SECTION 1.

 The Legislature finds and declares all of the following:

(a) In order to respond to pending proposals for federal tax reform, California may need to undertake a comprehensive reform of the state’s tax laws to respond to the revenue and administrative implications of the federal changes.

(b) California has long been known as the land of opportunity, but for many of its residents the future is receding. Inequality continues to rise — even though California has one of the most progressive tax structures in the nation. Protecting middle-class Californians is critical to our future.

(c) California’s tax collections are heavily dependent on the income of its top earners. This has led to dramatic revenue swings year over year. During the dot-com economic boom of the 1990s through the early part of the 21st century, state revenues soared by as much as 20 percent in a single year only to fall precipitously during the dot-com bust. More recently, when the Great Recession hit, a 3.6 percent decline in California’s economy resulted in a 23 percent plunge in General Fund revenues, which resulted in a loss of over $20 billion annually to the General Fund.

(d) This revenue instability has caused California’s residents to suffer. Essential services, including health care and child care for families, were cut at a time when they were needed most. In addition, the state cut billions of dollars to education, including adult education, which could have helped families recover from the recession. Relying on this outdated system to support California’s needs is dangerous fiscal policy.

(e) An underlying problem is that, while California’s economy has evolved, its tax system has failed to keep up with the times. Over the past 60 years, California has moved from an agriculture- and manufacturing-based economy to a service-based economy. As a result, state tax revenues have become less reliant on revenues derived from the Sales and Use Tax on goods and more reliant on revenues derived from the Personal Income Tax. In 1950, the Sales and Use Tax comprised 61 percent of state General Fund revenues; today, it accounts for about 30 percent. The Personal Income Tax accounted for 12 percent of the General Fund in 1950; today, it accounts for almost 70 percent.

(f) It is the intent of this act to:

(1) Increase opportunities for California residents and businesses and promote upward mobility for Californians with middle-class tax relief, more stable education and higher education systems, and new jobs through business growth.

(2) Realign the state’s outdated tax code with the realities of California’s 21st century economy.

(3) Substitute a new, revenue-neutral personal income tax structure for the existing structure.

(4) Ensure that out-of-state corporations that do business in California contribute their fair share to California’s economy.

(g) The intent of this act is to make three broad changes to the tax code:

(1) Provide tax relief to middle- and low-income Californians while simplifying the personal income tax and maintaining progressivity and also mitigating the reliance on top income earners, which currently contributes to revenue instability.

(2) Broaden the tax base by imposing a modest sales tax on services. These changes would more fairly apportion taxes between goods and services and would produce more stable revenues. Local jurisdictions would not be authorized to increase the sales tax on services, as they now can do with the sales tax on goods. Health care services, education services, child care, rent, interest, and services represented by very small businesses would be exempted from the sales tax on services, and offsetting tax relief would be provided to middle- and low-income California families.

(3) Enhance the state’s business climate and incentivize entrepreneurship and business creation by lowering the corporate income tax on small businesses, exempting very small businesses from the sales tax on services, and significantly reducing the minimum franchise tax.