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

IN THIS ISSUE

• Davis: Deficit is $34.8 billion; Tax hikes will be needed, and a roundup of related developments.

• BOE rejects attempt by Insurance Department to tax workers’ compensation deductibles, plus other actions at the December 18-19 meetings.

• UI taxes will go up 29 percent in 2003.

• Economists: Tax increases will further damage state’s economy.

• Taxpayers gain class-action certification in Orange County Prop. 13 case.

• Taxpayer wins court order against system used by assessor in Prop. 8 reviews.

• Senator renews push for tax on alcoholic beverages.

• Revisions suggested in FTB regulation on meeting procedures.

• Court rejects FTB argument seeking to make confidential tax returns public.

• Assembly budget committee members are appointed.

• Taxpayers win two-thirds of assessment appeals.

• University student fees are increased.

• Los Angeles Times: Property tax is bright spot in revenue picture.

• Santa Rosa and Oakland top BOE district offices.

• San Bernardino utility tax cut moves forward.

• New Legislation of Interest: BOE police powers, and more.

• Your Tax $$$ @ Work: Convict dies despite $2 million heart transplant, costly textbooks, and more.

• Potpourri: L.A. business tax amnesty, and more.

• Coming Up: Legislature reconvenes, BOE meets.

• NOTE TO SUBSCRIBERS: A special Caltaxletter edition wrapping up the important tax developments of 2002 was published December 20. If it happened in the Legislature, the courts, on election ballots or at state tax agencies, it’s covered 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:

• Education. There would be an across-the-board 3 percent cut in current-year spending on K-12 schools and community colleges, totaling $1.078 billion. This prompted cries of protest from educators. The legislative analyst said mid-year cuts of this magnitude would be difficult. Outgoing state schools chief Delaine Eastin called the governor’s proposed cuts “sinful.” The 18-month cuts for K-12 education would total $3.1 billion. The governor wants to cut the University of California by $73 million and the California State Universities by $60 million, prompting regents and trustees of those systems to approve higher student fees (see story below.) The community college system would lose $97.5 million in the current budget year.

• State Payroll. Public employee union leaders attacked the governor’s plan to reopen contracts with all state employee bargaining units and save $470 million by having employees forego about an 8 percent increase in salaries. The unions fear a loss of as many as 7,000 jobs if they reject the salary freeze. As expected, union leaders called for higher taxes to maintain government services. The Davis administration said it would try to come up with a golden handshake program for those who would take early retirement. Such an incentive program fizzled in 2002 in part because public pension officials told the administration how much it would cost the state’s taxpayers for each early retirement.

• The proposal also calls for the state to reduce a $500 million appropriation to the State Teachers Retirement System that, under current law, is to ensure that retired teachers’ benefits are not eroded by inflation.

• Transportation Funds. The governor also announced that he wants to pull back $1.7 billion over the current fiscal year and the budget year ahead from sales tax revenue that is earmarked for transportation projects. The legislative analyst said 141 projects would be delayed.

• Workers Compensation Administration. The governor would require companies to pay the full cost of administering the workers’ compensation program. The state now covers 80 percent of the expense and a change would pass on $24.6 million of the cost to businesses. Preliminarily, the cost per full-time employee would be $7.28. The Orange County Register quoted Robert Bekken, a Newport Beach employment attorney: “Employers are facing skyrocketing workers’ comp costs. Now the governor wants them to pay for the administration of the program as well.”

• Health and Welfare. The governor would eliminate social services cost-of-living increases, as well as optional benefits, such as dental care, and reduced rates for providers in the Medi-Cal program.

• Prisons. The legislative analyst noted that the state prison system was hardly scratched by the governor’s December cutbacks.

• Overall, Legislative Analyst Elizabeth Hill said the governor’s plan was “fiscally prudent.” She said “most of the proposals are credible, particularly in the context of the enormous deficit facing the state.” This remark came when the governor figured the deficit to be something between $21 billion and $30 billion.

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:

• Taxing Adult Beverages? A move to tax alcoholic beverages at the rate of a nickel a drink, unsuccessful in the Legislature last year, has been renewed by Senator Gloria Romero. With backing from health groups, her legislation would impose what she called a fee on breweries, wineries and distilleries, raising $500 million a year to help keep hospital trauma centers open. (See story below.)

• Taxing the not-so-rich? According to the Los Angeles Times (December 20), there is talk about requiring at least some income tax payments from low- to middle-income Californians. Under the state’s extremely progressive personal income tax system, a family earning less than $50,000 a year typically pays little or no state income taxes.

• Taxing Internet Sales? The Times reported that the California State Association of Counties would like to see all Internet sellers collect California sales tax.

• Taxing Lottery Winnings? Counties also propose a tax on lottery winnings, such as a dime-a-ticket payment that would be used as insurance against having to pay taxes on any winnings. This would require voter approval, The Times reported.

• Taxing Indian Gambling? The San Francisco Chronicle reported (December 20) that some states tax Indian gambling, and, according to the Little Hoover Commission, tribal casinos generated more than $4 billion in 2000. While the state cannot impose a tax without tribal consent, compacts that allow gaming on Indian land will be up for renegotiation early in 2003.

• Taxing Tobacco? The San Jose Mercury News reported (December 20) that the Davis administration is leaning toward three new taxes, including an increase in the state tax on cigarettes by as much as $1.67 per pack. The administration also is looking at reinstating the top 10 and 11 percent personal income tax brackets and increasing the state sales tax from 5 to 6 percent, the newspaper said it learned.

• Locals’ Tax Plans. The governor’s decision to pull funds back from his Transportation Congestion Relief Plan to help bail out the state general fund is upsetting local transportation officials around the state. This move threatens hundreds of millions of dollars worth of projects in the Bay Area, reported the Oakland Tribune (December 19), so the Metropolitan Transportation Commission is pushing for a higher statewide gas tax. The MTC voted to lobby the Legislature and governor for a state gas tax increase. The state tax is 18 cents a gallon and was last increased 13 years ago. The MTC also voted to ask voters in the Bay Area for a regional gas tax increase of as much as 10 cents per gallon.

• Marin County supervisors decided to seek voter approval next November of a sales tax increase for local road repairs, bus service and other local transportation initiatives. They acted after hearing about the governor’s proposed budget cuts, reported the Marin Independent Journal.

• In Los Angeles, the City Council approved higher fees on lobbyists to raise about $35,000 a year, but held off action on a proposal to raise some fees on such businesses as masseuses, pawnbrokers and tow truck operators by factors of 10 or more, the Daily News reported December 18. The council did not postpone gun dealer fees, imposing $2,000 fees by the end of the month.

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:

• No Action Taken on Manufacturers’ Rebate Regulation. The board took no action on a proposed regulatory change providing that manufacturers’ rebates to retailers are not subject to the sales tax. Cal-Tax’s Greg Turner, in urging adoption, said sales tax should be paid on the price the consumer pays for a product and not a higher price. Lance Hastings, representing the California Grocers Association, said it is hard for retailers to explain to customers why they are being charged a tax on a price higher than actually paid.
  
  Lenny Goldberg, representing the California Tax Reform Association, urged the board to reject the regulation due to the revenue loss. He said the tax should be on the value of the product, not the price. Rodger Dillon, staff for Senate President Pro Tem John Burton, read a letter from the senator into the record opposing the proposal.
  
  Mr. Andal added that, for average Californians, the policy to collect sales tax based on something above the purchase price “doesn’t pass the smell test. It does not make any sense. There is no rationale.”
  
  Board Member Claude Parrish said manufacturers provide incentives to increase sales. This benefits the state by increasing sales tax revenue and this is something for which they should not be punished.
  
  Controller Kathleen Connell voiced strong objection to the proposal because, among other products, some cigarette manufacturers provide “buy-down” incentives.
  
  Mr. Andal’s motion to approve the regulation failed on a 2-2 vote. A motion by Mr. Klehs to table the regulation indefinitely also failed by a 2-2 vote, leaving the issue on the doorstep of the new board to be seated in January.

• Possessory Interest Handbook Revisions Approved. Without objection, the board approved revisions to the handbook on the appraisal of possessory interests (AH 510).
  
  The revised handbook contains a greater discussion of the standards defining existence of a taxable possessory interest, coverage of how Proposition 13 applies to possessory interests, and a “special topics” chapter. BOE property tax chief David Gau said both assessors and Cal-Tax had agreed with the changes and there was no opposition.

• Electronic Funds Transfer Regulation Moves Forward. A proposed new regulation on electronic funds transfer filing requirements was approved by the BOE Business Taxes Committee and placed in the formal regulatory process. A hearing will be scheduled sometime next year.
  
  Regulation 1707 sets forth procedures for calculating the threshold for making electronic payments. It also describes the methods used by the board to implement its EFT program. There was no opposition to the proposal.

• Appraiser Certification Regulations Approved. After making a slight modification suggested by assessors, the board approved and placed in the 15-day file a series of property tax rules to establish procedure for revoking appraiser certificates of those who fail to maintain training required by statute. The new procedures are incorporated in new Rule 284 and amendments to Rules 281, 282 and 283.

• Regulation Approved that Clarifies Certain Medical Devices as Sales Tax Exempt. Amendments to Sales Tax Regulation 1591 clarifying that certain medical devices are exempt from sales tax were approved unanimously. There was no opposition to the change and no debate.
  
  The amendments provide that: (1) prosthetic and orthotic devices qualify as exempt medicines if they come into sustained physical contact with the body; (2) Continuous Passive Motion Devices are exempt; (3) tissue expanders are exempt from tax under defined conditions, and (4) shoe inserts are excluded from the term “orthotic devices.”

• Section 100 (Without Substance) Regulatory Changes. Under Section 100, the board can make non-substantive regulatory changes without the usual notice and hearing. Such a change was approved by the board on December 18: Property Tax Rule 122.5 (Fixtures) had a grammatical change.

• Long-Term Leases of Motor Vehicles. Work on changes to Regulation 1803.5, relating to long-term leases of motor vehicles, begun in 2002, was restarted, and the board placed the regulation into the public hearing process. The proposal defines motor vehicles as passenger vehicles designed to carry no more than 10 passengers.

• Change of Ownership of Legal Entities. The board agreed with a request of Gary Maeder (of Heller Ehrman law firm in Los Angeles) to place Rule 462.180, relating to changes of ownership, into the regulatory process to correct the omissions of references to limited liability companies.

• FTB Request to Rehear Pacificorp Case Rejected. The board voted 4-1 to turn down an FTB request for rehearing of the Pacificorp case, in which the board had issued a written opinion that sales of electricity are intangible sales (see Caltaxletter of September 13, 2002).

• Budget Cuts? During a discussion of the board’s baseline budget for 2003-04, BOE Executive Director Jim Speed said the budget is still in a state of flux due to the budget crisis. He noted that the board has reduced its staff during the first half of the fiscal year from above 4,000 to 3,838.
  
  Mr. Andal inquired if the Department of Finance had accepted the cuts suggested by the board. When told they have not yet been adopted, he said it was amazing that in light of the big deficit, the Department of Finance is not even willing to go as far as a government agency suggests.

• Timber Tax Rate. The board set the timber tax rate for 2003 at 2.9 percent of harvest value. The board also approved timber harvest values for the first half of 2003 as recommended by the Timber Advisory Board.

• Meeting with Assessors. The December 18 morning session of the board in conjunction with a meeting of the California Assessors Association opened with welcoming remarks from BOE Chair Chiang, praising their good work. Member Parrish said he made it a point to visit with every assessor in his district, stressing that they were “ELECTED” assessors.
  
  Member Andal referred to skirmishes of the past yet noted the board was a better place as a result and that some “giants” of the assessor community had retired and would be missed. He quipped that assessors would be happy that their “long nightmare” would soon be over since he is leaving office.
  
  The harmony dissipated, though, when outgoing CAA President Larry Stone of Santa Clara County took the podium and proceeded to heap praise on a “whole new era” because of the new Board of Equalization that will be sworn in next month.
  
  Newly elected Controller Steve Westly and former legislators Carole Migden and Bill Leonard will take office in January. Members Andal and Klehs, along with Controller Connell, are leaving office. Members Parrish and Chiang will be starting their final four-year terms.
  
  Mr. Stone quoted Ms. Migden from an article in the San Francisco Chronicle in which she said her election to the board would bring change. She indicated that the new board would be more hostile toward businesses’ efforts to reduce their taxes. Assessors, of course, would see those words as an indication that they would have a friend on the board.
  
  Mr. Stone said the three new members would “minimize past inequities and set a new tone … a healthy tone … The days when BOE rules are promulgated almost entirely by industry are over once and for all.”
  
  Mr. Stone also mentioned, without elaboration, that BOE staff had been subject to “inappropriate political pressure.”
  
  Incoming CAA President Joan Thayer of Marin County said the new board will be “profoundly different.” She said she wants to “put aside past differences” and that assessors and the board should be able to “amicably agree to disagree.”
  
  With the staggering state budget deficit, Ms. Thayer said a priority will be to lobby for continued state grants to fund counties’ property tax collection efforts.

• Automated e-mail. Assessors were briefed on a pilot program to be rolled out in two weeks that will involve sending board materials via e-mail. By the second quarter of 2003, the board’s assessor advice letters will be available by e-mail. The system also will create an archive to readily access the material.

• McDonnell Douglas/Boeing Loses Sales Tax Appeal on Taxation of “Synthetic Lease.” By a 3-2 vote, the board rejected a sales tax appeal by McDonnell Douglas/Boeing related to the financing for a prototype aircraft. Because of defense spending cutbacks in the early 1990s, the company needed to raise cash for operations and arranged for a loan from a subsidiary of a Japanese bank. To secure the loan, title to the T-1 aircraft, a prototype for the MD-90 aircrafts series was transferred to the bank. Representing the taxpayer, Whittier attorney Joe Vinatieri contended the sale was not a “sale” subject to tax because it was a “synthetic lease” for the sole purpose of obtaining a loan. After this financing arrangement, the Federal Aviation Administration found the company still the owner of the plane for federal registration purposes. In 1984, an appellate court in the Cedars-Sinai Medical Center case held that a sales-leaseback was not truly a sale of tangible property subject to the sales tax. BOE staff argued that the case was subsumed by a board regulation, so there is no separate concept embodied in the case that is not embodied in the regulation.

• Reorganization of District Offices. The board approved a reorganization of some district offices to correspond more closely to the newly reapportioned board member districts. Under the reorganization, the San Jose district will administer Santa Barbara County, the Riverside district will administer San Bernardino County, the Ventura district will administer certain ZIP codes in northern Los Angeles County, and the Long Beach office will administer certain ZIP codes in southern Los Angeles County.

• Andal to KPMG. Mr. Andal, retiring from the board, will be joining the accounting firm of KPMG in January, as director of state and local taxes. He will be based in Sacramento (400 Capitol Mall, Suite 800. His new phone number is (916) 554-1138).

• Charlie Knutsen Retires. At the end of the month, Charles Knutsen, head of the County Property Tax Division in the Property Tax Department, will be retiring. Mr. Knutsen, who originally was an auditor-appraiser in Colusa County, has been a big player at the board in the effective implementation of the 1966 assessment reform bill (AB 80).

• McManigal Retires. Senior Property Tax Counsel J.K. McManigal is also retiring this year. His responsibilities were in property tax law generally, including change of ownership, exemptions, and state assessments.

• Sally Lee Retires. Another key board staff retirement is Sally Lee, who had been deputy director of the Administration Department. Mr. Andal complimented Ms. Lee, saying she “improved management during a period of great change. The agency is better because she was here.”

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: