In a sharply worded letter to legislative leaders, Governor Arnold Schwarzenegger said March 15 that he plans to veto the recently passed gas-tax/sales tax swap bill (ABX8 6, Assembly Budget Committee) and a flawed conformity bill (SBX8 32, Wolk). The governor's announcement was welcomed by Cal-Tax, which has urged the governor to veto the two measures.
A veto of the gas tax swap – which, among other things, would have increased taxes on off-road diesel users – means legislators have almost nothing to show for their efforts to reduce the state's deficit in the recent special session.
In his letter, the governor wrote: "I asked you to exchange the sales tax for an excise tax on gasoline in a way that lowered costs for consumers by $1 billion and preserved General Fund dollars to avoid major cuts to vital programs. Instead you are sending me a bill that provides no tax relief to consumers at the pump and raise taxes on commuter rail services. I cannot sign this flawed legislation as written."
(Cal-Tax: We urged the governor to veto the bill for these reasons and others. This bill is a good example of why the midnight special process, where bills are not seen or heard until the last minute, is so flawed. Further, we don't understand why some Democrats want to increase the sales tax on diesel fuel used by rail services and other off-highway users.)
The Orange County Register, in a March 15 editorial titled, "An unconstitutional gas-tax switch," quoted Cal-Tax President Teresa Casazza: "Put simply, this is a hidden tax and an end-run around the taxpayer protections of Proposition 13." The editorial states: "She's correct. Proposition 13 wasn't meant to protect taxpayers from easily imposed taxes except when some taxpayers are given tax cuts. It was intended to protect taxpayers from easily imposed taxes, period."
State Treasurer Bill Lockyer told a group of Alameda County officials that the governor is right in announcing he will veto the gas tax/sales tax swap. Mr. Lockyer observed that the governor's original proposal would have saved a lot of money, but the bill that reached his desk saved only a fraction of the amount. "Why do all this complicated shifting around if the net result is confusing?" Mr. Lockyer asked. "It didn't make sense to change everything around and have lawsuits about it … for a very modest net result."
With regard to the conformity bill, which contained a poison pill in the form of a new penalty designed to increase revenue from corporate taxpayers, the governor wrote: "I asked you to send me legislation that protects homeowners from being taxed on 'short sales' when they are forced to sell their home for less than they owe on their mortgage. Instead you are sending me a bill that uses these homeowners as leverage to increase tax penalties for businesses. Send me a clean bill that protects homeowners from this tax immediately, and I will sign it."
The governor continued: "I asked you to send me a bill that prevents California from being the only state in the country trying to tax billions of dollars in federal stimulus funding for renewable development. Without this federal tax conformity, billions of dollars and thousands of jobs slated to start this year will be lost. Instead, you are tying this simple tax conformity bill to the same increase in penalties holding up tax relief for homeowners. Send me a clean bill that exempts federal stimulus dollars from being taxed, and I will sign it."
The penalty inserted in the conformity bill by Democratic leaders would put California's corporate taxpayers in a precarious situation – many have opted to overpay to avoid the state's 20 percent "understatement penalty," and under SBX8 32 they thus would be at risk of being hit with the "erroneous refund" penalty.
(Cal-Tax: Proponents are arguing that the 20 percent erroneous refund penalty in the bill is conformity. They neglect to point out that they are trying to graft this provision onto a branch of California's basic tax structure that does not – and is not intended to – match the federal structure. Federal corporate tax law and state law are very different. Fundamentally, California requires a combined report and federal law allows consolidated returns. Who should be included and not included in a combined report is vague, depending upon such things as whether there is strong centralized management. Disagreements on whether an affiliate is includable or not will lead to tax differences, and corporate taxpayers should not be punished for vagueness in the tax law. Proponents also neglect to tell the press that their proposal denies due process for taxpayers by prohibiting administrative appeals of the penalty.)
Cal-TaxReports, March 22, 2010
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