David R. Doerr,
principal contributor
Ronald W. Roach, editor
Vol.
XIV, No. 2
January 15, 2001
Unveiling his $104.7 billion state budget for 2001-02, Governor Gray Davis last Wednesday proposed several new or increased targeted tax incentives ranging from a boost in the manufacturers investment credit to a three-day sales tax “holiday.”
Presenting the budget – including a nearly $83 billion general fund – the governor said it is “responsive and responsible” with emphasis on the state’s energy crisis, education and maintenance of a prudent reserve. Of the state’s revenue growth, he proposed splitting it 46 percent for one-time spending priorities and 54 percent for on-going programs. As has been the case since the early 1990s, there are no tax hikes in a budget proposed by a California governor.
If adopted by the Legislature for the fiscal year starting July 1, the governor’s tax proposals would amount to $108 million in budget-year relief, mostly for businesses. Based on reactions from Republicans and Democrats, there will be considerable debate and probable compromise on amounts and types of tax relief before the Legislature is finished. Also, Governor Davis will issue a revised budget plan in May, based on fresher economic forecasts. Here are the governor’s tax proposals:
Would further tax relief be part of the May budget revise, based on updated revenue estimates? “I wouldn’t rule it out. I wouldn’t rule it in,” the governor said. There was no mention in the budget documents of income tax conformity as a component of the proposed tax package. He stressed that his biggest priorities are dealing with the energy crisis and making progress in education. “Tax cuts, health care and others would compete for additional money” only after the “first two challenges” are completely satisfied, he said.
The governor refused to speculate whether the economy will produce enough revenue to trigger another one-year, 0.25 percent sales tax reduction. The formula, a high level of surplus revenues in back-to-back years, was adopted in the early 1990s and caused such a cutback this year for the first time. A decision about next year will be made next fall.
The governor’s budget is based on $3.8 billion in additional revenue for the current and past budget years that was not expected last summer when a $99.4 billion budget was signed into law.
Legislative Analyst Elizabeth Hill forecast a budget surplus of more than $10 billion last November, counting revenues through June 2002. The governor’s new budget proposal forecasts a $2.5 billion revenue gain in the budget year ahead, so his economists are looking at two-year revenues of more than $6 billion that were not anticipated last summer.
California’s astounding economic growth – 11.7 percent in personal income in 2000 – will moderate to less than 6 percent in 2001, according to the budget forecast which also pegged wages and salaries to grow 5.5 percent on the heels of last year’s 14 percent surge. Much of this is a result of a cooling economy, particularly in stock options from the dot.com companies.
Governor Davis, in his State of the State address last week, said, “California’s economy remains fundamentally strong. It continues to create new jobs and opportunity for our citizens. But our economy is also re-stabilizing, expanding at a more sustainable rate of growth.”
As the economy moderates, the Davis administration expects a “soft landing” – and no recession. A recession would be defined by back-to-back quarters of negative growth, the governor said, adding that he doubts the state would experience one three-month period of negative growth.
However, Governor Davis said the “short-term stock market windfalls” through capital gains and stock options can no longer be expected, and there will be no $10 billion budget surplus.
General fund spending is expected to grow 3.9 percent, far less than the first two years of Gray Davis’ administration, when spending soared 37 percent. The reserve would be $1.9 billion, or 2.4 percent of general fund revenues.
The proposal for a sales tax holiday, which would be in effect for just the one three-day period in 2001, came as a surprise. The governor said he had studied such programs in eight other states, particularly New York and Texas, and was convinced it would work in California. (This state has not had such a law since enactment of the sales and use tax in 1933. Bills to establish sales tax holidays failed in the last session of the California Legislature, although the Assembly unanimously approved one bill that died in the Senate Revenue and Taxation Committee.)
The governor set aside $1 billion to respond to California’s energy crisis, including $250 million for incentives for Californians to meet a goal of a 7 percent reduction in consumption.
His major education initiatives total $728 million, including voluntary longer school years for middle schools and additional math and reading training for teachers, plus extra money for schools to recruit algebra teachers. The budget’s $32.1 billion commitment to K-12 education ($53 billion from all sources) increases per-pupil spending to $7,174. This is $479 more than the current year, and the administration believes California will spend at or above the national average per pupil.
Governor Davis stressed the importance of not spending too much on ongoing programs. “We are investing in our future, but we are doing so without saddling future generations with unsustainable costs.”
The Assembly Republicans’ budget leader, George Runner, criticized the budget for lacking what he called real tax relief. Senate and Assembly Republicans have proposed a $3.3 billion package of tax cuts (see January 8 Caltaxletter). The GOP proposals would increase the MIC by 2 percent, increase the dependent exemption, suspend the sales tax on gasoline, eliminate the car tax and permanently cut the sales tax by 0.25 percent.
Mr. Runner also that by spending down the surplus to less than 4 percent of general fund revenue, the governor would see that the sales tax goes back up by 0.25 percent next January.
Senate Budget Committee Chair Steve Peace, a Democrat, said the governor’s budget was responsible, but he told the Los Angeles Times that it shortchanged the commitment to solving the energy problem. Senator Peace wants the state to commit $2 billion to buy or build power plants. He also wants the governor to continue a $300 million-a-year program that provides tax relief to low-income homeowners and elderly or disabled renters.
Senate President Pro Tem John Burton was critical of the sales tax holiday proposal, complaining that rich people should not enjoy the same tax relief.
Assembly Republican Leader Bill Campbell told The Times: “Unless there are more tax reductions, it will be very hard to find Republicans to vote for this budget.” He said their minimum demand is to maintain the 0.25 percent sales tax reduction through 2002.
As expected, the sales tax “holiday” idea was praised by retailers, who said it would help families that have been hurt by recent economic setbacks. It was criticized by local government officials, particularly when they learned that any revenue they would lose by opting to participate would not be replaced by the state.
In other budget developments:
Assembly Member Carole Migden has reintroduced legislation to require specified out-of-state Internet sellers to collect California sales tax. Governor Gray Davis vetoed a similar bill by Ms. Migden last year.
This year’s bill, AB 81, requires out-of-state “dot.coms” to collect sales tax on purchases shipped into California if: (1) the out-of-state e-retailer is at least 10 percent owned by (or owns) an in-state business, and (2) the out-of-state e-retailer has a similar name and sells similar products as its in-state affiliate.
Ms. Migden said stores such as Barnes & Noble Booksellers and Borders Books collect no sales tax on books sold by their online affiliated companies.
Since last year’s veto, Roger Salazar, a spokesperson for the governor, told the San Jose Mercury-News that Governor Davis has not changed his mind. “The Internet industry has contributed greatly to California’s booming and explosive economy,” Mr. Salazar said. “At this stage of the game, he thinks it needs to mature a little bit more before we think about taxing the Internet.”
In view of the hard times that have been chronicled regarding dot.coms, one Capitol wag said the Migden bill – co-authored by Assembly Member Dion Aroner – was akin to going out on the battlefield and shooting the wounded.
In a 46-page report to the Legislature in December, Legislative Analyst Elizabeth Hill recommended 39 changes in law relating to education, resources, transportation, taxation and general government. These five relate to tax policy:
A fee on landlords to pay for building inspections does not fall within voter-approval requirements of Proposition 218, the California Supreme Court held in a 5-2 ruling last Monday (Apartment Association of Los Angeles County, Inc. v. City of Los Angeles). The Second District Court of Appeal had found the fee invalid under Proposition 218 (Article XIIID of the State Constitution).
The high-court majority found the fee to fit within the rationale of a 1986 case (Pennell v. City of San Jose). The court said, “The ordinance levies only property used for residential apartment rentals, and the money is used only to pay for regulating such rentals to insure, among other things, that they do not degenerate into what are commonly called ‘slum conditions.’ The assessment is not imposed on all property owners – only a subset of owners who rent apartments.”
In 1998, the Los Angeles City Council approved a $12 yearly fee on each apartment in the city to finance the cost of inspection and enforcement by the Housing Department.
Writing for the court’s majority, Justice Stanley Mosk’s opinion rejected the city’s argument that a regulatory fee or levy on the operation of a business necessarily falls outside the scope of Proposition 218. He wrote, “Hence, the mere fact that a levy is regulatory (as this inspection fee clearly is) or touches on business activities (as it clearly does) is not enough, by itself, to remove it from Article XIIID’s scope. But the city is correct that Article XIIID only restricts fees imposed directly on property owners in their capacity as such. The inspection fee is not imposed solely because a person owns property. Rather, it is imposed because the property is being rented. It ceases along with the business operation, whether or not ownership remains in the same hands. For that reason, the city must prevail.”
In a dissenting opinion, Justice Janice Brown, joined by Justice Marvin Baxter, wrote, “As the majority acknowledge, ‘no one can rent [apartments] without owning them.’ And no one is subject to the rental inspection fee without owning them. The exaction is thus imposed ‘as an incident of property ownership;’ that is, it is dependent on such ownership.”
Jonathan
Coupal, president of the Howard Jarvis Taxpayers Association, said the decision
ignored the plain language in Proposition 218. Los Angeles officials were giddy
over their victory. Council Member Mike Feuer said the decision will pave the
way for improved housing conditions in the city.
The buzz in and around the Capitol in recent weeks isn’t the question of whether an $88.5 million award of public funds to a bunch of San Diego lawyers is outrageously scandalous. It is whether they will get away with what one political columnist calls an “embarrassment of riches from the state.”
In fact, this whole sad saga, wrote George Skelton of the Los Angeles Times, is giving the legal profession a collective black eye. It involves a 1991 law, ruled unconstitutional in 1999, that allowed the state to collect $300 anti-smog fees on out-of-state cars when their owners registered them in California. The refunds, ordered by the governor and Legislature, amount to more than $500 million.
Is the $88.5 million in fees to the plaintiffs’ lawyers an unconstitutional gift of public funds? This could be the case, said former state Chief Justice Malcolm Lucas. One issue is that the governor and Legislature, not the courts, decided to make the refunds retroactive, waiving a statute of limitation that substantially increased the total amount.
State Board of Equalization Member Dean Andal planned to file a lawsuit last Friday.
Governor Gray Davis and Attorney General Bill Lockyer were, at this writing, mulling whether to appeal the judgment of a three-member arbitration panel that gave the award to the lawyers, including politically connected donors to the governor and other Democrats. State Controller Kathleen Connell also was considering a separate lawsuit as she vowed not to issue a check to the lawyers without exhausting legal remedies. State Senator Chuck Poochigian said he would try to block the award through legislation.
Ironically, it was the governor who insisted on the arbitration panel after the state earlier balked at an $18 million award of legal fees for the lawyers who handled the five-year case. The BOE at one time suggested a $1 million fee was more appropriate.
The lawyers said they deserved the award because it was a complex case, even though Legislative Counsel Bion Gregory had warned the Legislature in 1990 that imposing such a tax could be unconstitutional.
When the governor pushed for arbitration of the attorney costs – including those of Milberg Weiss Bershad Hynes & Lerach – no ceiling was discussed. After word of the confidential decision leaked in December, the governor joined in criticism of the amount of the award. But he also noted that he had named former Chief Justice Lucas, a conservative, to head the panel. He was joined by two retired Los Angeles judges, one selected by the lawyers, the other mutually agreed upon. They are John Trotter and Bonnie Lee Martin, who wrote that the state, in going to arbitration, “chose to gamble and lost.”
According to a source, the lawyers presented “expert” witnesses who testified that the award should be more than $110 million from the $665 million appropriated in the state budget for the refunds. The state presented no “expert” witnesses to refute the lawyers in the proceeding that was, in essence, a private trial. Mr. Lucas, however, refused to go along unless it was reduced to $88.5 million. When the governor’s request to reconsider the award came up, the panel refused, on a 2-1 vote, with Mr. Lucas dissenting.
Mr. Lucas noted that the $8,800 hourly rate that the award represented would raise eyebrows as “too handsome.” Most of it, he said, would be based on lobbying activities on behalf of the lawyers to get the governor and the Legislature to appropriate funds for the award and put it up for binding arbitration.
The State Board of Equalization met in early January to consider legal action to reduce the award. The board agreed to support an appeal by the governor or Mr. Lockyer, if they appeal, and asked board counsel to prepare litigation should the board decide to sue on its own. Its next meeting is January 23.
Copley News Service reported that the BOE’s closed-door session on January 4 was sometimes contentious, quoting one member as saying “there was a lot of hollering.”
The Times’ Skelton quoted Mr. Andal as critical of the governor, the Legislature and the BOE itself for not protecting the taxpayers’ purse. Mr. Andal said the governor should not have advocated arbitration without a limit on the fee, the Legislature should not have gone along with it, and the BOE should have insisted on a fee limit when, as the original lawsuit’s defendant, it accepted the governor’s arbitration approach.
Meanwhile, Senator Poochigian said he would introduce a bill declaring legislative intent to limit the award to no more than $18 million. He was quoted in the Skelton column: “Putting it charitably, this is ludicrous. It’s an embarrassment for everybody.”
Citing the confidentiality agreement that was part of the arbitration, lawyers have generally declined comment. The award would have been kept secret if it had not been leaked by Dr. Connell and Mr. Andal.
The governor and other Democrats have received more than $200,000 in campaign contributions from William Lerach and his firm, but a spokesperson for the governor has said there is no connection between the contributions and the arbitration, and that the governor tried to distance himself from the legal fees issue.
Mr.
Andal told reporters on January 3: “The message that should be sent is that you
may win, you may get attorney fees but it isn’t a lottery and you shouldn’t be
able to buy it with campaign contributions and lobbyists.”
Senator Tom McClintock has proposed giving part of the state surplus back to California families to help them cope with skyrocketing energy prices. Married couples and heads of households would get a $530 cash rebate and single filers would get $200. Mr. McClintock pegged the cost of the rebates at $5.3 billion.
Among those endorsing the idea were Joe Sullivan, representing the Howard Jarvis Taxpayers Association; Lew Uhler, president of the National Tax Limitation Committee; Natalie Williams, vice president of the Capitol Resource Institute, and Randy Thomasson, president of the Campaign for California Families.
Explaining his proposal, Mr. McClintock said, “The rationale of this measure is simple. For 25 years, this government has actively discouraged the construction of new power plants in this state, and today we are out of power. Further, this government created a Soviet-style power exchange that has exacerbated that fundamental problem.
Santa Clara Valley Water Tax. AB 88 (Alquist) authorizes the Santa Clara Valley Water District to levy a special property tax and to exempt parcels owned by certain people over 65.
NOL Conformity. AB 91 (Zettel) increases California’s net operating loss carryforward to 100 percent, beginning in 2002, in conformity with federal law. Current California law provides for a 60 percent NOL in 2002 and 2003, and a 65 percent net operating loss carryforward beginning in 2004.
Tax Credit: Low-Income Housing. SB 73 (Dunn) increases the aggregate cap on the low-income housing tax credit from $50 million to $70 million. It also indexes the cap for future years, tying it to changes in the consumer price index.
Property Tax Allocation: Independent Library Districts. SB 74 (Speier) exempts independent library districts from the 1992 and 1993 property tax shift to school districts. The net effect of the proposal is to shift back to independent library districts the revenue they lost as a result of the last shift.
Sales Tax: Space Flight Exemption. SB 76 (O’Connell) expands the sales tax exemption
for property used in space flights to property used in assembly, launch or
transport of space flight vehicles and property used in spaceport operations.
The bill also exempts from sales tax materials used in the construction of a
space launch facility or a facility to manufacture, assemble and test space
vehicles.
FTB SCHEDULES AUDIT REGULATION SYMPOSIUM. The Franchise Tax Board has set April 23 for a symposium on the proposed audit regulation. The confab will be held in Room 1040 of the FTB’s Butterfield Road complex in Sacramento at 10:00 a.m. Prior to the symposium FTB staff will be holding town hall meetings around the country to get ideas on best audit practices. The focus of the meetings will be on what is working, what can be improved and what can be done differently. The schedule for the town hall meetings is as follows: January 31 – Hyatt Regency in Houston; February 27 – Hotel Pennsylvania in New York City (Note: the phone number is no longer PEnnsylvania 6-5000); February 28 – One North Franklin in Chicago; March 5 – Los Angeles Airport Marriott in Los Angeles; March 7 – Sun Center, 10961 Sun Center Drive, Rancho Cordova, and March 12 – Oakland Marriott.
PROPERTY
TAX SNAFU IN MADERA COUNTY. Up to 1,500 Madera County taxpayers have been
hit with 10 percent penalties for late payment of property tax bills they never
received. Around 60 of them attended a mass meeting at the Farm Bureau Hall in
Madera on January 6 to express their outrage and demand their money back,
according to the Fresno Bee. County
Treasurer-Tax Collector Tracy Desmond said failure to receive a tax bill
does not prevent imposition of penalties. She said the county is looking into
the possibility that a Fresno firm hired to pre-sort mail for the county might
have lost some of the tax bills. County Supervisor Frank Bigelow told
the crowd, “We can’t tell you if it’s in a trash can, whether it’s sitting on a
shelf, or if it was never sent.” Patty
Munoz of Bonadelle Ranchos, reflecting the sentiment of the taxpayers, told
Ms. Desmond, “I honestly don’t think I should have to pay this because
this is not my fault.” Ms. Desmond told
the crowd that taxpayers could file a claim for refund with a committee
consisting of the assessor, auditor and treasurer-tax collector. If the
committee turns down the refund request, it can be appealed to county
supervisors.
|
January 15-18 |
BAY AREA
ASSESSORS’ ASSOCIATION REGIONAL CONFERENCE |
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January 19 |
FTB REGULATORY HEARING ON SOURCING NON-RESIDENT
INCOME |