A major tax bill (ABX8 8, Evans) is now dead, as the Legislature adjourned the special session on the budget (the eighth extraordinary session) on March 11. The bill was passed by the Senate on February 18, but was not taken up in the Assembly.
As a result of the adjournment of the special session, little headway was made in actions to trim the state's projected $20 billion deficit. The governor vetoed ABX8 2 (Assembly Budget Committee), the centerpiece of the Democrats' budget-reduction plan (see story below). A proposed gas tax-sales tax swap, which reached the governor's desk, still has some major flaws (click here to read Cal-Tax President Teresa Casazza's column describing Cal-Tax's concerns). A few other budget-related bills passed, but they had little fiscal effect.
The vote to end the session was nearly unanimous in the Assembly (63-1) but managed to squeak through the Senate without a vote to spare (21-9).
The failed tax bill, ABX8 8, which was opposed by Cal-Tax and other organizations, was pending in the Assembly for concurrence when the ax fell. It would have:
· Expanded sales tax nexus to out-of-state retailers entering into agreements with anyone in California who refers potential customers by a web link or otherwise.
· Suspended the professional licenses of taxpayers who are delinquent in paying taxes (which would make them unable to earn income to pay those taxes).
· Required financial institutions to match their account holders against the Franchise Tax Board's list of tax delinquents.
· Expanded the definition of "abusive tax avoidance transactions," increased penalties on amended returns and prevented judicial review.
Other bills killed by the ending of the special session were SBX8 8 (Senate Budget Committee), the Senate's version of ABX8 8, and a proposed oil severance tax bill (ABX8 41, Nava).
In other budget news:
Governor Vetoes Legislature's "Spending Cut" Bill. Governor Arnold Schwarzenegger has vetoed the centerpiece of the Democrats' budget reduction package approved in February, saying the legislation "does not actually implement spending reductions and make progress to close the budget gap." In his March 8 veto message, the governor said ABX8 2 (Assembly Budget Committee) would have made the budget situation worse by delaying needed action.
The bill stipulated to making $2.2 billion in reductions to the 2010-11 budget, which has not even passed yet. The governor said delaying implementation of the spending reductions would require the Legislature to make even more difficult choices later in the year.
According to the governor, the bill also made certain savings assumptions that were "unrealistic." The governor's veto message said: "When I proposed the deportation of undocumented felons last year, I said I would review each case individually and would not commute the sentence of any undocumented felon that had committed a serious or violent crime. Based on this review, my January budget includes only $19 million in estimated savings from the commutation and deportation of a select number of undocumented felons, not the $182 million assumed in this legislation. As such, the savings level assumed by this bill will not be achieved."
February General Fund Revenues Beat Estimates by $480 Million. For the third month in a row, general fund revenues came in substantially higher than forecast in the January budget proposal. In February, the total was $480 million (8.7 percent) above estimates. This follows January numbers that exceeded estimates by $1.28 billion (18.6 percent).
Controller John Chiang said: "Revenues came in above projections for the third month in a row, continuing a positive trend that shows California is on the road to recovering from the recession. Given February's numbers and recent action from the Legislature to improve the state's cash flow, Californians should expect to receive their hard-earned tax refunds on time. While the worst may be behind us, we still face cash challenges later in the summer absent enactment of further credible and sustainable budget and cash solutions."
Personal income tax revenue for February was $250 million below estimates. This was more than offset by higher sales tax receipts ($544 million above projections) and higher corporate tax payments ($119 million above forecasts).
Tax Foundation Says Requiring Internet Sellers to Collect Sales Tax Will Worsen Budget Woes. The National Tax Foundation reported March 8 that expanding sales tax nexus to Internet sellers that have contracts with affiliate advertisers has not worked in other states. In Rhode Island, where a repeal effort is under way, the expansion of nexus produced no revenue at all.
The report cites the fact that Internet sellers have severed their affiliate ties in states that have enacted the nexus expansion, resulting in no new sales tax collection and income tax revenue losses from those businesses that have shut their doors because their advertising revenue has been shut down. This point was noted in an official fiscal analysis of similar legislation proposed in Virginia. The situation is slightly different in New York, where the state's largest Internet sellers have not severed affiliate ties, in order to litigate the constitutionality of the nexus law.
The Tax Foundation report also makes the case that enacting a sales tax expansion, far from "leveling the playing field" for bricks-and-mortar businesses, would tilt the playing field in those businesses' favor. It would do so by imposing a greater collection burden on remote sellers than exists for in-state businesses, requiring these sellers to collect the sales tax based on where the customer is located in thousands of sales tax districts. Conversely, brick-and-mortar retailers need only collect sales tax in the district in which they are located.
The report concludes that "widespread adoption of vague and expansive nexus standards will expand these compliance costs and cause adverse impacts on interstate commerce, … [a]n unconstitutional and breathtakingly expansive nexus standard will lead either to a decrease in economic expansion or a lower rate of return for those that choose to press ahead."
For the full report click here.
Cal-TaxReports, March 15, 2010
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