanced largely by slashing education, health and human services spending.

California's collections from personal income taxes have been posting their worst fall since the Great Depression. Analysts expect the most populous U.S. state's revenues, ravaged by the recession, to remain weak and again throw its budget off balance.

A 14-member, bipartisan commission is reviewing California's tax laws to draft recommendations for laws to help the state government avoid feast-or-famine revenue cycles.

"For too long our broken tax system has taken Californians on an unwelcome rollercoaster ride," Schwarzenegger said in a statement on Wednesday. "This commission will help change that ... I assure all Californians that I will call on the full legislative body to immediately consider the commission's recommendations as soon as they are submitted."

Schwarzenegger said he also had approved a request by the commission to extend the deadline for its recommendation report until September 20. The special legislative session in the Democrat-controlled legislature would follow.

The commission has been looking at various tax ideas, including substituting a net receipts tax on businesses for sales and corporate income taxes, extending the state's sales tax to services and new taxes on oil extraction, fuel commercial real estate. It is also looking at a flat personal income tax.

Commission Chairman Gerald Parsky, a partner at Aurora Capital Group in Los Angeles, said commission members agree on the need to broaden California's tax base to bring greater predictability to gauging its revenues.

The state's revenues have boomed in fat years for stocks and housing, but have plunged amid the housing, mortgage and financial-sector meltdowns.

California's 11.6 percent unemployment rate also is slashing at personal income tax revenues.

Commission members are also interested in bringing California's tax system in line with changes in the state's economy.

"The economy of California has moved rather extensively toward the service sector and the service sector is not included in the tax base," Parsky told Reuters in a telephone interview. "There is at least interest on the part of the commissioners to see how the service sector could be brought into the tax base."

(Reporting by Jim Christie; Editing by Diane Craft, Leslie Gevirtz)