Governor Schwarzenegger and Legislative Leaders Work Together to Bring California’s Revenue System into the 21st Century

Bipartisan Commission Will Address Chronic Budget Problems

Today Governor Arnold Schwarzenegger signed Executive Order S-12-08 to create the bipartisan Commission on the 21st Century Economy to re-examine and modernize California's out-of-date revenue laws that contribute to our feast-or-famine state budget cycles. This 12-member commission, appointed by the Governor and legislative leaders, will suggest changes that will result in a revenue stream that is more stable and reflective of our economy. This long-term action will help avoid the extreme revenue swings that have caused crippling deficits while maintaining a fair and equitable revenue structure that will ensure our continued competitiveness and attraction to employers and workers.

"Unlike our diverse economy, our state's revenue system is the epitome of boom or bust and right now we are paying the price," Governor Schwarzenegger said. "That is why I have worked with the legislative leaders to find a long-term solution to our revenue problem. And today, I am signing an executive order creating a bipartisan Commission on the 21st Century Economy to study our revenue system and help California achieve the long-term fiscal stability our state needs and our people deserve."

"California's tax system is antiquated and long overdue for an overhaul. Our state is one of the most advanced economies of the 21st century, but it relies upon an outdated and volatile tax model that no longer makes sense," said Senate President pro Tempore Don Perata. "This commission will examine how to best capture revenue in California's dynamic economy and put the state's finances on the stable and sound footing needed to remain a global leader."

"We need a multifaceted approach to the national economic downturn. That's why I proposed a thorough, non-partisan review of California's economic structure, which was built for the 1930s. This Commission will provide recommendations to help get vital programs like education, firefighting and children's healthcare off the budget roller coaster," said Assembly Speaker Karen Bass. "The Commission has a tall order: we need maximum performance in a minimum period of time. We're not looking to punt the problem-we're looking for a playbook filled with potential options. I applaud Governor Schwarzenegger for helping make this Commission a reality, and I appreciate the other legislative leaders' commitment to bringing about modernization and stability to California's economy."

"Keeping California competitive in a global economy is the key to a strong and healthy state budget. I applaud the Governor for working with legislative leaders to address California's broken budget system and I look forward to reviewing revenue-neutral recommendations from the commission, not just on fixing our revenue system, but also on how the state can adjust its spending levels to come into alignment with revenues," said Senate Republican Leader Dave Cogdill, of Modesto.

"The Commission has a unique opportunity to update California's tax laws and improve our lagging economy while ensuring that taxpayers are protected," said Assembly Republican Leader Mike Villines, of Fresno. "I believe the Commission can also play an important role in improving our business climate and putting California jobs first by helping to restore our state as a place where businesses can grow and prosper."

The Commission will be made up of 12 members; six appointed by the Governor, three appointed by the Senate President pro Tempore and three appointed by the Speaker of the Assembly. The Governor designates the chair. The members of the Commission will be named before their first meeting in November. They will report their findings to the Governor and the legislature by April 15, 2009.

The full text of the Governor's Executive Order is below:

EXECUTIVE ORDER S-12-08

             WHEREAS California is and should remain the best place in America to live, work and raise a family; and

            WHEREAS California's long-term prosperity requires that employers and entrepreneurs invest, remain and grow in the state and that workers desire to live in the state; and

            WHEREAS the quality of life for Californians benefits from essential and important services provided by state government directly and through funding for local government operated programs, and it is beneficial for those essential and important services to have a stable and predictable source of funding; and

            WHEREAS General Fund revenue over the last several decades has fluctuated dramatically due to changes in the economy in general, but primarily as a result of the volatility that is inherent in California's current tax system; and

            WHEREAS the volatility inherent in California's current tax system is reflected by fluctuations during the last decade, as exemplified by:

            (a)     a 28.1% increase in personal income tax revenue in Fiscal Year 1999/2000, followed by a 25.9% decrease in personal income tax revenue in Fiscal Year 2001/02;

            (b)     a 22.7% decrease in corporate income tax revenue in Fiscal Year 2001/02 and a 27.6% increase in corporate tax revenue in Fiscal Year 2002/03;

            (c)      an 11.1% increase in sales and use tax revenue in Fiscal Year 1999/2000 and a currently estimated 1.4% decrease for Fiscal Year 2007/08; and

            WHEREAS the volatility inherent in California's personal income tax is driven significantly by its reliance on capital gains tax revenues, which have experienced decreases in the last decade as great as 59.1% in tax year 2001, and an increase of 64.9% in tax year 2004; and

            WHEREAS this fluctuation in General Fund revenues creates difficulty in funding the operations of government year-to-year, as the need for state services such as operating state parks, operating state prisons, overseeing elections and providing funding for healthcare and social services do not change in response to revenue, but in relation to population, demographics and service availability; and

            WHEREAS this fluctuation in General Fund revenues makes it even more difficult to plan for those activities of government which, due to their magnitude, require funding over several decades, including projects for environmental remediation and infrastructure development; and

            WHEREAS the California economy has changed significantly since our tax code was designed for the economy of the last century, shifting from a primarily manufacturing- and agriculturally-based economy to an information- and innovation-based economy; and

            WHEREAS, California's current tax system could be improved to provide greater incentives for firms to increase employment in the state and invest more in entrepreneurial activities and research that lead to high paying jobs and more exports; and

            WHEREAS an improved tax system would decrease the pressure for future tax increases to address revenue shortfalls that will continue to occur if the volatility of the current system is not reduced; and

            WHEREAS Californians would benefit from an improved tax system that supports a strong economy and job climate and provides a more predictable revenue source for essential and important government services; and

            WHEREAS elected officials could benefit from a study of tax system alternatives and information to develop strategies to improve the state's tax system.

            NOW, THEREFORE, I, ARNOLD SCHWARZENEGGER, Governor of the State of California, by virtue of the power and authority vested in me by the Constitution and statutes of the State of California, do hereby issue this Order to become effective immediately:

            1.   The Commission on the 21^st Century Economy (Commission) is hereby established. It shall consist of twelve members, six of whom shall be appointed by the Governor, three of whom shall be appointed by the Speaker of the Assembly, and three of whom shall be appointed by the Senate President pro Tem. The Governor shall designate one of the members as chairperson. The members of the Commission shall serve without compensation and at the pleasure of the official who appointed them.

            2.   On or before April 15, 2009, the Commission shall deliver a report to the Governor and to the Legislature with recommendations to change laws to achieve the following goals:

                        a.   Establish 21^st century tax structure that fits with state's 21^st century economy;

                        b.   Stabilize state revenues and reduce volatility;

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

                        d.   Improve California's ability to successfully compete with other states and nations for jobs and investments;

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

                        f.    Ensure that tax structure is fair and equitable.

3. The Commission shall be disbanded 30 days after delivery of their report unless the Commission's service is extended by further Executive Order.

4. The Commission shall comply with applicable open meeting laws.

            IT IS FURTHER ORDERED that State Agencies shall cooperate and provide support to the Commission in the implementation of this Order. Other entities of State government not under my direct executive authority, including constitutional officers, legislative branch, judicial branch, and local agencies, are requested to cooperate and provide support to the Commission.

            This Order is not intended to create, and does not create, any rights or benefits, whether substantive or procedural, or enforceable at law or in equity, against the State of California or its agencies, departments, entities, officers, employees, or any other person.

            I FURTHER ORDER that, as soon as hereafter possible, this Order be filed in the Office of the Secretary of State and that widespread publicity and notice be given to this Order.

            IN WITNESS WHEREOF I have hereunto set my hand and caused the Great Seal of the State of California to be affixed this 30th day of October 2008.

            Arnold Schwarzenegger
            Governor of California

            ATTEST:
            Debra Bowen
            Secretary of State