After some significant arm-twisting, the Legislature early this morning approved a 2010-11 budget (SB 870, Ducheny) 100 days past the start of the fiscal year, and after a floor session that lasted more than 20 hours. The legislative analyst reports under the new budget, general fund spending for 2010-11 will be $87.5 billion – a 1.3 percent increase over last year.
Tax provisions were lodged in several budget trailer bills, as follows:
· NOL Suspension. Net operating loss carryovers and carrybacks are suspended for 2010 and 2011 tax years (SB 858, Senate Budget and Fiscal Review Committee).
· Exemption From 2008-09 NOL Suspension. Taxpayers who meet the following criteria are exempted from the 2008-09 NOL suspension:
o Ceased to do business and had a final taxable year prior to August 28, 2008.
o Sold or transferred substantially all of its assets resulting in a gain on sale during a taxable year ending prior to August 28, 2008.
o Could have offset the gain generated by the sale or transfer with existing NOLs.
o Executed the sale or transfer pursuant to a plan of reorganization under Chapter 11 of Title 11 of the United States Code.
· Corporate "Understatement Penalty" Safe Harbor. A safe harbor from the current corporate strict liability 20 percent "understatement penalty" is created if the taxpayer's understatement is less than 20 percent of total liability, even if the understatement exceeds $1 million (SB 858). This provision is effective for original tax returns filed on or after January 1, 2010.
· "Cost of Performance" Standard for Determining Sales Factor for Corporations Not Electing Single Sales Factor. For taxpayers that do not elect to use a single sales factor corporate apportionment formula, intangible sales will be sourced based on "cost of performance" for determining the sales factor. The bill contained an uncodified section, believed to have originated indirectly from the Franchise Tax Board, providing that no inferences are to be drawn from the "cost of performance" provisions in the bill with respect to the extent to which the rules for assigning sales, other than sales of tangible personal property, are intended to properly reflect the market for the activities, and that the provisions are intended to accomplish the goal of proper market reflection in the sales numerator (SB 858).
· Collection Cost Recovery Fee. Authorizes a collection cost recovery fee at the Board of Equalization for past-due accounts related to sales and use tax, as well as numerous special taxes and fees.
· Sales Tax on Support Services. A sales tax was imposed on services provided by nursing homes and other In-Home Supportive Services providers. Sources say that a tax, as opposed to a "quality assurance fee," was necessary to comply with federal requirements, and the tax will be paid by the state and not private retailers. The vote was 54-17 in the Assembly and 27-8 in the Senate (AB 1612).
· Use Tax Reporting Extended. The provisions allowing taxpayers to report use tax on their personal income tax return are made permanent (SB 858).
· Proposition 24 Contingency. The state will revert to cost of performance for all taxpayers if Proposition 24 passes and elective single sales factor is repealed.
· On-Sale Liquor License Fee Increase. Applicants for on-sale liquor licenses will pay $13,800, rather than $12,000, for the license (SB 856, Ducheny). The bill passed the Assembly 61-8, with nine members not voting. It passed the Senate 31-2.
· Restrictions on Tax Agencies. Both the BOE and FTB are prohibited from redirecting funds for audits and collections without Department of Finance approval. In addition, the Legislature directs the FTB to resolve tax cases without litigation on a basis that is fair to both taxpayers and the state (SB 870).
While the actual language of the budget bill and budget trailer bills was not available to the public until shortly before the votes were cast, the public was provided an opportunity to discuss the basic outline of the budget agreement during a Senate Revenue and Taxation Committee hearing held October 6.
Commenting on the suspension of the net operating loss carryover provisions during that hearing, a representative of the California Teachers Association said the union was concerned with the legislation, noting that it might hinder its campaign to pass Proposition 24, a measure on the November ballot that would repeal recent tax revisions. A CTA lobbyist said: "We have some concerns – serious concerns – with the cost of performance and the NOL because we haven't seen [the language] and we don't know if there are negative impacts on our proposition that we are trying to get passed on November 2 – Proposition 24."
While the Assembly adjourned around dawn on October 8, the Senate debate continued, with the last vote cast shortly before 8:30 a.m. Just before the final vote in the state Senate, Senate President Pro Tem Darrel Steinberg praised the work of his fellow legislators and the institution of the Senate. He said: "California's still standing – California is poised to make a comeback."
Debate in the upper house of the Legislature was tense. With Senator Jenny Oropeza and Senator Pat Wiggins absent due to their health, and Senator Sam Aanestad also absent, leadership found it difficult to obtain the two-thirds vote needed to pass the budget. Also, Senator Rod Wright had to leave before the final vote was cast due to a court conflict in Los Angeles.
However, after arm-twisting, a number of Republican senators switched their "no" votes to "aye" and the budget received the 27 votes needed for passage.
Shortly after the budget passed, Governor Arnold Schwarzenegger held a press conference. He began by saying: "How do you all stay awake?" The governor praised the Legislature for the compromise on the budget. He said legislators cut $7.4 billion in potential spending, and that he will use his line-item veto to cut an additional $965 million.
Commenting on the "rainy day" fund and the pension reforms, the governor said he has been fighting for those reforms for six years. "At times it's been hard and downright ugly," he added.
The governor said he expects to sign the budget today or shortly thereafter.
In other budget news:
Rainy Day Fund Improvements Submitted to Voters. Voters in November 2012 will have an opportunity to strengthen constitutional provisions requiring the governor and Legislature to save money for a "rainy day." The proposal (ACA 4, Gatto and Niello), approved by a vote of 29-7 in the Senate and 65-8 in the Assembly, strengthens current constitutional provisions on the "rainy day fund" by:
· Increasing the size of the fund from 5 percent to 10 percent.
· Requiring the state to always make 3 percent payments into the fund except in years when withdrawals are made.
· Providing that rainy day funds can be used only to cover spending no higher than the previous year's, adjusted for inflation and population growth.
· Providing that not all money in the fund can be used in one year.
· Capturing "unanticipated revenue" into the rainy day fund.
Governor and SEIU
Agree to Pension Reforms. Governor Schwarzenegger announced October 7 that
his administration has reached a tentative contract agreement with the Service
Employees International Union that includes pension reforms and a 10 percent
reduction in the state's employee compensation costs through furloughs and
unpaid leave days. The governor said the agreement rolls back the expansion of
benefits adopted in 1999 when Governor Gray Davis signed SB 400
of that year. "This agreement continues our progress toward critically
needed pension reform and, along with the previously reached union agreements,
will help address the state's soaring retirement costs," the governor
said. SEIU Local 1000 said in a press release that the agreement provides some
security and stability for its members. "At one point the state was
demanding more than $1 billion in take-aways and no wage increase," the
SEIU said. "After spending literally hundreds of hours battling the
Schwarzenegger Administration, we reached a tentative agreement that cuts those
concessions in half." The Legislature approved a pension reform bill as
part of the budget package, reflecting this agreement. (Sources: News releases
from the Governor's Office and SEIU Local 1000, both October 7.)
Cal-TaxReports, October 8, 2010
© 2010 California Taxpayers' Association. All Rights
Reserved.