A state tax panel plans to recommend this week that California reduce the income tax, eliminate the state sales tax and install a new form of value-added tax on businesses, but it remains uncertain how many commissioners will support the plan and how far it will go in the Legislature.

Gov. Arnold Schwarzenegger and Democratic leaders had lofty hopes for the tax panel when they launched it in December. They formally called it the Commission on the 21st Century Economy, envisioning the panel would re-engineer the tax structure to generate money as the state has moved to a service-based economy.

The proposal needs to be approved by the Legislature and, in some cases, by the voters to take effect.

Any hope that the commission would produce a tidy package has been dashed, however. Schwarzenegger officials said as recently as last week the governor wanted an all-or-nothing vote, with no changes by the Legislature. But the commission cautioned that its package should be considered more a starting point than a finished product.

"We're confident that this general approach that we're proposing is a good policy for California's economy," said John Cogan, a Schwarzenegger appointee and Hoover Institution fellow who was instrumental in shaping the final package, along with UC Berkeley law school dean Christopher Edley. "But the magnitude of the change that we are considering is so large ... that we don't believe we should be recommending an up-or-down vote by the Legislature at this juncture."

The tax commission concluded its final meeting Monday at UC Berkeley and did not take a formal vote, instead opting to pass around a formal document later this week and offer each commissioner the opportunity to sign it for submission by Sunday.

At least three panelists have expressed public opposition to principal parts of the package, while labor and business groups have assailed the plan.

"I think inherent in this proposal is a signal to the entire populace, and certainly the Legislature: Please hold your fire, please don't reach a conclusion without further analysis," said Chairman Gerald Parsky, a lawyer who worked for former Presidents Richard Nixon and Gerald Ford and served as chairman of the University of California Board of Regents.

The tax proposal's linchpin is a "business net receipts tax," or BNRT, for which the closest comparisons are the value-added taxes used in Europe and a variant used in Michigan. When fully implemented, all businesses operating in California would pay a tax of roughly 4 percent on all their revenue minus deductions for capital investments, contractors and possibly health expenditures for employees.

The commission envisions that the BNRT would supplant the existing corporation tax and state sales tax of 5 percent. It theoretically would provide enough revenue to allow the state to reduce its income tax levels as well, with a top bracket of 6.5 percent rather than 9.55 percent.

The BNRT would be phased in over five years while the sales tax would be phased out. Commissioners ultimately felt the BNRT was the best way to tax service industries in California, which are becoming a more dominant share of business but escape taxation.

A Schwarzenegger service tax proposal in January came under fire from every new service that would have been taxed, from golf courses to professional sports. The tax panel thought it would be more politically palatable to install a BNRT rather than try to extend the sales tax to services.

The commission decided against including an additional 18-cent-per-gallon gas tax to pay for transportation. It will recommend to the Legislature that lawmakers pursue another rainy-day fund at the ballot. And it will suggest that the Legislature may wish to consider allowing more offshore oil drilling in exchange for royalties, as well as consider charging even the poorest California earner $50 in income taxes.

The BNRT is so dramatic a change that it has drawn opposition from all sides. Labor groups fear that because employee salaries are not deductible, companies will simply reduce pay or lay off workers to pay for the tax. Businesses also have raised concerns that the new BNRT is unproven and could place California businesses at a disadvantage to other states and nations.

Some Democrats have criticized the plan because those earning more than $200,000 a year receive half of the $15 billion income tax reduction. Backers say it makes the state's income tax structure more stable.

"I don't think that in this state, at this time, any regressivity makes sense," said Commissioner Fred Keeley, a former Democratic assemblyman.

Schwarzenegger spokesman Aaron McLear said the governor still intends to call a legislative special session shortly after the panel submits its report Sunday. While Schwarzenegger had been demanding a legislative "up-or-down" vote, the governor is supportive of whatever approach the commission thinks is best, McLear said.

The governor has no ultimate timetable in mind, McLear said. "Obviously the sooner we fix California's broken revenue system, the better," he said.

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.