SACRAMENTO, Calif. -- Gov. Arnold Schwarzenegger signed an executive order Tuesday calling a special session of the Legislature to overhaul California's tax system _ and he wants it done by the end of the year.
The governor asked lawmakers to give a fair hearing to a proposal from the Commission on the 21st Century Economy, which calls for repealing sales and corporate taxes, flattening the income tax rate, and taxing a wider variety of businesses. Critics already are taking shots at the plan, and its creation was riddled with infighting.
"People are scared of new things. Sometimes they feel more comfortable with a system that is in place that is disastrous," Schwarzenegger said at a Capitol news conference.
He said he was delighted with the compromise the bipartisan commission reached, and if the Legislature sent him that package, he would "sign it immediately."
Nine of the commission's 14 members approved the plan released Tuesday.
Assembly and Senate leaders said legislative tax committees would hold hearings to review concerns raised by the business community and advocates for middle class families and low-income workers. It was not immediately clear when the special session would begin.
"Californians deserve a fair and full assessment of the ways these recommendations would affect them _ whether positive, negative or neutral," Assembly Speaker Karen Bass, a Democrat from Los Angeles, said in a statement.
Critics argue that the plan has not been well-studied. Union leaders worry the policies might drive down wages, and businesses fear being unfairly taxed.
Robert Stern, president of the Center for Governmental Studies in Los Angeles, said the commission's report appears to be dominated by its conservative wing, while it is liberals who control the Legislature.
"That bodes ill. If it had been unanimous it would have had a tough time. If it's not unanimous it's even more difficult," Stern said. "We will not see this version enacted, but we may seem some version enacted."
The commission appointed by Schwarzenegger and Democratic legislative leaders spent a year looking for ways to stabilize California's tax system, which it found was dated and puts the state at a competitive disadvantage.
Personal income tax currently makes up most of the money coming into state coffers, which makes California vulnerable to the booms and busts of Wall Street. The state has experienced a series of budget crises since it relies heavily on the top 10 percent of income earners, who paid more than 53 percent of the personal income tax last year, according to the report.
"It is a system that just didn't work. It is heavily flawed and it is absolutely disastrous," Schwarzenegger said. "All of these services go on this extraordinary roller coaster ride, up and down, up and down."
Instead of a progressive income tax structure where millionaires are taxed up to 10.55 percent of their income, the commission recommends a simpler system with just two rates: 2.75 percent for individuals making up to $28,000 a year and couples making $56,000, and 6.5 percent for those who make more.
At the heart of the commission's proposal is a plan to phase out the state sales and corporate taxes. It recommends replacing that revenue _ about $36.4 billion or 40 percent of all state revenue _ with a new business tax that some commissioners compare to taxes applied in Europe.
The so-called "business net receipts tax" would apply to sectors that are not taxed today, such as legal, engineering and accounting services. To calculate the tax, a business would subtract the cost of its purchases from all its incoming payments. A tax rate of up to 4 percent would be applied to the net amount.
The commission recommends the changes be phased in over five years beginning in 2012. Commission chairman Gerald Parsky said the plan is revenue neutral, so lawmakers could adopt the tax code changes with a majority vote. Raising taxes requires a two-thirds vote.
"This is all about creating a system that delivers to the citizens of California the promises that the Legislature has made," Parsky said.
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Associated Press Writers Judy Lin and Samantha Young also contributed to this report.
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