David R. Doerr,
principal contributor Vol. XV, No. 35
Ronald W. Roach, editor
October 11, 2002
Roundup: Davis vetoes e-waste tax; approves tax on bunker fuel.
S.F. assessor grants gay couples unauthorized reassessment exemption.
Your Tax $$$ @ Work: Higher police pensions, cheating janitors, and more.
Surprising the computer software tax filing industry, the Franchise Tax Board on October 1 changed course and voted to upgrade its e-filing income tax program so it will do the math for taxpayers and provide automatic access to tax tables.
The board thus reversed itself after state Controller Kathleen Connell, the board chair, said early feedback on the Form 540 2EZ Direct service, launched just two weeks earlier, indicated there were “some concerns that it was a bit limited.” Taxpayers wanted the software to do their math and be able to look up the tax tables, she said.
The 3-0 vote of the board ordered staff to put the calculator and tax reference material on line with the Form 540 2EZ form only. Dr. Connell noted that the forms are designed for individuals with income under $50,000 and joint filers under $100,000, who do not itemize deductions and have three or fewer dependents. This group encompasses about 4.3 million taxpayers who have uncomplicated returns, or about one-third of the state’s taxpayers.
“This added e-file capability has been part of my vision for free and simple e-filing for all Californians,” Dr. Connell said. The 540 2EZ Direct filing system, complete with the math calculator and tax lookup features, has been deployed on the FTB Web site (www.ftb.ca.gov).
FTB staff said in the two weeks since the Form 540 2EZ Direct was launched, nine returns came in, all of them claiming refunds. Three had errors on them, all involving looking up the tax. (Dr. Connell later acknowledged that nine returns were not a statistically valid sample, but said a statistically valid sample didn’t matter because she was sure the board was doing the right thing.)
Staff also researched e-filing programs in 23 other states and reported that California provides less in terms of taxpayer service than most others. Only Nebraska and California were not providing programs with calculators.
Board Member John Chiang, chair of the state Board of Equalization, and state Finance Director Tim Gage supported the controller’s motion. “Our system is clunky and inefficient,” said Mr. Chiang. “This is an important step forward” to assist taxpayers.
By allowing taxpayers to download the Form 540 2EZ Direct with the calculator and tax tables attached to them, Mr. Chiang said the board provides a service that should not be defined as “tax preparation.”
FTB Executive Officer Gerald Goldberg also said he could not anticipate that the FTB would develop software that would compete with the more sophisticated tax service now provided by the private sector, such as that which uses an interview technique to walk a taxpayer through the process.
(Editor’s Note: Private company software, for example, is designed to stress areas where a taxpayer could reduce tax liability. The FTB’s software would not be expected to perform such a function, since the FTB is geared to maximize revenue.)
The board had already voted to reverse itself before hearing from industry representatives in a discussion of the “MOU” issue. In fact, the memorandum of understanding (calling for the industry to provide a certain amount of free software services for low-to-moderate income taxpayers) may not even be needed, said Dr. Connell.
The board will not consider this issue until another meeting later this year, if then. A group of software manufacturers has been negotiating an MOU with the Internal Revenue Service that would prevent the IRS from adopting e-filing software that duplicates what the private sector provides, thus putting companies out of business. In exchange, the companies would gear up to make the software work free for some 60 percent of taxpayers, those at the lower end of the income scale.
California might piggyback on that MOU, which some said was about two weeks away.
Greg Turner of Cal-Tax, Whitney MacDougal of Intuit and others from the tax preparation software industry opposed the board’s switch to upgrade the software, but the vote had already been taken by the time industry representatives were invited to testify on the MOU issue.
Mr. Turner noted that Cal-Tax has always been supportive of the e-filing concept as a cost-effective method of collecting taxes. However, he said, “To say it is free for the taxpayer is a misnomer. Someone has to build the software.” In other words, taxpayers will pay millions of dollars to set up the system that will be free for most, but not for all. He called for the FTB to move toward a public-private partnership and “not have an agency spend millions of dollars for an IT product that competes with the private sector.”
Mr. Chiang wanted to define “preparation” of taxes, stressing that “attaching a calculator isn’t tax preparation.”
Mr. Turner replied that the FTB is starting down a “slippery slope. Once the FTB invests in software, it’ll just keep going.”
Mr. Chiang disagreed: “We’re clearly not intending” to go that far.
Mr. Turner concluded, “Programs that start out small tend to grow and have lives of their own.”
Ms. MacDougal encouraged the board to keep dialogue going with industry. “A few weeks ago, we were really close” to having an MOU. “I worry that the vote you just cast may fundamentally alter the ability of the MOU to be effective.”
She also questioned the value of the staff’s research of e-filing conditions in other states, saying there are some states actively discussing discontinuing or curtailing e-filing programs because they have not been as popular as expected and the states face budgetary concerns.
Dr. Connell questioned whether the 60 percent free target of the federal MOU would work for California, because she said the state’s tax forms are more complicated than most and some companies might not want to do in California what they do elsewhere.
Ms. MacDougal replied that it doesn’t cost Intuit more to operate a program for California than it does for other states.
Dr. Connell said that there will be better statistical data in the future, agreeing with Ms. McDougal that nine returns were not a sufficient sample. Dr. Connell said, “We didn’t need a sample” to order the use of calculators and tax forms. “It was just the right thing to do.”
Mr. Chiang said, “We need further delineation of those who are going to use” the free software. “Are they small businesses, rich people? Who is going to shoulder the additional burden to access the services?”
Dr. Connell said it “is not an easy recipe” because of the “complexities” of providing the free service to those who need it, and not to those who can afford it.
The state, though, has leverage over the industry, she said, through legislation or “setting up our own system.” She looked to Executive Officer Goldberg for confirmation.
“I concur,” he said.
As Scott Baugh, representing the Computer and Communications Industry Association, prepared to testify, Dr. Connell, who has only 90 days left in office, noted that she came up with the idea of electronic “2EZ” filing while on a morning jog in Los Angeles years ago. She said that’s when she decided her “legacy would be that of customer service and equal access to that service. Calculators and tax forms are customer service enhancements,” she reiterated.
(Thus the postcard “2EZ” tax returns must continue to be printed in purple, she said, in her memory.)
“Short of going to a dentist, I don’t think there is anything worse than doing your taxes,” Dr. Connell continued, comparing cavities to tax problems that prompt audits. The simplified forms, she said, are helping those with limited ability to figure out and pay their taxes.
Mr. Baugh repeated Mr. Turner’s “slippery slope” concern. “You don’t anticipate going there,” he said, referring to Mr. Goldberg’s comments, “but you can go there; it is an option.
“We spend hundreds of hours on this, and boom, with one vote we’re back where we were.”
Mr. Chiang interjected: “I view this as private sector intrusion of a government responsibility. I don’t think we are stepping on the private sector. We are improving a government service.”
Dr. Connell: “We’re hitting the threshold of sensitivities here.”
Mr. Chiang said that he did not want to be known as a tax administrator of a state that does not offer services equivalent to services in other states.
Meanwhile, Dr. Connell said privacy is no longer an issue; that she has talked to certain state senators and has their blessing, even Senator Steve Peace, who has blistered the FTB with criticism over the privacy issue, causing considerable delay for the FTB to move forward with the plan.
“Privacy is a camouflage for not moving forward … we’ve addressed it. We do not have a privacy issue. The 540 2EZ with calculations and tax forms has nothing to do with privacy and everything to do with customer service,” she said.
Cris Forsyth, chief of staff for Assembly Member Rebecca Cohn, addressed the board. He noted a need to educate some 30 new Assembly members who will be elected in November. Dr. Connell said she has no intention of cooling her heels. She said she wants to deal with the MOU before she leaves office. (Note: Term limits prevented her from seeking a third four-year term.)
“This issue is on a fast track … I’m not in the least bit restrained to wait for legislators who have not yet been elected to meet and confer and be informed. If the time frame is (adoption of an MOU) by the end of the year, OK.”
Further, she said Senator Joe Dunn will be carrying major legislation on electronic filing in the coming session. She implied that the Senate has a head start on this issue because some of its veteran leaders concentrated on it during the past few months when the Assembly was caught up in the budget blockade.
FTB staff said the privacy issue was addressed by a system that has the taxpayer download the form and fill it out off-line, including the calculations.
The San Jose Mercury News quoted Senator Dunn’s legislative consultant, Elena Lopez-Gusman, as saying her boss intends to change the system to an on-line process with legislation next year. An off-line form, even upgraded with calculators, “is antiquated the day it is unveiled,” she said. “On-line is the standard operating procedure for any consumer transaction on the Internet. Why should the government be behind?”
Private companies charge $5 to $30 for their tax preparation software, and they are concerned that big government will drive them out of business. C.C. Chen, whose C&S Technologies of San Jose plans to charge $5 to $10 to file a tax return next year, said, “We can’t compete with the enormous resources of the Franchise Tax Board.”
Other FTB news:
Interest on Tax Debt. At Dr. Connell’s request,
staff is to prepare a report on how many taxpayers are “scamming” the system
by choosing not to pay their taxes, preferring to pay the state 6 percent
interest instead of coughing up what they owe or putting it on plastic. Owing
the state is much cheaper than putting their tax payments on credit cards, she
said.
Dr. Connell said she knows there are those who “rent cars, take vacations and
come in and say they can’t pay their taxes.” There ought to be a way to
increase the interest on those people to what they’d have to pay for a credit
card balance (perhaps 19 percent) without penalizing those who really can’t
afford a tax payment, she said. “People who have assets are scamming the
system, using us as the last resort. Particularly when the state is broke,
this is not acceptable.”
Child Support. Mr. Goldberg reported that
negotiations with an alliance for a software collection contract have resulted
in a 25 percent cap reduction, to $900 million, and the FTB hopes to have a
contract awarded by February or March.
The effort has been delayed by several months, he said, because the board gave
one prospective applicant more time, and the applicant then decided against
submitting a bid, and there were federal government issues.
He said federal penalties remain and at this time Congress has not accepted
California’s request to waive penalties, as other states are being penalized
as well. This could be election-year politics, and the issue can be revisited
after November, Mr. Goldberg speculated. However, he said California will
continue to be paying penalties until its program is certified, and that is
“several years away.”
Dr. Connell: How far away are we from improving the tragically endangered
lives of these children?
Mr. Goldberg: “If we proceed with the proposal, we’ll have a much better child
support system than in the past. We will be better able to locate delinquent
parents and collect more money.”
Dr. Connell: “It frustrates me. Are other states doing a better job?”
Mr. Goldberg: “I’m convinced we will have the state of the art system that
other states will want to emulate.”
Budgetary Changes. The board approved a request to seek $521,000 in the 2003-04 state budget to make permanent six limited-term positions that expire next July 1 to continue a pilot program targeting the underground economy. Continuing the program with these six positions will generate $5.7 million annually, beginning in 2004-05, board staff said.
Pete Wilson Tax Campus. Dr. Connell reiterated her request to have the expanded Butterfield Campus known as the Pete Wilson Tax Collection Campus. “I don’t know why Gray needs his name on that building,” she quipped.
Regulation to Adjust Apportionment Factors for Certain
Oil, Gas, Mineral & Timber Payments Launched. The board gave staff the
green light to proceed with a regulation to adjust the standard unitary
apportionment factor for certain oil, gas, mineral and timber payments.
Staff is proposing to treat royalty and other payments for oil, gas, timber
and mineral interests on the property of someone other than the taxpayer as
rent for property factor purposes. The proposal will be discussed at a
symposium tentatively set for December 11.
Tax Clearance Certification Regulation Goes to 15-Day File. The board placed the proposed amendments to Regulation 23334, relating to tax clearance certificates in the 15-day file. Changes in the regulation were proposed by FTB staff as a result of written comments from taxpayers. One of the changes is to make it clear that all organizations must file a final return.
Audit Regulation. FTB staff told the board it is working on responses to the public comments made at the August 19 public hearing on the proposed audit regulation.
Significant reductions in services for taxpayers are likely if the Franchise Tax Board’s $401 million general fund budget is slashed by 20 percent, according to a September 19 memo from Executive Officer Gerald Goldberg to the State and Consumer Services Agency.
The memo outlines FTB staff proposals to achieve a 20 percent reduction in 2003-04 spending. The governor has asked most departments and agencies to submit proposals that could achieve such a budget reduction.
Here are the proposals:
Program and Administrative Changes ($8.3 million). Suspend the child and dependent care tax credit, accelerate mandatory e-file for tax practitioners and significantly reduce the distribution of tax forms.
Discretionary Revenue Producing Activities ($56.9 million). Reduce audit, collections, filing enforcement and non-resident withholding processing. “The department is well aware of the adverse impacts on revenue which potentially could be over $950 million,” the memo said. “These compliance programs represent the majority of the department’s ‘discretionary functions’ when compared to the more core business activities of return processing, cashiering and taxpayer service areas. Although these proposals negatively impact revenue, they had to be considered in order to achieve the total savings target of this budget exercise.”
Elimination of Non-Revenue Programs ($7.8 million). Eliminate administration of the Homeowners and Renters Assistance Program and Political Reform Audit Program. “While these are long-standing programs administered by the FTB, they are outside of the department’s core revenue functions,” the memo said.
Customer Service Programs ($3.3 million). Reduce by 20 percent the FTB’s “Education and Assistance Activities” – statewide call center, district office counter assistance, correspondence and related activities. By placing this item at the bottom of the list, the FTB considers customer service a board policy priority, the memo indicated. It also noted that the FTB already faces a current-year budget reduction of $1.2 million and 26 positions in the area of customer service. “Any further reductions would have significant adverse impacts on this mission-critical function, which ultimately increases costs in other areas and impacts tax compliance.”
If the agency secretary agreed with the recommendations, the document was to be forwarded to the governor’s finance director.
The memo also noted that the FTB’s target amount for reducing spending by 5 percent in the current budget year is $19 million, and to realize these savings the FTB would have to forego filling the new revenue-producing positions that were established this fiscal year. Otherwise, there would have to be layoffs, which could not be accomplished in a timely manner.
The FTB also is planning to seek additional funding to implement new legislation to increase revenues, such as residential real estate withholding and suspension of the teacher tax credit.
Calling for industry to solve the problem of electronic waste, the governor vetoed SB 1523 (Sher), which sought to impose a $10 tax on sales of television sets and computer monitors.
The recycling tax was opposed by the high-tech industry because it would put California companies at a competitive disadvantage.
In his veto message, the governor called on the Legislature to send him a bill next year that “challenges industry to assume greater responsibility for the recycling and disposal of electronic waste.”
He criticized SB 1523 as an expansion of government at a time when he has to reduce the bureaucracy by 7,000 positions and cut further spending to balance the budget. “ … I believe that building a state bureaucracy (with 64 more employees) to address this problem is not the best solution for managing electronic waste. We should compel industry to solve this problem.”
The governor said he was “very troubled” by the building e-waste pollution problem, noting that the “amassing stockpile of obsolete and broken monitors and televisions grows daily.” He deplored exporting the waste, including lead, to third-world countries and urged industry to develop more environmentally friendly computers and television sets.
The governor’s lengthy veto message also noted that he recently signed legislation for a “new generation of car emission reduction technologies” and “I am convinced we can do the same for electronic waste.” He said he challenged California, as a global leader in the electronics industry, “to lead the way and devise an innovative solution for the source reduction, recycling and safe disposal of electronic waste.
“Industry already has initiated several successful incentive programs that create a partnership between the consumer and the manufacturer. I believe this would be a better model for California and would foster the concept of an environmentally sustainable electronic and technology industry and provides incentives to design products that are less toxic and more recyclable.”
Mark Murray of Californians Against Waste, sponsor of the bill, blamed industry lobbying for the measure’s demise. “California’s high-tech companies are failing to support a meaningful solution to the toxic e-waste problem,” he said, according to the San Jose Mercury News.
The newspaper also cited lobbying by Hewlett-Packard, noting that HP Chief Executive Carly Fiorina made a personal appeal to the governor, saying the bill “would do more harm than good.” Kristine Berman, HP’s government affairs manager for California, told the Mercury News, “We were looking for a solution to the problem that was fair and applied equally to all companies. And we look forward to working with Senator (Byron) Sher next year.”
Senator Sher said all Silicon Valley legislators supported the bill because the fee would be suspended both for in-state and out-of-state companies if a court found it illegal.
According to the Mercury News, the senator and other supporters of the bill applauded the governor for acknowledging the problem and calling for industry to help solve it.
The bill, which would have required collection of the tax in 2004, originally called for a tax of up to $30 per product.
Other bills signed or vetoed before the midnight September 30 deadline (see September 27 Caltaxletter for a report of earlier actions by the governor on such legislation as SB 1661, the paid family leave measure):
Bunker Fuel Tax.
The governor decided to allow a tax increase on bunker fuel by vetoing
SB 145
(Perata), which was to extend the sales and use tax exemption for water common
carrier fuel from January 1, 2003 to January 1, 2013. Bunker fuel is that
which ships purchase at a California port but is not consumed until the ship
has left California waters.
In 1992, the Legislature taxed bunker fuel, only to repeal the levy when it
was shown that ships merely waited until they were in a non-California port to
fill their tanks. The results were both lost revenue and lost jobs.
Nevertheless, the governor said in his veto message: “While I would ordinarily
sign this measure, the state’s very difficult financial condition requires me
to veto this bill because it would result in total state and local revenue
losses in the range of $22.3 million to $35.5 million, depending on the
consumption of bunker fuel. In the current fiscal environment, enacting a
measure with such losses would not be prudent.”
Property Tax Study. The governor vetoed SB 1714 (Poochigian), which would have required the state controller to report on the impact that state land acquisitions have on local property values. (Note: Caltaxletter of September 27 erroneously reported that this bill had been signed.) In his veto message, the governor noted that no funding was provided for the bookwork, including annual Department of General Services estimates of property tax losses per county resulting from any planned acquisition. “The information may be of interest to local governments and most of it can already be provided by county assessors,” the governor said, adding that the state’s revenue shortfall has put added pressures on state agencies. “Consequently, the ability of impacted departments to perform new duties within existing resources is severely restrained.”
Business Improvement Districts (BID). The governor vetoed AB 2561 (Vargas), which would have allowed a city council to form a mass-transit-oriented BID for up to 10 years before a review is required, as long as 30 percent of property owners sign a petition in support. The current threshold is 50 percent, and all new BIDs have maximum assessment periods of five years. Governor Davis, in his veto message, said, “I am committed to the principles of smart growth and urban revitalization, but I do not believe that this bill provides the proper balance between these principles and those of fair and just taxation. Allowing BIDs to continue without review for a period of 10 years is unsuitable for an otherwise worthwhile program sponsored and supported by the state.”
Property Tax Shift Study.
The governor vetoed
AB 1939
(Daucher), which would have required the legislative analyst to study a
property tax shift mechanism intended to provide relief to local governments
and incentive to build affordable housing.
“While I share Assembly Member Daucher’s concern with respect to both issues,
AB 1939’s proposal does not appear to be the answer,” the governor said. “On
its own, this proposal failed as a bill in the previous half of the session.
Nothing the (legislative analyst) could reveal would enhance its mechanisms.”
He said the analyst has a number of other options for the Legislature to
consider, and “another study at this time would not be helpful as neither the
analyst nor the state has the budgetary flexibility to undertake yet another
study nor finance the kind of relief local government is seeking.”
Reduced ERAF Contribution.
The governor vetoed
SB 1509
(Dunn), which would have reduced a city or county contribution to the
Educational Revenue Augmentation Fund (ERAF) by an amount equal to the share
of property tax lost due to new tax-exempt affordable housing. The state would
have had to backfill lost ERAF revenues that go to schools.
“Although I recognize the need for
greater affordable housing opportunities for low-income Californians, the
state’s $24 billion deficit would make the redirection of funds necessary to
backfill ERAF revenues very difficult,” the governor said. “This bill, while
otherwise meritorious, could result in losses exceeding $2 million in 2003-04,
increasing each year thereafter.”
Natural Heritage Preservation. The governor signed AB 3009 (Assembly Budget Committee), suspending the Natural Heritage Preservation Act tax credit between July 1, 2002 and June 30, 2003, and amending the law regarding surcharges on energy purchases.
Omnibus General Government Budget Trailer Bill. The governor signed AB 3000 (Assembly Budget Committee), which, among other things:
Increases the maximum fee on water dischargers from $10,000 to $20,000, adjusted annually for inflation, to provide special fund revenues of $15 million.
Revises the interest rate paid by the state on unclaimed property and on overpayments of estate taxes and corporation taxes to the lesser of 5 percent or the bond-equivalent rate of 13-week Treasury bills. The general fund saves $25.4 million from reduced interest payments on refunds of various overpayments.
Increases the cap on the electricity sales surcharge from two-tenths of a mill to three-tenths of a mill, effective January 1, 2003 (the surcharge provides revenue for the Energy Resources Programs Account, and the increase is to boost the fund by $10 million in 2002-03).
Authorizes the State Board of Equalization to specify the form of indicia signifying payment of cigarette taxes.
Authorizes each member of the BOE to request the governor to convert one Civil Service position to an exempt position.
Increases from $1 to $5 the amount the attorney general may charge consumers on a triennial basis to subscribe to a list of persons not wishing to receive unsolicited or wanted telephone calls (the Do Not Call Program is expected to receive $7.2 million from the fee increase).
Imposes a 20 percent surcharge on criminal fines used to calculate the state penalty, imposing priorities for the spending of the $45.8 million annually expected to be collected, until July 1, 2007.
Imposes a 10 percent surcharge on civil court fillings, raising $15 million annually, until July 1, 2007.
Emergency Room Penalty Surcharges. The governor vetoed SB 807 (Dunn and Perata), providing an additional $200 assessment on specified moving vehicle violations, such as reckless driving. The assessments were to be deposited into the Maddy Emergency Medical Services Fund.
Water District Reorganization. The governor signed SB 1977 (Johannessen), exempting from taxation the transfer of assets from a federally exempt mutual water company to a community services district established before September 26, 1977. This measure applies to the Lake Shastina Mutual Water Company, which is contributing all of its assets to the Lake Shastina Community Services District.
UI Alternate Base Period. The governor vetoed AB 3010 (Assembly Budget Committee), providing an alternative base period for unemployment insurance claimants whose earnings do not qualify. According to the Senate floor analysis of the bill, it would have required additional benefit payments of $30 million.
It’s been this way as long as anyone can remember: As the July 1 statutory deadline approaches for assessors to complete and certify their property tax rolls, many of them need more time. All they do is ask the State Board of Equalization. No explanation needed nor offered. They get extensions with no questions asked.
All this has grated on some folks at the state board, and now, without accusing assessors of lollygagging, the board has decided to get together with assessors and come up with a way for them to at least say why they need more time.
The board’s Property Tax Committee on October 2 voted 4-1 (Claude Parrish objecting) to put the issue through the board’s Interested Parties Process, which might produce a rule, or at least some procedure involving an explanation that assessors would follow when they need more time.
The committee also voted to have staff engage in a special probe, formally called a Special Topic Survey, of the computer systems used by assessors in Los Angeles and Santa Clara counties, with a report back due in 90 days. This action was prompted by Los Angeles County Assessor Rick Auerbach’s letter explaining that his county’s “antiquated” computer system caused so many delays that he found it hard to meet the July 1 deadline.
No one indicated that there was a computer system problem in Contra Costa County, which was included at the request of Board Member Johan Klehs. One member suggested that one county in each of the four BOE districts be designated for the special investigation, but this was not part of the motion.
Board Member Dean Andal and Marcy Jo Mandel, representing Controller Kathleen Connell, were joined by Mr. Klehs in calling for the special study.
Mr. Andal said that the board is expected to be the “guardian” of the state’s revenue system. He said a computer breakdown, particularly in a county as large as Los Angeles, would have dire consequences on state revenues and school funding. Perhaps, Mr. Andal said, the BOE could ask Los Angeles County supervisors to improve the computer system, or, if necessary, seek state funding.
“When L.A. sneezes, the rest of us get a cold,” said Mr. Andal.
Placer County Assessor Bruce Dear said he saw no need for a board rule requiring assessors to say why they need extensions, but, if the board was going to move forward, it should do it with assessors’ input. He said assessors are dedicated to producing accurate assessments. He said he’d prefer to complete his assessed value roll on April 1 each year, but requests for extensions can be caused by businesses that don’t provide timely information. An extension is necessary to produce an accurate assessment, he said.
Mr. Andal said as many as 50 of the 58 counties have asked for extensions and no one seems to care, even though the Legislature set a deadline for a reason and others in government have responsibilities that depend on the data from certified values.
The board should at least know why an assessor wants an extension, insisted most board members.
Mr. Klehs said that just because counties get only 15 cents out of every property tax dollar doesn’t mean counties shouldn’t provide assessors with tools they need to assess values and collect the tax. He suggested that a board member should have the power to sign off on an extension request from an assessor within the board member’s district.
Board Member Parrish said he could not support the board’s consideration of such a rule or standard for assessors. He said the news media made a “political football” of the assessor’s extension in San Bernardino County. If extensions are viewed as negatives, no assessor will seek an extension and the result will be inaccurate tax rolls, Mr. Parrish said.
Finally, Mr. Andal said the Interested Parties Process, where all stakeholders participate in discussions, may result in a rule, a letter to assessors, or nothing at all. But he asked, “Why set a deadline if waivers are going to be routinely granted without a reason?”
In other action, at the board’s October 2-3 meetings in Sacramento:
BOE Threatens To Subpoena CFO of ICG
Telecom. ICG Telecom Group (a
member company of ICG Communications) petitioned the BOE for reassessment of
its state-assessed property. The petition was based largely on the argument
that the company was currently in bankruptcy and therefore its property was
not worth what the board had previously set for its value.
What came out of the hearing, however, was that the company had failed,
despite repeated demands, to file schedules for possessory interests it held
throughout the state. This is a continuing and industry-wide problem,
according to Board Member Andal. “Obviously, our penalties are not working,”
he said.
In an attempt to spur that compliance, the board, on Mr. Andal's motion,
decided to send the CFO of the company a letter explaining that it is his
responsibility to ensure tax compliance and that “unless he complies, we will
issue a subpoena and compel him to come down here and stand before us and
explain why they have not complied.” The board voted to support sending the
letter and denied the taxpayer's petition for reassessment.
Assessors’ Handbook Section 504. The Property Tax Committee authorized publication of the updated Section 504 entitled “Assessment of Personal Property and Fixtures.” The updated section is scheduled for November distribution, including the most recent statutory amendments, regulatory changes, judicial decisions and adopted board policies on various topics ranging from assessment of artificial satellites to guidance regarding oak barrels at wineries.
Taxpayers’ Bill of Rights.
The Customer Services and Administrative
Efficiency Committee approved annual Taxpayers’ Bill of Rights reports for
business taxes and property taxes.
Emerging issues for business taxes were statutes of limitations related to
vehicles and vessels, as well as unregistered businesses. Under existing law,
a taxpayer can receive a notice of tax owed along with penalty and interest
from a vehicle or vessel purchase made up to eight years prior. The taxpayers’
rights advocate recommended a three-year statute of limitation.
On property taxes, an emerging issue that may result in board-sponsored
legislation involves assessor base-year value corrections. Under existing law,
the assessor can correct an error or omission in any assessment year in which
it is discovered, whether or not the error involved value judgment. Errors or
omissions resulting from the exercise of value judgment must be corrected
within four years. The taxpayers’ rights advocate intends to work with the BOE
Legislative Division to modify Revenue and Taxation Code Section 51.5
to allow refunds if the correction is made during statutory periods already
stated in law, and to apply the lower value prospectively beyond those
periods.
Under existing law, even if evidence surfaces that the assessment was wrong,
the assessor cannot change an assessed value that has been established by a
local board of equalization or assessment appeals board. Litigation is
required. The taxpayer’s advocate will develop legislation that would allow
the assessor, with the local board’s approval, to reduce the value when new
evidence shows the property had declined below the value established by the
local board at the time of its decision.
Indian Reservation Sales Tax.
The board unanimously adopted revised language to
Regulation 1616
(Federal Areas), essentially exempting from state sales and use tax meals,
food or beverages sold for consumption on an Indian reservation. The board
deleted controversial language to define “reservation-based value,” which the
Office of Administrative Law has deemed too vague. This issue will be refined
at a later date.
Clifford Marshall, Hoopa Tribal Council chairman, argued that his tribe
receives relatively little in the way of state or local government services
and should not have to collect sales or use tax.
Board Member Andal authored the amendments to the regulation to cover Indian
reservations. He said that while BOE auditors have tried to collect sales
taxes on reservations, they have been frustrated in the courts. “In reality,
we have been locked in a useless battle over food and beverages,” he said.
He also said that he has been treated unfairly in the news media over this
issue, with some suggesting “I’ve done this to engender support” from Indian
tribes. “I’ve never asked or been offered and in over 12 years in office I
have never received a campaign contribution from an Indian tribe. I may be the
only politician in California who can
say that.”
“Politics has nothing to do with this. This is about what is right for all of
the people of California, the Indian tribes and others,” Mr. Andal said.
Mr. Klehs then noted a more recent newspaper report with regard to airlines
seeking property tax relief due to losses incurred as a result of the
September 11, 2001 terrorist attacks. He said the report regarding his
fund-raising and the airlines was wrong and a correction was published. “All
we’re trying to do here is write a regulation that is similar” to court
actions, Mr. Klehs said of the Indian sales tax issue.
Sperring Honored. Member Andal’s longtime aide and tax counsel, Jon Sperring, was honored with a board resolution. Mr. Sperring begins work November 14 with PricewaterhouseCooper as manager in Sacramento for Franchise Tax Board and property tax matters.
Taxpayer Wins Key Residency Case.
At its August 1 meeting, the board took final action in a key personal income
tax residency appeal, upholding the position of the taxpayer (Appeal of
Raymond H. and Margaret R. Berner, #88344).
According to Richard Dewberry (Bewley, Lassleben and Miller), attorney for the
taxpayer, the boards opinion is important for three reasons:
In a letter to Finance Director Tim Gage, State Board of Equalization Member Dean Andal outlined an additional $1.3 million in savings that could be made in the BOE budget. He notes that two of the five board members support:
Reducing BOE Member Staff from 10 to Eight. “In the last eight years, I have served with no more than eight of 10 positions filled. Prior to 1994, all Board members served successfully with less than 10 positions.” Savings: $458,000.
Closing Five Field Offices. In the last several years, the board has added “publication fax back, 800-number information services and an Internet Web site to provide general information forms, publications and board meeting materials to taxpayers… For nearly all transactions, a visit to a board office is no longer necessary, making the district office concept an expensive relic of the past.” Savings: $853,000.
Suggested for elimination:
Torrance – “Less than 15 miles from neighboring offices.”
Salinas – “Branch office, less than 60 miles from San Jose.”
Redding – “Does not serve sufficient taxpayers.”
Houston – “Overnight travel required for most of office’s current office workload, which could be handled from Sacramento or New York.
Stockton – Office is less than 50 miles from Sacramento.
Proposition 51, the November 5 ballot initiative that dedicates 30 percent of the sales tax on motor vehicles to various transportation projects, will result in higher car taxes if it passes, according to the chair of the state Senate Budget Committee.
Senator Steve Peace, who also lambasted the initiative sponsors for what he contends is an illegal pay-to-play campaign strategy, said, “People who vote for Prop. 51 are voting to increase the taxes on their cars. No way around it.”
Senator Peace spoke at an October 2 legislative hearing on the initiative, which is sponsored by the Planning and Conservation League, a Sacramento-based, nonprofit environmentalist group led by Gerald Meral. Mr. Meral, who was not at the hearing but had watched it on television, told the Los Angeles Times that nothing in the measure raises taxes.
Senator Peace said that Prop. 51’s shift of about $1 billion a year from the general fund to specified projects, including those to relieve traffic congestion, would prompt the Legislature to increase vehicle license fees (the property tax on cars and trucks) rather than cut funding to local governments.
A number of legislators at a series of hearings have questioned the initiative sponsors’ methods of including projects that would result in support, including financial help, to get the initiative qualified and approved by voters. For example, a $120 million rail line would run close to a Palm Springs casino and resort owned by an Indian tribe that has donated $500,000 to the initiative.
Senator Kevin Murray has called the PCL “initiative pimps” because of their fund-raising strategy. Efforts to restrict initiative backers from linking benefits to campaign donors have been rejected by the courts as a violation of constitutional rights to free speech.
Senator Peace said he is gathering testimony from witnesses that connect donations to the measure’s projects. “We believe we have testimony that lays out at least a prima facie case for violation of the law,” Senator Peace said.
Mr. Meral told The Times, “There’s no evidence that we’ve committed any wrongdoing.”
While the Legislature usually holds one informational hearing on statewide ballot initiatives once they are qualified, there have been hearings in Sacramento, Oakland, and Los Angeles.
Mr. Meral said the Legislature may be violating a court decision that bans use of public funds to lobby for or against a ballot measure.
Meanwhile, Senate President Pro Tem John Burton condemned Mr. Meral and his PCL , saying Proposition 51’s passage would force the Legislature to revisit the budget and make even deeper and more painful spending cuts. “Jerry Meral has a history of making money for himself and for PCL by crafting bond initiatives that get special interests to support the initiative campaign in exchange (for) projects funded by the bonds,” Senator Burton said, according to Capitol Morning Report (October 10). “… PCL has become a whore for the self-aggrandizement of Jerry Meral instead of an organization committed to saving the environment. It is shameful!” He said he no longer cares about PCL’s position on pending legislation.
Salinas Mayor Anna Caballero has arranged for a third-party examination of claims that the city could go without $8 million in annual utility user tax revenue without cutting services.
The Reason Public Policy Institute, a Los Angeles-based nonprofit research group that promotes contracting with the private sector to perform public services, agreed to the mayor’s request, reported The (Salinas) Californian (September 25).
The mayor made the request after Brett Landon, a leader of the campaign to remove the city’s 6 percent UUT on the November ballot (Measure O), presented four scenarios that he said showed services could be maintained by freezing salaries for city employees for 30 months, reducing wages and benefits to top city executives, and eliminating up to six city positions.
Meanwhile, Save Our Services, a citizens’ group, played bingo outside City Hall on September 24 to highlight the potential plight of recreation centers if Measure O is approved.
In another development reported by The Californian: Rolling out the political hardball, labor union members (Service Employees International Union Local 817) rallied on the steps of the National Steinbeck Center on October 8 and called for the recall of Mark Dierolf as a trustee of Hartnell College. Mr. Dierolf is the author of Measure O and also was the lone trustee to vote against the college’s $131 million bond measure. John Vellardita, whose local represents some 300 city employees, had already served Mr. Dierolf with notice of a recall petition when he told reporters, “We’re giving notice to residents in the community that we want to remove him from public office.”
The current edition of Santa Clara County Assessor Larry Stone’s annual report (for 2002-03) is chock full of information of interest to taxpayers.
Despite an “economic tailspin,” the county assessment roll increased by $11 billion. The economic carnage was reflected by a 58 percent drop in commercial lease rates, drop in the average house value from $527,000 to $481,000, drop of average annual pay by 2 percent, disappearance of 25,000 jobs, and a commercial property vacancy factor of 16 percent.
According to Mr. Stone, the primary reason for record growth in assessed values has been Proposition 13. “Because Proposition 13 limits any increase in assessed value to no more than 2 percent annually, unless the property transfers ownership or is subject to new construction, the value of the assessment roll is significantly less than the fair market value of all property in Santa Clara County.”
Major accomplishments by Mr. Stone this year:
Completed assessment roll on time and under budget.
Reduced assessed values of 29,014 properties by $4.45 billion.
Introduced e-filing for business property statements.
Launched new “Assessor website” with over 100 pages of information and 18 downloadable forms.
Audited 1,085 business accounts.
Introduced a full activity based costing system, permitting management to improve the allocation of limited resources. The system is consistent with Mr. Stone’s goal of implementing a comprehensive performance-based management and budgeting system.
Resolved a record number of business personal property assessment appeals.
In Santa Clara County, 54.3 percent of the value of the assessment roll is single family homes. Condos are 8 percent, apartments are 5.5 percent, and single family 2-4 units are 2.2 percent.
Charging a violation of constitutional guarantees of free speech, the billboard industry is challenging the city of Los Angeles’ recently enacted $314 billboard tax. Clear Channel Outdoor, Viacom Outdoor and National Advertising Co. filed suit on September 27 to overturn the tax, Copley News Service reported.
The industry argues that the tax is imposed on their signs but not on “on-site” signs, such as those which advertise products in a store. An estimated 400,000 “on-site” signs are exempt, while the tax only applies to 10,000 “off-site” signs.
According to the suit, “There is no evidence that signs bearing an ‘off-site’ message pose a greater threat to the public welfare and safety in the city than signs bearing an ‘on-site’ message.” The industry charges the tax is a pretext to justify an additional burden on free speech.
L.A. City Council Member Jack Weiss, the author of the tax on billboard signs, says city attorneys told the council the tax will stand up in court. He said billboards have always been treated differently than “on-site” signs.
Cal-Tax General Counsel Greg Turner observed that the new tax imposes a greater burden on political advertising on billboards than on other political signs, which could prove troublesome to the city’s argument.
Despite the failure of SCA 9 (Speier), which would have made certain transfers of property among gay couples exempt from reassessment, San Francisco County Assessor Doris Ward has implemented the policy anyway, the San Francisco Chronicle reported. Under the new policy adopted by the assessor, couples registering as domestic partners will not have their residence and $1 million of property reassessed upon the death of one of the parties. The California Constitution now authorizes such a reassessment exemption only for married couples.
Deputy Chief Assessor Ronald Chun said the Constitution gives local government the right to interpret California tax laws. (Editor’s note: By law, this power is vested with the State Board of Equalization. If an assessor disagrees with the law or its interpretation by the board, he or she must sue the state board. State board regulations, following the constitutional provisions, limit change-of-ownership reassessment exemptions to married couples. Ms. Ward has not filed suit against the board on this issue. Will the board act to enforce its regulation?)
Contra Costa County OKs Higher Police Pensions. Only six weeks after Contra Costa County supervisors eliminated more than 100 jobs and cut social service programs to balance its budget, they approved as much as 50 percent increases in pensions for public safety workers. The Contra Costa Times reported October 2 that supervisors approved the enhanced public safety retirement known as 3 percent at age 50, so a 30-year veteran would qualify for 90 percent of salary for an annual pension, or 3 percent of highest salary times years of service. Under the current system, the same person would get a maximum of 78 percent of salary. Supervisors acted despite pleas from members of the county Grand Jury to hold off until a report is released on the financial impact the enhanced pensions will have on the retirement system. Juror Dale Kirkland said the fund lacks money to pay for the benefits, as it already faces more than $800 million in debts and obligations. Without better pensions, according to Supervisor Mark DeSaulnier of Concord, the county will lose sheriff’s deputies to other jurisdictions that have better wages and benefits.
Big Raises for Deputies. Alameda County supervisors have given sheriff’s deputies double-digit pay raises, reported the Tri-Valley Herald (October 9). Without comment, supervisors boosted deputies pay 8 percent retroactive to last January and added 6.8 percent as of last July. Meanwhile, deputies are still seeking enhanced retirement of 3 percent of pay for every year of service with the ability to retire at age 50. A deputies’ union spokesman said a pay survey showed Alameda County deputies were getting 16 percent less than the area median. With the raises, deputies make between $51,727 and $73,167 a year.
Cheating Janitors? Oakland school officials say as many as 26 janitors and a supervisor have fudged on their time cards to the tune of $150,000. Superintendent Dennis Chaconas said he heard rumors and asked for a review of custodians’ time cards last summer, finding enough discrepancies to hire a private investigator. As a result, the district had plans to fire six janitors and a supervisor, and suspend 12 others while their time cards are examined, reported the San Francisco Chronicle (October 3). According to the newspaper, some custodians submitted two time cards claiming to be working in two schools at the same time, some reporting working more than 24 hours in a day. They boosted their pay from the low $30,000 range a year to the $60,000 range, according to records. The newspaper contacted the supervisor who said his workers might have pulled a fast one on him. He said he signed 1,500 time sheets a month and didn’t look closely at everything he signed. Mr. Chaconas said he was shocked. “Some of these people I know personally. What caused them to think it’s OK to steal from the district?”
Update: Smog Fee Refund Award. Lawyers who were once awarded $88.5 million from the state as fees for helping motorists gain refunds for illegally collected $300 smog abatement fees are asking the state Supreme Court to give them more money. Copley News Service reported October 5 that while acknowledging that the $88.5 million is a “crocodile in the bathtub,” the lawyers want the court to reinstate a sizable arbitration award. Last July, an appellate court ruled that the huge arbitration award was “completely in outer space” and sent it back to arbitration with a cap of $18 million. Now the Supreme Court has 90 days to decide whether it will hear the appeal. Attorneys, led by the politically active San Diego firm of Milberg Weiss Bershad Hynes & Lerach, said that in rejecting the award, the lower court sent a message that the state may not honor binding arbitration agreements. “When is a binding arbitration award not a binding arbitration award?” the lawyers asked. “Apparently, it would seem, when the state is the losing party and it loses big.” Governor Gray Davis signed refund legislation that had put the lawyers’ fees in the hands of an arbitration panel whose decision was supposed to be confidential. However, word of the amount was leaked out by the state controller and others who expressed outrage, as did the governor. Hilary McLean, spokeswoman for the governor, told CNS, “We’re confident we will continue to prevail to the benefit of taxpayers.”
No Free Lunch (or Dinner) for Manteca School Board. Members of the Manteca (San Joaquin County) school board will no longer be feasting on free dinners supplied by school district food services personnel. The board voted on October 8 to end the practice. What started out as a few snacks had expanded in the past two years into full-blown meals, the Stockton Record reported on October 10. Trustee Ed Fichtner was the first to question the free meal policy. It is not known the extent of free meals served to board members in other school districts.
County Pays Inmates. Settling a federal class-action lawsuit filed by dozens of Ventura County jail inmates is costing taxpayers $255,600. The Los Angeles Times reported (October 9) that 81 former inmates – who contended that they were kept in custody for days without having criminal charges filed against them – will be paid between $100 and $1,250 for each extra day spent in jail. Oxnard attorney Philip Erickson told The Times that the settlement was “very good” from the county’s view because “we limited the damages and we especially limited the attorney fees.” This is at least the third “in-custody arrests” lawsuit that has cost taxpayers in recent years, The Times noted. Los Angeles County supervisors last year settled five class-action lawsuits for a total of $27 million. The courts had ordered about 400,000 detainees released. Also, earlier this year, The Times reported, a Westlake Village businessman was awarded $125,000 from the Sheriff’s Department after he had been jailed for several days in 1999 on suspicion of trying to kill his ex-wife. He was never charged with the crime and sued for false arrest.
Pension Bloat is Slammed. While Governor Gray Davis vetoed several pension-sweetening bills that had been highlighted by critics, he signed AB 2023 by one of his former staffers, Assembly Member Dario Frommer. The Sacramento Bee, in an October 11 editorial, slammed the governor for approving a bill that authorizes for state and local prosecutors and public defenders the same “lucrative” safety retirement benefits that are bestowed upon peace officers and firefighters. As The Bee noted, the California Public Employee Retirement System board opposed the bill. CalPERS says the value of the safety officer benefit will range from $85,000 to $145,000 per attorney, allowing them to retire in their early 50s. The earlier retirement for cops and firefighters can be justified because few people beyond 50 possess the strength and agility needed in those jobs, The Bee pointed out. “Government lawyers, even those working in the criminal justice system, face none of the physical challenges of police and firefighters,” the paper said. Authorizing local government to negotiate the benefit makes granting the additional benefit likely as it becomes a priority issue for unions representing the attorneys, and then the taxpayers will have to chip in millions more to keep the pension funds actuarially sound, The Bee said.
Chamber Backs Health Tax. The Los Angeles County Chamber of Commerce has endorsed Measure B, a proposed parcel tax to help fund trauma care, on the November ballot. The campaign announced the chamber’s support on October 2 in a joint announcement with the county Federation of Labor, which was appropriately called an unusual alliance in the news media. Chamber President Rusty Hammer called Measure B “part of the solution” to the problem of a $750 million deficit that threatens the network of 13 trauma treatment centers. Mr. Hammer said health cuts have already been made, including closure of 11 health-care centers and four school-based clinics. “Now the county needs to raise some revenue and get some assistance.” It is estimated that the proposal would tax owners of an average (1,400-square-feet) single-family home $42.66 a year.
Tough Old Bird. Blunt, tenacious and long-serving are the adjectives used by the Sacramento Bee describing Leroy F. Greene, who died September 29 of peritonitis at a Sacramento hospital. He was 84 and had retired in 1998 after 36 years as a state legislator. In his later years in the state Senate, the Sacramento Democrat campaigned successfully as a “tough old bird.” Among his legislative achievements was authorship of AB 8 of 1979, which provided for post-Proposition 13 allocations of property tax dollars. He also carried a bill, without success, to legalize prostitution, while succeeding with bills that resulted in school construction bonds. A civil engineer in an earlier life, Mr. Greene also was known as the gatekeeper for school construction funds as chair of the state board that doled out the money.
Willie Brown and CalPERS. According to a report in the San Francisco Chronicle (October 2), San Francisco Mayor and former Assembly Speaker Willie Brown is looking at becoming the next president of the powerful California Public Employees Retirement System. The 1.3-million-member system has assets well in excess of $100 billion and has leverage throughout corporate America, the newspaper noted. Mr. Brown, a member of the CalPERS board by virtue of an appointment by Governor Gray Davis, needs to round up six of the other 12 members to vote for him. There will be a board presidency election in February for someone to succeed Bill Crist, who is retiring. The Chronicle story notes that Mr. Brown has become “increasingly tepid” about the prospect of running for a state Senate seat in 2004, and has expressed interest in being a roving goodwill ambassador for the Bay Area if it lands the 2012 Olympic Games.
AOL Approves BOE Exchange of Information Rule. The Office of Administrative Law has approved changes to State Board of Equalization Rule 305.1, relating to exchanges of information during property tax appeals. The changes, which became effective September 19, conform the rule to changes in AB 407 of 2001.
Review of Mandates. In actions that could have consequences for the state’s budget, the California Supreme Court has agreed to review two cases involving state funding of its mandates. One case is to determine whether the Fourth District Court of Appeal correctly affirmed that a school district is entitled to be reimbursed for its costs of expelling students under state mandates (San Diego Unified School District v. Commission on State Mandates). The other case (Department of Finance v. Commission on State Mandates) is to determine whether state mandates are reimbursable when there is no reasonable alternative or no true choice but to participate in a program. The Third District Court of Appeal reversed a trial court decision that costs of complying with state open meeting requirements – preparing and posting agendas and providing opportunity for public comment – are reimbursable.
LAUSD Seeks Higher Fees. Although they were slapped down in court the last time they tried it, trustees of the Los Angeles Unified School District on October 8 proposed increasing fees on new housing developments by more than 57 percent. According to the Daily News, the proposal to hike the rate from $2.05 per square foot to $3.55 per square foot is likely to be approved by the board at its next meeting and last a year. It would generate more than $30 million a year for the district, which the newspaper notes needs $100 million to finish the beleaguered Belmont Learning Center. The board tried to raise the rate to $3.55 in August 2001, but developer Doug Ring sued. He won the case last May, and his attorney, Ben Reznik, said he is prepared to sue again. The Coalition for Affordable Housing in Los Angeles argued through Mr. Reznik that the fee increase was unfounded because the district had not done a proper needs analysis, and a Superior Court judge agreed. The district is appealing the ruling but a number of builders have asked for refunds, citing last May’s ruling. A new, two-inches-thick needs analysis has been prepared by the district.
Richman Proposes Business Tax Cut if Voters Approve San Fernando Valley Secession. Assembly Member Keith Richman, who is running for mayor of the new San Fernando Valley city that would be created if voters in November approve the split from Los Angeles, is calling for a halving of business license taxes in the new city. “The city of Los Angeles is the most expensive place to do business in Southern California,” Mr. Richman said. He contended that the business license tax stifles growth and discourages business from moving to the city.
L.A. County Hikes Business License Tax in Unincorporated Area. Los Angeles County supervisors, on a 3-2 vote September 25, approved a 10 percent to 30 percent increase in business license taxes on a range of businesses in the unincorporated area, the Pasadena Star-News reported. The biggest tax hikes will hit acupressure businesses, where the levy will increase from $1,440 to $2,268. Supervisors Mike Antonovich and Don Knabe voted against the tax increase. Mr. Antonovich called the fees a “little steep.”
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