Tax maven advising California says advisers should be wary

A member of a blue-ribbon panel appointed by California Gov. Arnold Schwarzenegger to make recommendations on improving the state’s tax code said the panel’s members are philosophically opposed to taxing professional fees or any other “non-tangible” services but warned that dire economic conditions may make such opposition moot. “Anything that’s considered a business input should not be taxed — and that includes financial advisory and investment activities — according to the consensus of all economists when discussing sales taxes,” said Richard Pomp, a professor at the Hartford-based University of Connecticut School of Law who sits on the California Commission on the 21st Century Economy. “But there’s a lot of money to be made in taxing business inputs, and that’s the rub. The commission has certainly heard a lot of discussion on extending the sales tax to services, and it’s hard for politician to resist.” California is facing a budget gap of more than $40 billion, and as of Wednesday, legislators who met through last weekend on an emergency 18-month budget still had not reached terms. Mr. Pomp, who several years ago advised New York on its tax code, said in a phone interview that the California commission is supposed to take the long-term view on improving the state’s tax base without being influenced by the state’s immediate revenue needs. But the group, which convened for the first time in January to help propose long-term solutions to the state’s revenue problems, is scheduled to make its recommendations April 15, an unusually short deliberative period that reflects current issues. “I think everyone should be worried in this climate,” Mr. Pomp said when asked if investment advisers should be concerned about an effort to tax their services. “If states were following normative principles informing how a tax should be designed and implemented, that group should not be worried. But when the pedal hits the metal, all theories get thrown out. In almost every state, the sparks are flying.”