David R. Doerr, principal contributor
Ronald W. Roach, editor 

Vol. XV, No. 40
December 20, 2002

IN THIS ISSUE

DAVIS: DEFICIT NEARLY $35 BILLION; TAX HIKES WILL BE NEEDED

Preparing to call for higher taxes, Governor Gray Davis on December 18 said the state’s budget deficit is expected to reach nearly $35 billion, dwarfing previous estimates. The deficit is a whopping 45 percent of the state’s general fund.

After a conference call with legislative leaders, the governor met with reporters and indicated that his proposals for higher taxes are on the horizon. “I’m going to propose a balanced approach,” the Democrat governor said. He also told a KFWB Los Angeles radio interviewer that the state’s budget problem is “just too big a gap to close” without more taxes.

Although he had left the door open for increased taxes during his November re-election campaign, the governor acknowledged for the first time that “in all likelihood” he must propose higher taxes, reported the San Jose Mercury News.

After the November election, the governor acknowledged that the problem was in excess of the legislative analyst’s $21.1 billion estimate of the gap between expected revenue and programmed spending over the next 18 months. He said it could be as much as $30 billion. He proposed $10.2 billion in spending cuts in late November, calling the Legislature into a special session. Fellow Democrats chaffed at the governor’s cuts-only initial proposal, saying they’d look at them and wait until January to act. By then, they figured, the governor would have to play all of his cards.

The governor’s 2003-04 budget proposal – with anticipated tax elements – is due January 10. “It will have further reductions and in all likelihood it will have some revenue increases,” Governor Davis said.

While he would not say what he would propose, he noted that in the past he has supported an increase in the property tax on motor vehicles, called the vehicle license fee, as well as higher excise taxes on tobacco products.

Davis Defends Budget Actions. In a year-end interview with reporters, the governor defended his decision not to cut more deeply into state spending last summer. According to the Sacramento Bee (December 20), the governor said there were projections that the economy would recover by late 2002, and it would not make sense to eliminate or drastically cut a program and then find out months later the action was unnecessary. The experts were wrong, he said, denying that he held back on cuts because he was running for re-election.

Davis Seeks Budget Reforms. Speaking to reporters during a year-end interview December 19, the governor said he will unveil a plan to “eliminate the volatility” that has been blamed for state budget woes. He also acknowledged that spending was also to blame for the deficit because the spike in revenues made more money susceptible to political urges for spending, be they Republicans seeking tax cuts or Democrats insisting on more funding for social programs, the Sacramento Bee reported.  The governor did not provide specifics of the plan that he will unveil in his state-of-the-state address or budget remarks in early January, but he said, “We are working on putting the budget together and also reforms … to make the source of revenue more stable.” The instability is mainly due to the state’s income tax structure that requires Californians to pay more as they earn more. Taxes on capital gains and stock options caused boom times that have gone bust with the demise of the largely California-based high-tech industry.

Peace Named Next Finance Director. While pegging the deficit at $34.8 billion, the governor also announced that termed-out Senator Steve Peace, a San Diego County Democrat who chaired the Senate’s Budget Committee in recent years, will take over as his finance director in mid-January. He will succeed Tim Gage, who asked to step down from the $133,412-a-year post.

In a Los Angeles Times column by George Skelton, Mr. Peace said one reason he took the job is he believes the governor sees the budget crisis as a window of opportunity to overhaul the state’s boom-and-bust tax structure. Profiles of Mr. Peace, producer many years ago of the cult classic flick “Attack of the Killer Tomatoes,” portray the 20-year veteran of the Legislature as extremely brilliant yet sometimes impatiently hot-headed with unyielding views. He had planned to run for secretary of state but bowed out after the state’s electricity restructuring law, which he helped produce, backfired.

As a senator, Mr. Peace advocated a cure for the “Proposition 13 sickness” by reassessing commercial property, boosting the homeowners’ exemption and cutting the sales tax. He described the plan in a February 2000 Q&A published in the Cal-Tax Digest. (It is available at Cal-Tax Online, www.caltax.org.)

Reaction. Assembly Republican Leader Dave Cox, in the Los Angeles Times, said, “These numbers go beyond the most dire predictions and projections we were looking at. It appears to me the books were cooked last year (to downplay the problem prior to the election) and the books are cooked this year (to exaggerate the problem).” He was quoted in the Orange County Register: “You have to be very suspect. The books are being cooked to gin up a tax increase.”

Senate President Pro Tem John Burton, who refused to accept then-Senator Peace’s resignation as budget committee chair during blow-up times, said, “I don’t think the governor could have done better. He is smart. He knows his stuff. He hits the ground running.”

Senate GOP Leader Jim Brulte said Mr. Peace is “honest” and “straightforward.”

Mr. Gage told reporters that the difference between the legislative analyst’s numbers and the governor’s updated forecast is dwindling revenues. He said the Department of Finance had later figures.

Taxpayer Perspectives. Cal-Tax on December 17 issued a report entitled “Taxpayer Perspectives on the State Budget Deficit,” describing the budget process as inadequate to manage the annual allocation of nearly $100 million. It calls for greater oversight of current spending, particularly documented cases of wasted tax dollars. Finally, it stresses that the way out of the budget mess is to encourage economic growth that produces necessary revenues to run the state.

Spending Cuts. The governor’s proposed $10.2 billion in spending cuts and other actions (described by the legislative analyst as cuts of $7.2 billion, transfers, loans and reversions of $2.3 billion and funding shifts of $700 million) include:

State’s Credit Rating Drops. As a result of the governor’s bleak fiscal outlook, the state’s bond rating was dropped from A+ to A on December 19 by Standard & Poor’s. The downgrading, taking the state to its lowest credit rating since 1996, means additional borrowing costs in the form of higher interest rates. Treasurer Phil Angelides told the Sacramento Bee that he does not anticipate that the state will have significant problems borrowing money. Governor Davis said he is sure “virtually every state will see their credit rating downgraded.”

Dutra heads tax-hike advisory panel. Considered a moderate, pro-business Democrat, Assembly Member John Dutra was named by Budget Committee Chair Jenny Oropeza to lead a new advisory working group on taxes. Ms. Oropeza said any member of the Assembly is welcome to join the informal panel. Mr. Dutra, in an interview with Steve Geissinger of the Oakland Tribune (December 20), said he didn’t volunteer for the “thankless job” but will attempt to identify, by mid-January, a mix of state tax increases that average Californians and businesses can tolerate. He said they include higher taxes on the wealthy, higher car taxes and a broader or increased sales tax.

Taxing Possibilities. Various reports in the media speculating on what taxes would be proposed surfaced in the wake of the governor’s updated deficit figure. The tax options range from ideas rejected last year but used in the past, such as higher income tax brackets, to expanding the sales tax to cover services, as well as taxing Indian gambling and the state lottery. Other familiar faces in the “let’s tax it” arena are the “sin taxes” – tobacco and alcoholic beverages. Here are some of the ideas reportedly being discussed or officially proposed:

Poochigian Urges Economic Recovery Package. Senator Chuck Poochigian, calling a growing economy the best way to pull the state out of its fiscal problems, has called for a rollback of measures taken last year that hurt the business climate. He urges a suspension of measures that increased workers’ compensation benefits, as well as a law forcing farmers into labor contracts and another law that requires nonunion companies to pay union wages on state-funded projects. Suspending these laws would create more jobs and tax revenue, he said. He also wants to make sure the state’s manufacturers’ investment tax credit is maintained, the Stockton Record reported December 12.  Another Republican senator, Bruce McPherson, added his voice to the call for a more business-friendly state to bolster revenue, reported the Santa Cruz Sentinel (December 20). He said that if consumers “get taxed more, they aren’t going to be able to drive the economic machine back to recovery.”

Restructuring and Proposition 98. Dealing with such a staggering deficit must account for Proposition 98, which would take 48 percent of every new general fund tax dollar and give it to education. While Proposition 98 could be waived by a supermajority vote of the Legislature, it also could be circumvented by passing a tax that ties new revenue with a specific local government program so that the money never goes into the general fund.

Dueling Ballot Initiatives? The spending lobby is reportedly working on an initiative that would allow the state budget to be passed by majority – not two-thirds – votes of the Senate and Assembly. Also in the works is an initiative that would increase taxes, particularly if Republicans continue to block Democrats’ tax-hike bills that need two-thirds votes. These would include a soak-the-rich income tax, imposing higher tax brackets, and a split-roll property tax. Meanwhile, preparing for the possibility that the governor might call a special election in 2003, Republicans are discussing an initiative that would limit government spending and close a loophole being used to raise taxes without two-thirds votes by calling them fees under the state Supreme Court’s decision affecting manufacturers of products containing lead.

Hiring Freeze and Ban of Promotions Soft. Governor Davis’ hiring freeze and ban on promotions of state employees from October 23, 2001 to date has been soft, Capital Weekly reports in its December 23 issue. The paper estimates 36,000 people will be hired during the coming year even under a “hiring freeze.” It also published a list of thousands of employees who were promoted in November 2002 and their old and new (higher) salaries. There were 93 Franchise Tax Board employees on the list and only seven at the State Board of Equalization. The paper said, “This listing indicates promotions are continuing and we will publish similar monthly listings on a regular basis to counteract ‘official’ sounding statements about a ban on promotions during the hiring freeze. Such information is useful to employees so that they might demonstrate to their supervisors that promotions are, in fact, continuing.”

BOE rejects insurance department try to tax workers’ comp deductibles

An attempt by the Department of Insurance announced earlier this year to impose the state’s insurance premiums tax on workers’ compensation deductibles was soundly rejected by the State Board of Equalization in a December 18 decision on tax appeals.

In three combined appeals (Employers Insurance Company of Wausau, Wausau Business Insurance Company, and Wausau Underwriters Insurance) the board unanimously held in favor of the taxpayers and adopted a written opinion to that effect.

Attorney Dick Martland (Nielsen, Merksamer et al), representing the taxpayers, said that the legislative intent of 1994 legislation showed no attempt to treat deductibles as taxable. He added that the Department of Insurance has treated them as non-taxable for seven years.

Larry White, tax counsel for the Department of Insurance, seemed to be touting his own legal opinion as authority for the proposed tax increase. He made little headway under questioning from board members. He said no one had yet paid the tax and said the attempt to assess the tax retroactively was unfortunate but required by law. Board Member Johan Klehs, who was chair of the Assembly Revenue and Taxation Committee when the 1994 bill passed, said he did some research and “nowhere can I find where the Legislature wanted to see these deductibles taxed.” Board Member Dean Andal said incoming Insurance Commissioner John Garamendi can go to the Legislature if he wants to see the deductibles taxed.

Barry Broad, representing the Teamsters, said that under the 1994 workers’ compensation reforms, it was essential that workers bear no risks. He added that no one assumed a premiums tax would be paid on these deductibles.

The Los Angeles Times (December 19) erroneously portrayed the decision as a $220 million revenue loss. Actually, there will be no revenue loss as no revenue had been collected, and the Legislature never intended to subject these deductibles to tax .What the unanimous board decision did was prevent lame-duck Insurance Commissioner Harry Low from imposing a $220 million tax increase that was never approved by the Legislature.

Other board developments:

UI TAXES WILL BE BUMPED UP 29 PERCENT IN 2003

California employers will see a 29 percent increase in the unemployment insurance tax rate in 2003, which means they will be paying from $63 to $378 per employee. The range in 2002 was $49 to $378.

The increase in premiums, pegged to a decline in the state’s unemployment trust fund of 23 percent, to $4.3 billion, is a result of increased benefits and a sluggish economy that has put more people out of work. About half of the 1.1 million unemployed Californians are getting UI benefits.

The maximum weekly benefit, now $330, increases to $370 on January 1, 2003, as a result of SB 40 (Alarcon) of 2001. The weekly wage replacement formula, now 45 percent, will increase to 50 percent, which means a weekly benefit will equal 50 percent of weekly earnings, up to a maximum of $370. The decline in the trust fund caused the premium schedule to go from “C” to “D,” increasing the range of rate from 0.9 percent to 5.4 percent on a taxable wage base of $7,000. That is up from 0.7 percent to 5.4 percent.

The premium schedule had been expected to go to “E,” dictating even higher costs, and would have gone there if federal Reed Act funds (about $900 million) had not been deposited in the state’s UI trust fund.

On the disability insurance side, the tax rate is staying the same – 0.9 percent – in 2003, but the taxable wage base is increasing from $46,327 to $56,916. This is happening because legislation several years ago tied the DI benefit to the workers’ compensation temporary disability benefit. Thus when there’s an increase for workers’ compensation, there is an automatic DI increase. A formula in place automatically adjusts the taxable wage base if there is an increase in the maximum benefit.

The workers’ compensation benefit – hence the DI benefit – is rising from $490 now to $602 in 2003 as a result of this year’s AB 749 (Calderon). So what’s the bottom line for the employee? Those making above $46,327 will see a tax increase in 2003 of up to $95.30 for the year. For those earning $56,916 or more, the maximum DI tax can total $512.24, compared to $416.94 this year.

The state’s new paid family leave program takes effect in mid-2004, so additional DI taxes – .008 – to fund this program will be levied starting in January 2004.

Meanwhile, new expanded benefits for workers’ compensation and DI are slated to bump up to $728 per week on January 1, 2004.

Economists: Tax increases will further damage state’s economy

Several noted economists have gone public in warning legislators, many of whom favor higher taxes, that tax increases will further damage the state’s floundering economy.

According to the Inland Empire Daily Bulletin, Jack Kyser, chief economist for the Los Angeles County Development Corporation, said, “My fear is there is going to be real damage to the state’s economy.”

Economist John Husing, an expert on Riverside and San Bernardino counties, said, “The whole process is going to hurt. The question is, who’s going to hurt and how much?”

Michael Bazdarich, director of the UC Riverside Forecasting Center, said “I could see tax increases hurting Silicon Valley and L.A. County. It will hurt us, but not as much.”

Economist Steven Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College, observed that a big car-tax increase and a soak-the-rich income tax increase would likely depress both the state’s and Inland Empire’s economy. He said the state should instead freeze the growth of spending in hard dollars, instead of simply holding back the rate of growth. “The state is spending money like a drunken sailor in port.”

TAXPAYERS GAIN CLASS-ACTION CERTIFICATION IN ORANGE COUNTY PROP. 13 CASE

Attorneys who have challenged Orange County’s method of recapturing property tax values in excess of Proposition 13’s annual 2 percent limit on increases in value have won another round as they seek to expand the case to include affected taxpayers throughout California.

Superior Court Judge John M. Watson on December 12 certified the class status for affected Orange County taxpayers in the case of Orange County v. Orange County Assessment Appeals Board No. 3, Renee Bezaire and Robert Pool real parties in interest.

The judge’s action requires further debate on the county’s requirements to notify potential class-action taxpayers. An appellate ruling also would be needed to expand the class action statewide.

The court cited extensively from the recent 4th appellate district’s decision in Bunker v. County of Orange. (See Caltaxletter of November 8.) The court used the language of Bunker but inserted the names Bezaire-Pool. "All ‘Bezaire-Pool’ are asking for now is a court order requiring the county to comply with California Constitution Article XIIIA, Section 2(b) and Revenue and Tax Code 51(a) (1) (D). That is, if ‘Bezaire-Pool’ were to receive the relief he requests, there will be, in addition to a simple declaration as to the effects of the California Constitution Article XIII A Section 2(b) and Revenue and Tax Code 51(a) (1) (D), an order to the effect that the county is obligated by law to send out two notices, not write any checks."

In the wake of Bunker, the parties attempted to stipulate that should the taxpayer win the ultimate dispute on appeal (whether the Constitution does indeed prohibit any annual increases in assessments greater than 2-percent) the county would be obligated to send notices to affected taxpayers in the county. Judge Watson, however, denied the stipulation. He noted: "The court's view is that affected taxpayers may include everyone who has ever been subjected to the recapture of taxes by the method found to be unconstitutional by this Court. The stipulation proposed by the attorneys may exclude many such people if this Court were to accept it."

Mr. Pool, a Seal Beach homeowner and property tax attorney with the law firm Gangloff Gangloff & Pool, challenged the assessment. According to the Orange County Register, he called the decision a “huge landmark.” However, he and county officials said refunds are not guaranteed anytime soon, the newspaper reported, because the appeals court is likely to consider the case first. Mr. Pool said the county has the burden of determining how many people could qualify for refunds, with Treasurer-Tax Collector John Moorlach having to deal with notices.

Mr. Moorlach, according to The Register, was critical of the judge for ignoring the eleventh-hour effort to compromise. He said the deal would have allowed the county to issue refunds without the “administrative nightmare” of notifying thousands of taxpayers that they could file a claim. The deal would have moved the case directly to the appellate court instead of requiring a hearing before Judge Watson on how and when class-action taxpayers would be notified.

The parties are scheduled on January 30 to debate the notice requirements placed on the county before the case can head toward the Fourth District Court of Appeal.

The Orange County trial court’s ruling is not binding on other counties. According to the Los Angeles Times, the Court of Appeal’s decision “will have far-reaching implications, because all 58 counties in California use the same method for determining property-tax assessments.” At stake are billions of dollars in tax refunds, including up to $1 billion in Orange County and up to $4 billion in Los Angeles County, The Times reported.

Attorneys for Orange County Assessor Webster Guillory sought to have Judge Watson removed from the case because he might benefit from a class-action ruling as some of his property had been similarly treated. The judge responded to this by removing himself as a potential member of the class action, The Times reported.

The newspaper also reported that the assessor will ask county supervisors to increase to $900,000 the amount to be paid to his attorney. Mr. Moorlach told The Times that his attorney has charged less than $100,000. The Board of Supervisors did not appeal the judge’s more than year-old decision but authorized hiring of outside counsel to represent Mr. Guillory and Mr. Moorlach.

Further information on this case is available at the Gangloff, Gangloff & Pool website at www.propertytaxrefunds.biz.

TAXPAYER WINS INJUNCTION AGAINST L.A. ASSESSOR ON PROP. 8 REVIEWS

A stipulated court settlement includes an order to prevent the Los Angeles County assessor from future use of a computer program challenged as bogus by the taxpayer.

The settlement, accepted last month by the parties and approved by Los Angeles County Superior Court Commissioner Bruce Mitchell, culminates a lengthy crusade by Lamar Guthrie of Hawthorne to discredit a system used to compare market values for properties that decline in value.

The action was brought by Guthrie, an engineer, and his wife, Gail, an attorney. Mr. Guthrie said the suit was certified as a class action one and one-half years ago, but the judge said it did not involve a complex legal issue and referred it to the commissioner. Mr. Guthrie said he received the commissioner’s signed judgment on December 19.

Mr. Guthrie said he challenged the assessor’s practice of using a computer-generated “value” that was not based on any recognized value approach, such as cost, market or income, but was simply designed to dissuade taxpayers.

The assessor did not admit to any wrongdoing in the settlement. There are no monetary damages other than the county had to pay his attorney’s fees, the expense of an expert witness and court costs, said Mr. Guthrie.

He said he and his wife bought a condominium in 1991 and knew values were declining at that time, but assumed the assessor would act accordingly. Instead, the assessed value of the property did not go down year after year. Finally, in 1995, he filed his first appeal, because he said he knew a nearby condo had sold for $125,000 and the Guthries’ property was valued at $164,500.

He said that when he appealed, a process that took two years, the assessor’s office readily acknowledged the lower value, actually putting it at $122,000, and said property owners have to file appeals every year. He has appealed three times and won all three.

The computer program used by the assessor (called an Appraisal Data System-13) resulted in appeals that inundated Assessment Appeals Boards as values declined, Mr. Guthrie said.

The court ordered the assessor to post notices at all field offices in the county to inform taxpayers of the past practice.

Mr. Guthrie said he regrets that his case did not go to trial. “I want to know what else was going on,” he told Caltaxletter.

He said the court retains jurisdiction, or keeps watch, over the order for five years. Although it is permanent, the injunction could take another lawsuit to enforce after five years. This is somewhat troublesome, said Mr. Guthrie, because he said it may be five or more years before property values hit another drop-off cycle. In the meantime, there is no need for the assessor to use the discredited process, he said.

Mr. Guthrie said his years of battle with the assessor’s office involved writing hundreds of letters, including pleas for help to the state attorney general, the county grand jury, the State Board of Equalization, and the news media. He said he probably spent $3,000 on the effort, plus many hours of time.

He’s not finished.

He said he has a request pending with the county’s Assessment Appeals Board to provide an interpretation of how his property value has been reassessed upward, as much as 16 to 18 percent from one year to the next, as the real estate market soared.

That is why he said he is watching the Orange County class action involving Robert Pool’s Seal Beach home assessment. Mr. Pool recently won countywide class action status of his suit in which a trial judge ruled the assessor illegally raised his property value more than 2 percent a year – as allowed by Proposition 13 – to recapture value from declining years. That case is expected to be appealed to a state appellate court, where a ruling could have statewide impact. (See story above.)

SENATOR RENEWS PUSH FOR TAX ON ALCOHOLIC BEVERAGES

Calling it a fee, not a tax, a Los Angeles senator has announced she will reintroduce legislation that would require the manufacturers of beer, wine and distilled spirits to pay a nickel for each average-size pouring of their products.

Senator Gloria Romero, who failed with similar legislation last session, was joined by the Hospital Association of Southern California at a Los Angeles news conference on December 12.

The senator said the “fee” would raise $500 million a year and be dedicated to hospital care for alcohol-related injuries. She said it would be SB 5X in the Legislature’s special session called to deal with the budget crisis, stressing that additional funding sources are needed because the state’s general fund is insufficient to help keep trauma centers open. (According to the Senate Web site, as of December 20, SB 5X had not been formally introduced.)

Senator Romero said, “The alcohol industry needs to assume greater responsibility for the increasing health-care costs associated with the use of their products.”

There is considerable opposition to the proposal, and a spokesperson for Governor Gray Davis said the governor had not taken a position.

Cal-Tax President Larry McCarthy said the Romero bill is probably an early indication of the way the Legislature will proceed to deal with the budget deficit – raising taxes and calling them fees. “This ploy is designed to avoid the constitutional two-thirds vote requirement for a tax increase. This is a shabby, disrespectful way to treat taxpayers. The Legislature should stay focused on spending reform and managing the state budget, not raising taxes to underwrite some programs that are out of control.”

The Los Angeles Times quoted Assembly Republican Leader Dave Cox as calling the bill “well-intentioned, but just the wrong approach. In the final analysis, this is just an increase in taxes.” Assembly Member Robert Pacheco, leading Republican on the Assembly Health Committee, told The Times: “The imposition of another tax – whether it be for beer or Twinkies or whatever – will have a further devastating impact on the economy.”

Senator Romero said it is a fee that could be absorbed by distributors without being passed on to consumers. The state Supreme Court’s Sinclair Paint decision found that taxes paid by manufacturers of paint using lead were actually paying fees to mitigate the damage of their product, expanding the definition of fees that could be approved by majority votes of the Legislature.

Victor Franco, Miller Brewing Company’s state affairs manager, told the newspaper that increasing the cost of beer and wine would punish responsible drinkers. He said it would reduce sales, rippling through the industry and affecting jobs all along the process, including the makers of bottles and cans.

“In our opinion, it’s a highly regressive fee that affects low- and moderate-income beer drinkers, and it will increase the cost of our products,” Mr. Franco said.

The Sacramento Bee quoted Jeff Becker, president of the Washington, D.C.-based Beer Institute: “The people we are asking to pay the bulk of the tax are the people who can least afford to pay it. The vast majority are not alcohol abusers.” He said half the beer consumed nationwide is in households with income of less than $45,000 a year.

While an average bottle of wine might be determined to contain five drinks, for a 25-cent fee, it is unknown how much of that would be paid by the consumer.

Revisons suggested in FTB regulation on meeting procedures

Before a sparsely attended Franchise Tax Board regulatory hearing December 16 on meeting procedures, two speakers suggested changes in proposed Regulation 17003.3.

The regulation is intended to implement SB 445 (Burton) of 2001, requiring certain documents pertaining to agenda items at FTB meetings be made public prior to the meetings.

Cal-Tax’s David R. Doerr suggested that the regulation be revised to be consistent with the statute, and that all materials on certain items be made public, not just those materials distributed after a certain date. He also said that the distribution should be made on items on which an action could be taken, rather than only items where final action is taken. “It is not possible to know in advance if final action will be taken on an item,” he said.

Lenny Goldberg, representing the California Tax Reform Association, said the regulation needed to be revised to provide that the actual language of proposals before the board will be available to the public, and if board members craft a proposal at a hearing that it “go out to print” and back on the agenda at the next meeting.

He cited several recent examples where this was not done. He said the public never saw the language of the resolution to reserve certain powers to the board itself, or the language of the instruction to staff on how to implement the Hunt-Wesson decision, or, most recently, the cobbling together of several options presented by Controller Kathleen Connell in October to instruct staff to proceed with an e-filing program.

FTB attorney Doug Powers presided over the hearing.

Court Rejects FTB argument seeking to make confidential tax returns public

Sacramento County Superior Court Judge Joe Gray, in a tentative ruling December 6, ordered taxpayer documents sealed in legal action taken by the Franchise Tax Board to enforce a subpoena (California Franchise Tax Board v. Gilbert P. Hyatt). The FTB opposed the effort to seal taxpayer documents.

In his opinion granting the taxpayer’s motion to seal the record pursuant to California Rules of Court 243.1 and 243.2, the judge wrote: “(1) The preservation of the confidentiality of the materials in question as provided under Revenue and Taxation Code Section 19542 constitutes an overriding interest that overcomes the right of the public access to the record; (2) that interest in confidentiality supports sealing the record; (3) there is a substantial probability that the interest in confidentiality will be prejudiced if the record is not sealed, and (4) the Court is aware of no less restrictive means to achieve the interest of confidentiality in this matter.”

Cal-Tax General Counsel Greg Turner said the decision protects taxpayers against FTB efforts to threaten taxpayers with disclosure of confidential information to induce taxpayers to drop legal challenges to proposed FTB assessments.

Mr. Hyatt, a prominent Las Vegas resident and inventor, has sued the FTB in Nevada courts alleging torts were committed against him by FTB employees during a residency audit. The decision of the Nevada Supreme Court to allow the suit to go to trial has been challenged by the FTB and is before the U.S. Supreme Court.

Assembly Budget Committee Members Appointed

Speaker Herb Wesson announced the appointment of 31 members to the Assembly Budget Committee, the largest number in the memory of long-time observers. This group faces the daunting challenge of approving significant budget cuts and bringing in a balanced budget on time.

Members of the committee are:

Jenny Oropeza (D) chair, John Campbell (R) vice-chair, Patricia Bates (R), John Denoit (R), Rudy Bermudez (D), Joe Canciamilla (D), Wilma Chan (D), Judy Chu (D), Dave Cogdill (R), Lynn Daucher (R), Manny Diaz (D), John Dutra (D), Merv Dymally (D), Dario Frommer (D), Jackie Goldberg (D), Tom Harmon (R), Ray Haynes (R), Hannah-Beth Jackson (D), Rick Keene (R), Lloyd Levine (D), Carol Liu (D), Bill Maze (R), Kevin McCarthy (R), Cindy Montanez (D), George Nakano (D), Fran Pavley (D), Robert Pacheco (R), Sarah Reyes (D), Sharon Runner (R), Joe Simitian (D) and Lois Wolk (D).

The unwieldly size of the committee will make it more difficult to lobby and probably make it more prone to party-line votes. Democrats outnumber Republicans 19-12 (61.2 percent), reflecting the 48-32 (60 percent) partisan make-up of the Assembly as a whole.

Taxpayers win two-thirds of assessment appeals

Recent statistics released by the State Board of Equalization show taxpayers winning more than two-thirds of assessment appeals for the 2000-01 fiscal year that were heard by an appeals board.

In 1,810 appeals, the assessment was reduced; in 855 appeals, the assessment was sustained, and in 28 appeals, the assessment was increased. Twenty-two decisions were appealed to court.

Almost half of the original appeals filed were either withdrawn, were invalid, were “no-shows” or were resolved by stipulation. Over 24,000 appeals were carried over into 2001-02.

University student fees increased

Student fees for attending the University of California and the California State University were increased substantially by the UC Regents and CSU Board of Trustees on December 16. Action came quickly to soften proposed budget cuts that are in the offing, due to the state’s massive budget problems.

It was the first fee increase in eight years, and student fees in California are still below comparable universities throughout the country.

For the University of California, the fee hike amounts to $405 a year, an 11 percent increase. At the state universities, undergraduate students will pay $144 a year more (up 10 percent), while graduate student fees will jump by $228 a year (a 15 percent hike.)

Students, as might be expected, objected to paying more for their education. According to the Los Angeles Times, Maribel Martinez, student government president at San Jose State, said the higher fees could result in more student dropouts. Adam Miller, executive director of the UC Student Association, was quoted in the Sacramento Bee as saying, “The most troubling thing about this is that students and parents haven’t had time to plan for this.”

UC Regent John Davies, reflecting the sentiment of the 11-4 majority of regents in favor of the increase, said, “We are trying to keep our fees as low as we can and still maintain quality. To me, it would be irresponsible not to spread the pain around as much as we can.”

CSU Chancellor Charles Reed, whose board voted 13-3 for the fee increase, said, “When you have a nearly $30 billion (state general fund) shortfall of revenue, everybody is going to feel some pain. I’m talking about every Californian.”

Los Angeles TImes: Property tax is bright spot in revenue picture

“The Property Tax is the Rare Bright Spot for State Income,” the Los Angeles Times trumpeted in a December 10 headline.

This mirrors what Cal-Tax has been proclaiming for some time: thanks to Proposition 13’s acquisition value assessment system, the property tax continues to produce good growth numbers in lean times. This is because, under acquisition value assessments, a reserve of value is not assessed (and money is not spent) until a property is sold. For example, if a house formerly worth $500,000 is sold for $400,000, there will likely be a jump in the assessed value from $250,000 (its former acquisition value) rather than a drop of $100,000.

According to the Times, the property tax is “projected to bring California and its localities at least 7 percent more than last year.” The property tax is the one area that is sustaining growth, Ventura County Assessor Dan Goodwin said. In Ventura County, the tax roll is up almost 10 percent.

Statewide, the property tax is expected to generate $29 billion this year, according to the State Board of Equalization.

Santa Rosa and Oakland top BOE district offices

The State Board of Equalization’s district offices in Santa Rosa and Oakland have been rated as the top district offices for two consecutive years, under a new program to measure the performance of the district offices. Rated worst for two consecutive years is the Santa Ana district office.

The index is based on performance measures such as the percentage of new petitions filed to completed audits, the percentage of petitions pending district action over four months, average hours per audit, staff to supervisor ratio, percentage of registration-by-mail, applications that took over eight working days from date of receipt to process, etc.

Cal-Tax President Larry McCarthy lauded board members for establishing the performance index. He said this should be a model for other state agencies to use to measure effectiveness and improve productivity. Board Member Dean Andal said Freda Orendt Evans, BOE chief of field operations, deserves a lot of credit for her work on this project.

The rankings are as follows:

Overall District Performance Index
Fiscal Year 2002-2003 (Through 9/30/02)

Rank

District

Administrator

Points

1

Santa Rosa

Robert Reichmuth

114

2

Oakland

Randie Henry

113

3

San Francisco

Wolfgang Liebelt

106

4

San Diego

Craig Clauson

101

4

Ventura

Michael Webber

101

6

Norwalk

Michael Templeton

98

7

Sacramento

Jim Atwood

90

8

West Covina

Sheila Montooth

83

9

San Jose

Stanley Rose

80

10

Riverside

Gerald Haff

75

11

Van Nuys

Alan Stagner

73

12

Culver City

Josef Colman

71

13

Torrance

Wayne Mashihara

69

14

Santa Ana

Angela Lealuga

68

 

Overall District Performance Index
Fiscal Year 2001-2002

Rank

District

Administrator

Points

1

Santa Rosa

Robert Reichmuth

120

2

Oakland

Randie Henry

110

2

Ventura

Michael Webber

110

4

Sacramento

Jim Atwood

102

5

San Francisco

Wolfgang Liebelt

96

6

West Covina

Shiela Montooth

91

7

San Diego

Craig Clauson

89

8

Norwalk

Michael Templeton

86

9

Riverside

Gerald Haff

76

10

Torrance

Wayne Mashihara

70

11

San Jose

Stanley Rose

66

11

Van Nuys

Alan Stagner

66

13

Culver City

Josef Colman

56

14

Santa Ana

Angela Lealuga

47

San Bernardino Utility Tax Cut Moves Forward

A small cut in utility user taxes for taxpayers of the city of San Bernardino moved forward on December 9 as the City Council’s Ways and Means Committee approved a .15 percent reduction. According to the San Bernardino Sun, the cut would reduce the amount generated by the current 8 percent tax by about $375,000.

Council Member Neil Derry said, “It has had a major impact on business looking to move into the city. It is not our money. It is the taxpayers’ money. They deserve to get some of it back.”

Concerns were voiced on how to cover the revenue loss. Mr. Derry proposed using $185,000 of excess revenue from last year’s budget and $170,000 that could come from a proposed fee increase. Council member Wendy McCammack said she is unwilling to pay for a tax cut with fee increases. She added that the city needs to reduce the utility tax.

new legislation of interest

Irrigation Equipment Tax Credit. AB 63 (Cogdill) establishes a 25 percent tax credit for the installment of specified irrigation systems on farms. The credit is capped at a maximum of $150 per acre.

Cigarette Taxes; BOE Police Powers. AB 71 (J. Horton) imposes a 1 cent-per-pack cigarette tax on manufacturers and importers of cigarettes. The bill also requires licensing of all manufacturers, importers, distributors and retailers of cigarettes and tobacco products. In addition, it prohibits sales of cigarette taxes by firms not parties to the master settlement agreement, and reduces the stamping discount from .85 percent to .39 percent, if unspecified legislation is passed. The bill also amends the penal code to give specific BOE employees the power of police officers to make arrests.

Property Tax Allocation. ACA 5 (Cogdill) phases out the 1992-93 and 1993-94 property tax shift by fiscal year 2012-13.

Firearms Fee. SB 35 (Scott) authorizes the Department of Justice to impose a $1 fee on the purchase or transfer of each firearm.

YOUR TAX $$$ @ WORK

Convict with $2 Million Heart Dies. State prison officials on December 17 reported the death of a 32-year-old two-time felon less than a year after he received a heart transplant at the prestigious Stanford University Medical Center. Spokesperson Russ Heimerich said the exact cause of death had not been determined but it appeared that the man’s body was rejecting the heart as he convalesced at the Vacaville medical prison. He died on December 16 at the Stanford facility, where he was admitted November 23. Mr. Heimerich told the Sacramento Bee that the costs to taxpayers for the operation and follow-up care “could easily reach $2 million when it’s all added in.” The Department of Corrections blames complications with a contract at the University of California at San Francisco hospital and timing of the heart’s availability for having the procedure done at Stanford. It was reported that the average heart transplant nationwide is a $200,000 procedure. The inmate was serving a 14-year-sentence for the 1996 robbery of a Los Angeles convenience store, and would have been eligible for parole in 2008. It was the first reported case in the nation of a prison inmate receiving a heart transplant. Mr. Heimerich said the “whole question of whether it is ethically correct is moot – we have to do it.” The courts have ruled that medical care must be provided inmates and, as the California prison inmate population ages, The Bee reported there is concern that the cost of inmate health care will far exceed last fiscal year’s $663 million.

Costly Textbooks. Why are school textbooks so expensive? The San Jose Mercury News investigated the system and, in a series by Jessica Portner, noted that books have nearly tripled in cost over the past decade. California spends $400 million a year on school books. In a December 18 editorial, the newspaper said, “ ‘Price is no object’ is not the watchword of good government. Yet that’s the philosophy of the people who decide which textbooks California’s public elementary and middle schools can purchase.” The problem stems from a state Board of Education that “isn’t responsible for buying the books; school districts are. When you shop with someone else’s money, why look at the price tag?” As curriculum changes, new textbooks are needed, but publishers are producing books that weigh too much and “look elegant enough for the coffee table. Not surprisingly, they are expensive,” the Mercury News wrote. The editorial noted that if publishers were told to consider price, they’d have an incentive to hold costs down. Legislators should look into the costs of textbooks, including relationships between board members and publishers, the editorial said, and the factors that drive up costs. The newspaper noted that eventually schools will be able to cut down on textbook use by using CDs and the Internet. Meanwhile, California needs “the best value for its textbook dollar.”

Huge Pay Boost. Shasta County supervisors approved an 18 percent pay raise for 32-hours-a-week Public Health Officer Andrew Deckert, jumping the annual pay to $118,732. The purpose was to improve recruitment chances for a newly created deputy health officer’s position, reported the Redding Record-Searchlight.

Modesto Mayor and City Business. The Modesto Bee reported December 18 that a “high-level furor” was prompted at City Hall by Mayor Carmen Sabatino’s use of city employees and resources. Mr. Sabatino also said that he is exploring whether the city should pay to defend him if he faces criminal charges, because “I am obligated to defend the office of mayor.” He said the Modesto Bee linked his name to criminal behavior and it seems the city attorney should be able to help him prepare a defense. Mr. Sabatino directed city workers to help him prepare a December 9 news conference, which he called city business. But City Attorney Michael Milich said that prior to the news conference, “I had a clear understanding with the mayor that the purpose was not related to city business.” After the news conference, the mayor was presented with a bill for $270 from the company that supplied the lectern and sound system. He paid the bill, as advised to do so by Mr. Milich and City Manager Jack Crist, The Bee reported, even though he denied the event was political.

Asisal School Superintendent Placed on Leave in Fight Over Budget Priorities. Asisal schools chief Jesse Barajas, after only three months on the job, was placed on indefinite leave by the East Salinas district’s school board December 11 amid criticism of his budgetary priorities, the Monterey County Herald reported December 13. Mr. Barajas expressed shocked at the action and said, “I’ve done nothing wrong that I know of.” According to former teacher union president Sue Loucks, teachers had been complaining to board members about Mr. Barajas’ spending. The teachers’ union concerns include the creation of a chief academic officer at a cost of $100,000, spending $45,000 on a consultant to develop a plan for evaluating principals and spending, $26,000 for new furniture for the district’s human resources office.  Mr. Barajas created a $100,000 fund for “school reform improvement,” by taking the money from another fund for employee travel and conferences, with a portion going to the academic officers salary and some on new furniture. Ms. Loucks said Mr. Barajas’ school reform plans upset many teachers. When he presented his plan – which emphasized the basics and fiscal responsibility – he predicted the reform suggestions would meet resistance. The district is one of the lowest performers in the state on standardized test scores.

Solano County: Pay Hikes for Top Administrators Despite Budget Crisis. Although facing a budget crisis, Solano County Supervisors, by split vote December 10, granted 5 percent pay boosts to its top administrators, according to the December 13 edition of the Vacaville Reporter. County Administrator Michael Johnson got a $9,777 raise, to be added to his base salary of $195,535. County Counsel Dennis Bunting also got a raise (of $7,726), to be added to his base salary of $154,526. Supervisor Barbara Kondylis voted against both raises, citing costs to the county.

High School Athletes Pad Community College Enrollment. A seven-month investigation by the Orange County Register has found community colleges padding their enrollments with high school athletes to get tens of millions more of taxpayer dollars. The expose found that some college physical-education classes are nothing more than high school practices, The Register reported on December 16. Kerry Mazzoni, secretary of education for Governor Gray Davis, called for an immediate investigation. Cal-Tax President Larry McCarthy said this expose makes legislators who claim that education budgets can’t be cut appear to be advocates for such wasteful spending. Among districts which have offered “Bridge PE” are the North Orange County Community College District and the South Orange County Community College District. Trustees of the Fullerton High School district said they were disturbed to read that school athletes were forced by their coaches to sign up for Cypress College Bridge PE classes and punished if they refused. Senator Dede Alpert said, “It’s hard to stand up for the community colleges if people are wasting money like this.” Community College Chancellor Thomas Nussbaum said at least 77 of the state’s 108 community colleges offer these courses. On December 19, as a result of The Register articles, Cypress and Saddleback Community Colleges announced they were canceling their high school physical education classes.

School District: Millions Spent on Private Attorneys. The Ravenswood School District has been spending about $600,000 a month to private attorneys, in addition to paying the county counsel $30,000 for full legal services. The San Jose Mercury-News on December 17 reported the district “has replaced the fleet of high-priced lawyers whose bills have brought it to the brink of fiscal insolvency, turning to county counsel for representation…”

Tax $ Paying for Criminal Defense of San Joaquin County Sheriff. The San Joaquin County Board of Supervisors, on a 3-2 vote on December 10, refused to rescind the contract for use of tax dollars to pay for the legal defense of Sheriff Baxter Dunn. The Stockton Record reported that $49,000 has been charged by Mr. Dunn’s attorney for the first seven weeks of work. Mr. Dunn has been the target of an FBI investigation. The sheriff has denied any wrongdoing. Voting to cut the expenditure were Supervisors Jack Sieglock and Leroy Ornellas.

Los Angeles City Council Votes Big Raises, Despite Deficit. The Los Angeles City Council on December 17 unanimously approved a $6 million salary increase package for top management and 9,000 other non-union employees, according to a report in the Los Angeles Daily News. The 4 percent pay hikes, nearly twice the rate of inflation, will boost the pay of 15 managers above $200,000 by 2004 and for the first time place one city official above $300,000. City Council President Alex Padilla said, “These are cost-of-living adjustments … and I think part and parcel with fair compensation for good work. The city has a potential $90 million budget problem because many departments have overspent their budgets in the past six months and revenues have fallen short of projections. Jon Coupal, president of the Howard Jarvis Taxpayers Association said, “That’s outrageous. When the state is going to have to lay-off people and local governments are screaming at the state saying don’t touch our money, for them to be giving any raises at all is extraordinarily inappropriate.” The newspaper reported December 19 that newly approved salary increases for most other city employees will cost nearly $150 million over the next three years, but, with a $4.8 billion city budget, city officials argued that the expense is both affordable and prudent. “If we don’t settle these contracts, then we’ll have nothing but labor strife and people aren’t going to get their services,” said Council Member Dennis Zine. According to the newspaper, the city usually grants 2 percent cost-of-living hikes every six months and a 3 percent boost in the final six months of a contract.

Sacramento Suburban Water District Directors’ Perks. Talk about director perks ripping off taxpayers. The Sacrament Bee, in a series of editorials, has been exposing and denouncing high-priced goodies the directors of the Sacramento Suburban Water District have provided themselves. They include trips to New Orleans, Quebec and other exotic locals; first class air travel, spending that didn’t have to be backed up by receipts, etc.

Folsom/Cordova Schools Save by Contracting Out School Bus Service. School bus service in the Folsom/Cordova School District (in suburban Sacramento) will be contracted out, school trustees decided December 19. The move is expected to save the district $750,000 annually. The contract with Laidlaw Educational Services will begin in August. Sixty school bus drivers face layoffs, but presumably there will be openings at Laidlaw. Diana Criddle, a union labor relations director said, “It really is not in the best interest of the children of the district.” District officials said the action is necessary due to the state budget deficit and looming shortfalls to the district.

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Los Angeles Approves Business Tax Amnesty for Small Business. Small businesses who owe less than $5,000 in business license taxes were given limited tax amnesty by the Los Angeles City Council on December 17. According to the Los Angeles Times, the city will waive penalties and interest owed for 2000, 2001 and 2002. The waiver is in response to a flood of complaints reaching City Hall after 151,000 letters were sent to residents asking for back taxes. Councilwoman Wendy Greuel said, “Small business is the backbone of our local economy and we believe strongly that the city should not chase away business but actually keep business in the city of Los Angeles.”

Leonard Staffer Named. Incoming State Board of Equalization member Bill Leonard had named Barbara Alby as his chief of staff. Ms. Alby formerly represented suburban Sacramento in the state Assembly.

Senator Escutia Testifies on Death Threat. Senator Martha Escutia told a Norwalk Superior Court jury on December 10 that former South Gate city Treasurer Albert Robles threatened to kill her and she fears for her life, the Whittier Daily News reported. She said businessman Mark Cudler told her husband about the threat in a March 2002 phone call. Mr. Robles’ attorney Tom Brown suggested the charges stemmed from a bitter 2001 referendum in South Gate where Ms. Escutia supported a proposed power plant that Mr. Robles opposed.

Proposition 13 Inflation Factor Announced. Pursuant to Proposition 13, assessed value of property (other than for change in ownership or new construction) can change each year by the lower of: (1) market value, (2) last year’s value plus the percentage change in the California Consumer Price Index, or (3) last year’s value plus 2 percent. The State Board of Equalization announced December 9 that the change in the consumer price index from October 2001 to October 2002 is 2.459 percent. Therefore, for 2003 assessments, assessors are instructed to use a 2 percent inflation factor.

Santa Clara County Assessor Pay Raise Held Up. After adopting pay raises for top county managers, the Santa Clara County Board of Supervisors on December 10 held up a $20,330 pay raise for Assessor Larry Stone and larger raises for the county’s DA and Sheriff. According to the San Jose Mercury-News, Supervisor Jim Beall said he needed more information before he could approve raises of up to 7.5 percent for elected officials. Under the raises approved for top administrators, Public Defender Jose Villareal and County Counsel Ann Ravel will get raises of 15 percent. The paper noted the timing of the raises could not be worse, with the county facing a $74 million deficit.

Marin County Tax Collection Supervisor Arrested for Embezzling. A top employee in the Marin County tax collector’s office was arrested December 10, the deadline to pay property taxes, and charged with embezzling county money, the Marin Independent Journal reported. Walter C. Jones, the lead supervisor, is suspected of depositing county funds on numerous occasions in the past few weeks into accounts of several banks. Mr. Jones, who was originally hired in 1994, supervises five employees and makes $72,756. He is scheduled to be arraigned on December 23.

Los Angeles Sheriff’s Sales Tax Proposal Finds Few Takers. Los Angeles Sheriff Lee Baca found little support on the Los Angeles Board of Supervisors for his proposal to place a 0.5 percent sales tax increase on the ballot. Funds would be earmarked for law enforcement (two-thirds) and health care (one-third). According to the Los Angeles Times, four supervisors made it clear that they are unlikely to ask voters to approve the proposal. Supervisor Zev Yaroslavsky noted that only about half the county is policed by the sheriff. Supervisor Mike Antonovich said, “We are already paying one of the highest sales taxes in the United States.” Supervisors postponed action on the request until March.

Johannessen Appointed Secretary of Veterans’ Affairs. Retiring State Senator Maurice Johnnessen was appointed December 17 as the new Secretary of the Department of Veterans’ Affairs. Governor Gray Davis selected the Redding Republican for the post because of “his spirit to solve problems and rise above partisanship.” Mr. Johannessen broke ranks with Senate Republicans in 2001 and 2002 to cast the deciding vote for Senate versions of the state budget. Senator Ross Johnson denounced the appointment as a “pure political payoff.”

coming up

January 6

Legislature reconvenes
 

January 8-9
Location:
Subject

STATE BOARD OF EQUALIZATION MEETINGS
450 N Street, Sacramento
Agenda not available at press time.
 

NOTE TO SUBSCRIBERS: THE NEXT CALTAXLETTER WILL BE PUBLISHED JANUARY 10.

Taxletter Section | Home


© Copyright 2002, California Taxpayers' Association. All rights reserved.