David R. Doerr,
principal contributor Vol. XVI, No. 15
Ronald W. Roach, editor
April 25, 2003
In one of the biggest – if not the biggest – legal defeats in the 54-year history of the California Franchise Tax Board, a unanimous U.S. Supreme Court has ruled that the income tax collection agency is no longer immune from being sued in other states for alleged intentionally abusive auditing practices.
The 9-0 watershed states’ rights ruling handed down on April 23 favored engineer/inventor Gilbert P. Hyatt of Las Vegas, affirming a Nevada Supreme Court ruling. It gives the green light to the former California resident to pursue his lawsuit in a Nevada trial court.
Mr. Hyatt has been waging a court battle with the California board, which claims he owes $20 million in back income taxes from 1991-92, including substantial civil fraud penalties, according to press reports.
California’s tax board is immune from lawsuit in California, and contended that this blanket immunity statute applied to agents investigating taxpayers in other states under a doctrine of sovereignty and comity among states that respect other states’ performance of such a paramount core function – tax collection.
The court, in a decision written by Justice Sandra Day O’Connor, rejected that argument, noting that Nevada does not confer immunity to Nevada government employees who commit intentional torts.
The case of Hyatt v. California Franchise Tax Board does not settle the tax dispute, and Mr. Hyatt has yet to prove that he has been a victim of intentional torts. The high court’s decision allows him to proceed with his lawsuit, which alleges, among other things, that a board auditor trespassed on his property, rummaged through his mail and trash, gave out the address of his secret laboratory to competitors, and damaged his reputation.
Mr. Hyatt was an Orange County resident in 1990 when he won the patent on the microprocessor chip. He moved to Nevada in 1991 – before receiving some $40 million in licensing fees. The FTB contended that he did not establish Nevada residency until after he earned the fees.
“Hopefully, we’ll send a message to the state taxing agencies that they need to be a little more fair in their proceedings,” Mr. Hyatt told The Sacramento Bee.
The FTB and the office of Attorney General Bill Lockyer did not comment on the court’s decision. When the case was argued before the court in February, Mr. Lockyer’s representative argued that collecting taxes was a more important core government function than public education.
The ruling must have come as a shock to FTB management. Ben Miller, staff counsel, expressed confidence in the agency’s case when he discussed it at a board conference last year, and Executive Officer Gerald Goldberg had a similar view at February’s FTB Advisory Board meeting.
Cal-Tax General Counsel Greg Turner said the decision reflects the court’s states’ rights leanings. “This case was about defending the indefensible: California’s immunity from suit for intentional torts. Perhaps California needs to revisit its blanket immunity statute.”
The case has national implications, as 35 states submitted briefs in support of the Franchise Tax Board’s appeal.
The California Attorney General’s Office, since 1998, has spent some $3 million on outside legal counsel, retaining a high-powered Nevada law firm.
In its arguments, the FTB complained of the burdens and expense of out-of-state litigation, and the diversion of state resources from the performance of important state functions, the O’Connor opinion said. “… those burdens do not distinguish this case from any other out-of-state lawsuit against California or one of its agencies,” she wrote.
“The Nevada Supreme Court sensitively applied principles of comity with a healthy regard for California’s sovereign status, relying on the contours of Nevada’s own sovereign immunity from suit as a benchmark for its analysis,” the decision said. It found “no constitutionally significant distinction between the degree to which the allegedly tortuous acts here” and in a 1979 case (Nevada v. Hall) in which California courts refused to apply a Nevada statute capping damages from tort suits against the state stemming from a Nevada university official’s auto accident with California residents.
Justice O’Connor found that “we are not presented here with a case in which a state has exhibited a … policy of hostility to the public acts of a sister state.”
Proposed amendments to change-of-ownership regulations that would allow an exemption for transfers of property between registered domestic partners received support from the State Board of Equalization at its April 23 meeting.
The board, on a 3-2 vote (yes: Carole Migden, John Chiang and Marcy Jo Mandel for Controller Steve Westly; no: Claude Parrish and Bill Leonard), decided to introduce the proposed regulations into the formal administrative hearing process. A final vote is not expected before July.
Amendments to Rule 462.040 would delete the third person requirement in the definition of “original transferors.” The amendments to Rule 462.040 provide a change-of-ownership exclusion for transfers occurring on the death of a domestic partner.
Several representatives of gay and lesbian groups spoke in favor of the proposals. County assessors voiced opposition.
Board Chair Migden said that the proposal will not create loopholes in the change-of-ownership law, but the fiscal impact is hard to quantify. Ms. Migden said Controller Westly believes the regulations are the best immediate solution to the problem. Ms. Migden said, “Sometimes the administration of justice and fairness has a fiscal consequence.”
Board Member Leonard said the board does not have the authority to exclude the transfers and such action will lead to costly litigation and may raise hopes of taxpayers that are not sustainable.
The testimony of gay community representatives offered strong support for the principle of acquisition assessment in Proposition 13. One witness said that if she died, the increase in property tax would force her partner to sell their house, if the regulation is not adopted.
Marin County Assessor Joan Thayer, speaking for the statewide assessors association, said assessors oppose the rules because they violate Proposition 13 and implementing legislation. Santa Clara Assessor Larry Stone said he shares the objective of the chair to extend a change-of-ownership exemption to domestic partners, but he said proposed Regulation 462.040 would open a huge loophole and exacerbate the budget crisis. He said it is so broad that it could cost government millions of dollars in property taxes.
Los Angeles Assessor Rick Auerbach wrote the board to warn that “thousands of property owners will take advantage” of the loophole and assessors will have no way to determine if the exemption is being abused by business partners.
BOE staff attorney Kristine Cazadd said passage of AB 2216 (Keeley) last year authorizes the board to extend a change-of-ownership exemption to domestic partners.
Other board developments:
Barnes and Noble Dot Com Loses Appeal on
the Extension of Nexus. Last year
the board ruled that coupons distributed by Barnes and Nobel for discounts on
purchases from Barnes and Noble dot com created nexus for the Internet seller,
although the Internet firm had no physical presence in the state. In a second
decision, on the issue of whether nexus extended beyond the time the company
stopped distribution of the coupons, the board held that it did.
Attorney George Isaacson, representing the taxpayer, said that the coupon
distribution stopped on December 19, 1999, but the staff was asserting nexus
for the following quarter. He said there was no law or rule supporting this
expansive nexus interpretation.
Mr. Isaacson also lodged a complaint that the board asserted the expansive
nexus in a reply brief. He also said the reply was written by the same person
who served as the so-called impartial administrative hearing officer in the
original appeal. He said the reply brief was intemperate and contained untrue
allegations.
BOE attorney Randy Ferris, who wrote the reply brief, said the coupons were
good through January 31 and it is not unreasonable for the board to decide
when nexus ends. BOE Chief Counsel Tim Boyer said Mr. Ferris was the
administrative hearing officer on a different issue and there was no legal
problem for him to represent the Sales Tax Department in this hearing.
In its decision, the board held nexus for the company ended on January 31, and
asked the Business Taxes Committee to take up the issue of when activity
ceases for nexus purposes. On a 3-2 vote (Parrish and Leonard voting no), the
board also directed staff to undertake a full nexus audit of Barnes and Noble
dot com and said it expected the company to cooperate. Mr. Parrish said the
motion was punitive and a waste of staff resources. Mr. Leonard said it was
unfair to decide the taxpayer had nexus and then conduct an investigation.
Valuation of Divested Electricity Power Plants. The BOE Property Tax Committee received a report from staff saying that electricity power plants that the board will begin assessing this year will be valued at their fair market value. Staff said income and cost indicators for the property will be developed for board consideration. Peter Michaels, attorney with the San Francisco law firm of Cooper, White and Cooper, said the 1998 sales prices of such facilities, adjusted for economic changes since 1998, would be the best indicator of value and urged the board to request development of a sales indicator. Mr. Parrish urged board staff and taxpayers to work together to develop a fair value. Mr. Leonard asked staff to provide the value that the local assessor had on the 2002 roll for each property.
Sales Tax Regulation on Vehicles and Trailers Purchased for Use in Interstate Commerce. A proposed regulation clarifying existing statute and board policy on how the sales tax applies to vehicles and trailers purchased for use out of state and in interstate commerce was moved forward by the BOE Business Taxes Committee. There was no opposition to the proposal. Proposed Sales Tax Regulation 1620.1, which will be noticed for a formal hearing in the near future, provides record-keeping requirements, definition of terms and addresses the application of tax to sales of certain vehicles and trailers delivered to purchasers in California.
Contract for Security Services Deferred. The board deferred a $1.44 million contract with Inter-Con Security for 24/7 security guard services at the board’s 450 N Street headquarters building – until its next meeting in San Diego. A representative of a state employees union argued that the board should reject the contract and hire state employees to do the job. He argued it would cost less. A BOE staff spokesman said to the contrary, it would cost more to use state employees and, if it wanted to do so, the board would have to secure a budget augmentation. Mr. Parrish expressed general support for scrapping the contract and using state employees.
Squabble Over Local Sales Tax Allocation.
Acting as a referee between cities
over allocation of local sales tax on airline fuel, the board was clearly
uncomfortable with the role and put off making a decision to a future meeting.
At issue: $1.6 million in local sales taxes on airline fuel sold in the 1990s
by an out-of-state retail fuel service. Contracts for fuel were signed in an
office in an area of Orange County that became incorporated as Laguna Hills.
BOE tax counsel John Waid recommended that the allocation be made to cities
with commercial airports, which Laguna Hills does not have. He said the
signing of the contract does not meet the legal test for allocation of local
sales tax because the office in which the contract was signed was not the
place of business of the retailer, which the law requires for allocation
purposes.
The case pitted against each other the two major consulting firms that seek
out reallocations of local sales tax dollars. Doug Boyd of HCL represented
Laguna Hills, while Al Koch of MRC represented opposing cities.
Bob Cendajas, an attorney representing Ontario, said if the board rules for
Laguna Hills, it will result in a major disruption of local sales tax
allocations as sellers and buyers can “walk contracts down the streets.”
Mr. Parrish said he would vote for Laguna Hills, which is in the heart of his
district, but asked staff if the board has the authority to tell the cities to
come up with a compromise.
Interest on Erroneous Income Tax Refunds. At the urging of Mr. Leonard, the board made a statement for taxpayer rights when it ruled against the Franchise Tax Board in two cases involving interest on erroneous tax refunds. In the Appeal of James and Casey Haughy and the Appeal of Bruce and Rebecca O’Bannon, the board ruled that interest on erroneous FTB refunds starts 30 days after a taxpayer gets a notice from the FTB that the refund was erroneous and to return the money.
Sunglasses Regulation Approved. The board approved Sales Tax Regulation 1592, providing physicians and optometrists are consumers, not retailers, of prescription clip-on sunglasses. No opposition to the regulation was voiced.
Promotion for Ms. Zentner. BOE Executive Officer Jim Speed announced the board has appointed Raye Zentner to be the deputy director in the Administrative Department.
Only nine weeks before the start of the new fiscal year, Assembly Republicans were cool toward a proposal from Democrats that was designed to slice about $6 billion from the state’s huge budget deficit. It didn’t reduce spending enough, said GOP leaders.
Assembly Speaker Herb Wesson raised hopes for a crack in the impasse on April 22 when he unveiled a proposal that the Los Angeles Times reported was rooted in compromise. However, it was reported that the speaker didn’t show the plan to Republicans before he released it to the news media. It calls for Democrat support for new cuts in health care, education and local government and Republican support for borrowing $2.2 billion in bonds to make state employer contributions to pension plans.
“We’re hoping to find some kind of balance between revenues from pension bonds and cuts we will have to make,” Mr. Wesson said. “That is the next major step in resolving the budget crisis, but it is a very difficult one.”
However, the Assembly Republicans’ lead budget-writer, John Campbell, said the cuts were not enough, and they also would not take effect until the next fiscal year. “You cannot make reductions in a budget that doesn’t exist yet,” Mr. Campbell said, noting that Democrats could later reverse the cuts. Democrats responded that they could pass the cuts as urgency measures that would be binding.
Mr. Campbell said, “We are not slamming the door in any sense.”
The Wesson plan, backed by the Assembly Democratic Caucus, proposes $2.5 billion in cuts and deferrals. According to The Times, they include $493 million in reductions to health and human services, such as suspended cost-of-living adjustments to disabled and seniors, and administrative measures to reduce the Medi-Cal caseload. Higher education would be hit by an additional $179 million in reductions, and there would be about $85 million cut from the prisons budget.
Republicans, using it as leverage to produce more spending cuts, have defeated legislation to issue pension bonds, but they have said they are willing to reconsider their position if there are additional reductions.
The Treasurer’s Office has warned that the Legislature must approve Governor Gray Davis’ proposal to issue pension obligation bonds by May 5 or lose $656 million in potential budget savings.
Borrowing Costs Increase. It is costing California taxpayers more for the state to borrow money. Bloomberg News reported April 25 that the state’s sale of $2 billion in bonds on April 24 drew interest of 0.48 percent more than top-rated municipal debt. The 4.99 percent yield has more than doubled since October, which Bloomberg reported is a sign that investors perceive more risk in how California will narrow the record deficit ($26 billion to $35 billion) through mid-2004.
California’s credit rating has been downgraded, leaving it tied with Louisiana and New York for the worst ratings among states, Bloomberg reported, citing Moody’s Investors Service as the source. The article also quoted George Strickland of Thornburg Investment Management as saying California bond yields are “not compelling” given the risks.
Bloomberg reported that California “hasn’t been in such budgetary straights since 1992, when it issued promissory notes to employees and suppliers. Banks cashed the IOUs and received a 5 percent yield.”
Spending is the Problem, says GOP. Senate Republican Leader Jim Brulte on April 24, speaking on the floor of the Senate, said March state revenues were $189 million below expectations, while spending was $1.704 billion above projections. “We maintain our belief that spending” is the root cause of the budget deficit and “we need to reduce state spending rather quickly.”
USA Today reported April 25 that state and local government spending across the country rose 4.9 percent to a record $1.36 trillion last year, consuming 15.2 percent of U.S. personal income. That is the highest level in recorded history. The newspaper quoted Chris Edwards, director of fiscal policy for the Cato Institute in Washington, D.C.: “If everyone else is having to tighten their belts, state and local governments ought to rein in spending, too.”
Income Tax Revenues Down. According to Capitol Watch, published by the California Public Policy Foundation, the governor forecast $5.5 billion in personal income tax revenues in April. However, by April 23, the state had received PIT payments of $3.4 billion, and Republican analysts say revenues “may come in about $500 million below the (governor’s) estimate for the month.” As a result, the cash shortfall for the fiscal year to date was expected to grow to about $3 billion, and the general fund cash shortfall on June 30 could approach $4 billion, according to April 25 coverage in the Capitol Morning Report.
Dwindling Influence. The recent (April 15) Field Poll numbers on Governor Davis could also have an impact on the state’s budget crisis. Already in his final term with lame-duck problems, the governor’s clout is further weakened by the poll that found more than two-thirds of voters have an unfavorable opinion of him. And even 54 percent of the governor’s fellow Democrats dislike him.
Budget Leverage? As anyone with experience around the Capitol knows, no bill is dead until the Legislature adjourns sine die (for this session, that’s not until the end of September 2004). With that in mind, consider SB 400 by Senator Dean Florez, which would allow the state to tax services. It could raise taxes by about $30 billion a year. Senator Florez asked that a hearing on his bill be canceled early this month, and, according to the Inland Valley Daily Bulletin (April 12), a Florez aide said the bill was dead, adding that it was introduced mainly to encourage that action be taken to address the budget shortfall.
Locals React. Los Angeles County’s proposed $16.5 billion budget for the year starting July 1 would eliminate more than 2,000 county jobs as part of the plan to close an $800 million gap, the Los Angeles Times reported April 15. The plan calls for $467 million in cuts, taking $307 million from reserve funds and filling the rest of the budget hole by deferring maintenance and other moves. Revenues are down by about $100 million, due to a poor economy, and the county has had to deal with rising workers’ compensation and health insurance costs for retirees. The Board of Supervisors must adopt a budget by June 30, and County Administrative Officer David Janssen warned that the county’s situation could worsen by actions in Sacramento on the state’s epic budget deficit.
Pay Hikes for Legislative Staffers. Despite the state’s budget woes, 80 of the Assembly’s highest-paid staffers received pay raises during the past year, The Sacramento Bee reported April 18. The raises for those making $70,000 or more generally amounted to 5 percent. The Senate approved less than half a dozen pay raises in the past year, although there was a 5 percent raise across the board on April 1, 2002. Assembly Speaker Herb Wesson’s office said Assembly staffers haven’t had a blanket cost-of-living hike in nearly three years. Senate Secretary Greg Schmidt said this will be a lean year. “This year, obviously, nobody is getting raises. And I would anticipate no raises next year.” The Bee also reported that the Assembly Rules Committee’s deputy administrative officer retired in December, but returned this year as a part-timer with a salary of $83,004 and pension benefits totaling nearly $79,000 a year.
Pay Cuts for State Managers. State controller records show that 543 appointees of Governor Davis have agreed to take 5 percent less in pay, saving the state about $1 million over the next fiscal year beginning July 1, the San Jose Mercury News reported April 18. The governor is taking a 5.7 percent pay cut. The newspaper reported that 11 Assembly members and six senators have reduced their monthly checks, including Senate President Pro Tem John Burton (10 percent).
Basic Aid Districts. A 5-0 vote of an Assembly Budget Committee subcommittee on April 22 rejected the governor’s proposal to take $126 million from a handful of wealthy school districts. The Riverside Press-Enterprise reported that the committee balked at the plan to pay the “basic aid” districts, those with high property values, under the same funding formula as other districts instead of giving them less and letting them keep their additional property tax revenue. It affects about 50 of the state’s more than 1,000 districts.
Fees to Leverage GOP Tax Votes? The Los Angeles Times, in an April 23 report, said Democrats are threatening to approve – by majority votes – a “crazy quilt” of fees if Republicans continue to oppose broad-based tax increases. Billions of dollars in fees are the Democrats’ “trump card” in the budget debate, the newspaper reported, mentioning Sinclair fees on adult beverages and gasoline, as well as bullets, dry cleaning, diapers and light bulbs.
The Times cited a warning by moderate Democrat Assembly Member Joe Canciamilla, who spoke as part of a panel discussion at the Cal-Tax annual meeting on April 2: “The unwillingness of the two sides to come together about how to resolve the budget crisis leaves each side looking at what are its choices. My more liberal members are being pushed into a corner of saying, ‘OK, Republicans don’t want a tax increase? Then we will impose every fee we can.’ ”
Mr. Canciamilla continued: “Trust me, our (Democratic) caucus has looked at it and come up with all sorts of ugly options. If you wanted to take the fee measure to the extreme, it could get pretty nasty.”
In a move intended to protect Californians from potentially tens of billions of dollars in higher taxes, leaders of the California Taxpayers’ Association and the California Chamber of Commerce have joined forces on an initiative effort for the March 2004 statewide ballot.
Several initiative proposals, each slightly different, were submitted to the attorney general for title and summary on April 23 by Larry McCarthy, president of Cal-Tax, and Allan Zaremberg, president of the California Chamber of Commerce.
At some point, they will settle on one of the initiative petitions to circulate for signatures. Its effects will include maintaining the two-thirds vote requirement to raise taxes in the Legislature and to pass the state budget. It would also close a loophole created by the state Supreme Court that is being used to raise taxes disguised as majority-vote fees.
The Cal-Tax/Chamber initiative is designed to counter an initiative campaign launched by public employee unions that would lower the requirement for approving a state budget and increasing taxes from two-thirds to a 55 percent vote of the Legislature.
Mr. McCarthy noted that there are scores of bills pending in the Legislature that could boost taxes and fees by more than $60 billion. “Never before have taxpayers been under such a tremendous threat of higher taxes and fees, which would be used to maintain excessive spending at state and local government levels,” Mr. McCarthy said.
As anticipated in a Senate committee where labor interests usually dominate, seven Republican-authored bills responding to the workers’ compensation insurance crisis were rejected.
The Labor and Industrial Relations Committee on April 23 defeated a measure by Senator Chuck Poochigian that would have rolled back record benefit increases approved last year and considered by many to be a contributing factor to spiraling employer costs.
Senator Richard Alarcon, committee chair, said 52 bills on the subject of workers’ compensation are in print this session, with 16 of them before his committee.
The vice chair, Rico Oller, said the system is “totally screwed up” and is driving businesses into the poor house. Numerous small business owners have testified that skyrocketing insurance costs, even when they have had little or no claims exposure, are forcing them to lay off workers or cut back on employee health benefits.
Tom Rankin, California Labor Federation president, told the committee that higher medical costs and insurance company profits are to blame, not the benefit increase.
Senator Poochigian said the seven bills that were defeated and three bills that were held over by the committee of five Democrats and three Republicans represent the most significant parts of the 14-bill package to reform the system, heal the state’s ailing economy and fix the state’s budget deficit.
California Chamber of Commerce President Allan Zaremberg, in a statement, said workers’ comp “is in desperate need of severe overhaul. Our employers are paying the highest premiums in the nation. Our system is so ‘out of whack’ that only a major restructuring will suffice.”
In a letter of support for Senator Poochigian’s SB 1010, which would repeal several anti-business laws enacted in recent years, Cal-Tax Policy Analyst Lisa Martin said that in the context of the current budget crisis it “is important to remember that private-sector job growth is California’s largest revenue-increasing opportunity” and focusing on the business climate is critical for long-term stability of the state’s budget.
The rollback of so-called “job killer” laws (SB 1010) failed, as did SB 365 (Johnson), providing “predominant cause” as a standard for compensating injured workers. Also killed was SB 366 (Johnson), requiring “clear and convincing evidence” for psychiatric injuries to be covered by workers’ comp, and SB 714 (Battin), which would have reformed the permanent disability system to more accurately reflect worker injuries. The committee rejected SB 758 (Poochigian), providing vocational rehabilitation reform and eliminating the “cash out” provision, and SB 759 (Poochigian), providing a 90-day statute of limitations to seek penalties for unreasonable delay or denial of a claim. A bill requiring objective medical findings for permanent disability (SB 893, Morrow) also failed.
The committee approved SB 899 (Poochigian), eliminating conflicts of interests among doctors; the part of SB 757 (Poochigian) that requires an injury to be at least 50 percent work-related to be compensated; SB 176 (Johnson), making technical changes to require notices of classification changes, and SB 223 (Margett), mandating use of generic drugs.
Action was postponed on SB 414 (McClintock and Poochigian), mandating objective medical findings in determining injuries; SB 457 (McPherson), legal cost reform, and SB 731 (Brulte), eliminating benefits for prison convicts.
The debate over the manufacturers investment credit (MIC) continued April 21 as the Assembly Revenue and Taxation Committee heard pleas to maintain the incentive while foes called it a means for big companies to skirt tax liability. A MIC critic offered an alternative tax credit plan for companies that contribute to high-tech education.
MIC opponents touted Assembly Member Ellen Corbett’s AB 651, which would phase out the 6 percent MIC and replace it with a 7 percent “Career Technical Education Campaign” credit, based on how much manufacturers support high-tech education.
Proponents of the MIC continued to push AB 122, authored by Assembly Member Ronald Calderon, with the committee chair, Ed Chavez, listed as a co-author. Governor Gray Davis also is on record in favor of extending the MIC beyond its potential sunset of next January 1. The Calderon bill would maintain the MIC until at least 2009 and eliminate a controversial job-creation threshold.
Both bills were placed on the committee’s “suspense file,” which is scheduled for consideration on May 19, once legislators are armed with more recent economic forecasts from the governor’s annual May budget revision.
An issue is the threshold in the 1993 MIC statute that requires industries to gain and maintain at least 100,000 manufacturing jobs. Critics contend that the state’s employment records show that the threshold is no longer attained, so the MIC, and its $400 million-a-year benefit to manufacturers, will cease to exist as of next January 1. Others suggest that changes in the way manufacturing jobs are tabulated have made the threshold yardstick unreliable.
Mr. Calderon said the Employment Development Department is “no longer an accurate predictor of manufacturing employment,” but, if it is used, the same arguments that prompted the MIC in 1993 – a state struggling to bounce back from a recession – are valid today. “Manufacturers pay hundreds of millions of dollars in property tax revenues,” he said. “Not extending this credit” will prompt “final decisions” of businesses to “relocate to other states where there is a total exemption” from sales taxes on manufacturing equipment.
Chris Micheli of Carpenter Snodgrass and Associates, representing several manufacturers, said extending the MIC sunset provides “needed certainty to businesses. It effects long-term planning.” Three-fourths of the states offer full sales tax exemptions, he said, and “we have to retain the MIC just to be on the playing field of competitiveness.”
AB 122 also would establish the Calderon Manufacturers Technology Grant Program, for which details have not been fully developed.
Matt Sutton of the California Manufacturers & Technology Association said the loss of the MIC “would be an additional reason for companies to abandon California.” He called on legislators to view it as part of a larger economic stimulus package.
Governor Davis’ Department of Finance expressed support for extending the tax credit “but only for manufacturing firms” covered by the existing law.
Assembly Member Mark Wyland, the committee vice chair, said, “Whatever one’s political perspective, it is incumbent on us to strengthen the economy in this state. We need the good jobs and strong economy” that result from the MIC. “The case still remains for the continuation of this credit.”
Opposition was led by Jean Ross of the California Budget Project and Lenny Goldberg of the California Tax Reform Association. Ms. Ross said the MIC is claimed by less than 10 percent of manufacturers. She continued to challenge the viability of the MIC as a job producer (also see story below).
Mr. Calderon, referring to studies, said, “You can tweak the numbers any way you want to make your case. The fact remains … whether it is 10 percent of the companies using it, it doesn’t matter, when whoever is benefiting is remaining in California.”
Ms. Corbett said her bill would “harness the capacity of the California manufacturing industry” to finance a “crash program” for technical education. It would phase out the MIC at 1 percent a year for six years, while phasing in the education credit program, starting at 2 percent, in 2005, so that by 2010 there would no longer be a MIC and the education credit will have reached 7 percent. It would sunset in 2012.
Companies could garner tax credits, based on a system to be developed, for such things as amounts of donations in relation to a company’s size. Credits could be granted for equipment donations, internships, and for companies whose employees volunteer to be teachers, Ms. Corbett said.
Her bill had neither support nor opposition registered at the time of the hearing.
In other committee action:
Taxpayer Privacy. Assigned to the suspense file for an April 28 vote was AB 735 (Campbell), which would prohibit the Franchise Tax Board from allowing confidential taxpayer information to be made public as part of a legal proceeding unless there is a reasonable showing of necessity.
The bill, enacting the Taxpayer Privacy Bill of Rights, was prompted by the case of Gil Hyatt, a Nevada resident. The U.S. Supreme Court on April 23 ruled that Mr. Hyatt can sue the California FTB on allegations that intentional torts were committed in the FTB residency audit (see story above.)
Mr. Hyatt said the facts in his case have been publicized “to the world” and that he was threatened by auditors to “settle up, or else.” One auditor called “my ex-wife and boasted, ‘We got him.’”
In response to questioning from the committee, Brian Putler, director of the FTB’s Legislative Services Bureau, said the FTB is not scheduled to position on the bill until its April 29 meeting. Staff has recommended opposition, unless amended, because it would “impact negatively the audit and collections of the department,” Mr. Putler said. Staff has not recommended specific amendments, he added.
Mr. Putler said there was no staff policy concern with having any unauthorized release of information or threat to coerce constitute grounds for dismissal of an FTB employee.
Mr. Hyatt, an engineer and inventor, said that years after he had moved to Las Vegas, an FTB auditor “came up to my home … trespassed … went through trash and mail … sent my Social Security number to many entities … (and divulged) my secret research lab address to competitors.”
Assembly Member Wyland: “It seems the FTB has dramatically overstepped its bounds.”
Assembly Member John Campbell, the bill’s author, said that he believes the Legislature can craft a bill that would still allow the FTB to conduct its residency audits. The FTB contends that Mr. Hyatt moved from California to avoid paying taxes on millions of dollars in royalties from high-tech patents. (See story on Page 1 and the Caltaxletter of February 28 for coverage of oral arguments before the U.S. Supreme Court.)
Local Taxing Authority. AB 1412 (Wolk), which adds some 30 cities to the list of 22 cities now authorized to seek voter approval to impose local sales taxes, was approved. The bill authorizes locals to impose taxes of .25 percent to .5 percent in most cases, although Petaluma could add up to 1 percent. Special taxes would require two-thirds voter approval; general taxes could pass with a simple majority of voters in favor.
Seniors: Long-Term Care. A resolution urging Congress to allow long-term care insurance premiums to be deducted from federal income taxes (AJR 8, Mountjoy), was approved, although Mr. Goldberg of the California Tax Reform Association objected. He said such premiums are really “inheritance insurance” and suggested that the resolution was improperly focused.
Medi-Cal Tax Credits. Sent to the suspense file was AB 988 (Maze), which would provide tax incentives in the form of credits for doctors who accept Medi-Cal patients in the poorest parts of California. It would cost the state several million dollars, said the opposing Department of Finance, and Mr. Goldberg chipped in: “The issue is a very real one” but “as a matter of tax policy, it’s an unworkable approach” with all sorts of inequitable results.
Property Tax: Welfare Exemption. Another bill piled onto the suspense file was AB 783 (Maddox), applying to property used exclusively for religious, hospital, scientific or charitable purposes and owned by a tax-exempt organization. This land would qualify for the property tax welfare exemption prior to actual construction, allowing more time for a parish or museum to obtain building permits. It would reduce property tax revenues by about $7 million statewide, said Assembly Member Ken Maddox.
Real Estate Withholding. Mr. Chavez waived a hearing on his AB 1338, dealing with the uproar over the Davis administration’s withholding from many real estate sales, and placed the measure on the suspense file. The bill permits a seller to elect to determine the amount of withholding based upon the maximum tax rate for the expected taxable gain from the transaction.
School Parcel Taxes. The committee approved ACA 4 (Simitian). If approved by statewide voters to amend the Constitution, it would allow parcel taxes benefiting schools and community colleges to be approved by a 55 percent majority in local elections. Existing law requires two-thirds voter approval.
Property Taxes. The committee passed AB 1744 (Committee on Revenue and Taxation), clarifying various administrative provisions involving county assessors. It requires the State Board of Equalization to estimate fiscal impacts of proposed rules, regulations or instructions for use by assessors or local boards of equalization. The bill, sponsored by the state association of assessors, also would require an owner of property with new construction to respond within 45 days of a written assessor’s request for information.
Natural Heritage Preservation. AB 1502 (Laird), placed on suspense, would allow bond funds to be used to reimburse the general fund for credits issued under the Natural Heritage Preservation Tax Credit Act.
Real Estate Withholding. AB 1490 (Benoit), placed on suspense, would expand the withholding exemption for the principal residence of the seller to any residence that was owned and used as a seller’s primary residence.
Arts Council. The committee approved AB 1283 (Kehoe), providing an income tax check-off for the California Arts Council.
Use Tax: Presumption of Purchase. AB 694 (Levine), placed on suspense, would make it harder for purchasers of vehicles, vessels or aircraft to avoid paying use taxes. It shifts the burden of proof from the State Board of Equalization to the purchaser by making it a rebuttable presumption that use tax is owed under certain circumstances.
Veterans: Quality of Life. The committee approved AB 214 (Shirley Horton), which would allow taxpayer contributions through income tax checkoffs to create a Veterans Quality of Life Fund.
Tax Shelters. AB 1601 (Frommer), placed on suspense, would give the Franchise Tax Board more time to audit and penalize abusers of tax shelters.
Sales and Use Tax: Reporting. AB 1741 (Committee on Revenue and Taxation), placed on suspense, would authorize a voluntary use tax reporting program that would allow qualifying purchasers to voluntarily register with the State Board of Equalization and pay their past-due use taxes in exchange for a reduced number of years of past-due liabilities.
Estate Tax. AB 1556 (Nakano), approved on consent, allows estate tax payment treatment consistent with treatment of other taxes.
Income Tax. AB 1743 (Committee on Revenue and Taxation), approved on consent, provides technical maintenance of the personal income and corporation tax codes.
The Senate Revenue and Taxation Committee on April 23 heard a senator say she was “flabbergasted” by the amount of revenue that her bill would reap for the state from some of the world’s most profitable corporations – three-quarters of a billion dollars.
Even though the Legislature and governor are struggling to close a record gap between revenues and spending, the committee chair, Gil Cedillo, said the bill will be held in the committee pending a fresh economic forecast from the governor’s Department of Finance in May.
Senator Jackie Speier’s SB 516 would deny corporations with more than $20 million in gross annual receipts from claiming California Subchapter S status, which enables them to pay a 1.5 percent tax. As C Corporations, they would pay the 8.84 percent rate. Senator Speier said the FTB has estimated that her bill would generate more than $780 million in annual revenue.
While careful not to name specific corporations, Lenny Goldberg of the California Tax Reform Association testified that they include one of the world’s largest and most profitable wineries, real estate and construction firms. The Sub S filing status was supposed to be for small, closely held companies, he said, but, through holding companies, “some of the largest companies in the world aren’t paying California corporation taxes.”
Senator Speier said her bill would affect about 5,000 of the 182,000 entities that have Subchapter S status in California.
In other committee business:
Enterprise Zones. SB 172 (Ducheny), held in committee, would redesignate the Brawley manufacturing enhancement area as an enterprise zone, providing a meat packing plant enterprise zone benefits that include credit for sales tax, 100 percent net operating loss carryover, deduction for interest on loans to zone business, and one-year expensing for equipment.
Corporation Taxes. SB 227 (Hollingsworth), held in committee, would enable S Corporations to use the federal S Corporation election date to prevent some companies from sustaining inadvertent additional taxation. This has occurred as a result of last year’s law (AB 1122) that required California companies filling as federal S corporations to also file as S corporations in California, with an effective date of January 2000. A San Jacinto potato farming company, which had become a federal S Corporation in 1986, was unable to do so in California until January 1, 2002. However, it was in the process of selling some land when last year’s law passed. Thus it was required to pay an 8.84 percent corporate tax, as well as another 9.3 percent tax on the capital gain, effectively doubling the company’s tax, according to Senator Dennis Hollingsworth.
Income Taxes: Innocent Spouse. SB 285 (Speier), approved by the committee, would state that an innocent spouse would not have to prove his or her status before the Franchise Tax Board if the status had already been accepted by the Internal Revenue Service. The bill would give the FTB “ample opportunity” to make exceptions, Senator Speier said, but still protect innocent spouses from being “run through the wringer twice” by a non-innocent spouse.
Personal Income Tax: Standard Deduction. SB 330 (Morrow) was rejected by the committee after Senator Bill Morrow insisted on having an up-or-down vote on the measure instead of having it held in committee. Reconsideration was granted. The bill would have doubled the amount of the standard deduction used to compute taxable income. The FTB estimated the annual revenue loss at $1.3 billion in 2003-04. “I brought my ice skates in case hell freezes over,” said Senator Morrow of the bill’s chances. Senator Dede Alpert, who voted against the measure, said she was thinking more in terms of a “snow ball’s chance in hell.”
Possessory Interests. SB 451 (Ducheny) was approved by the committee to prevent county assessors from imposing possessory interest property taxes on privately leased housing on military reservations. The San Diego County assessor has placed or will place 712 housing units at Camp Pendleton on the tax roll, according to the committee analysis of the bill, and there are additional active projects to fix up and rent thousands of units for Marines at Camp Pendleton. The military’s crash program of providing housing for the troops has enlisted the private sector for financing, cutting many years off the time it would otherwise take to get the job done. It also was noted in the hearing that the federal government provides impact aide to schools to make up for land that is not subject to property taxation. A BOE estimate of property tax revenue loss in 2003 – $500,000 – rises to as much as $7 million by 2010, with about half of that loss at the expense of schools. The state would back-fill the loss to schools. Senator Denise Moreno Ducheny said the housing is urgently needed because enlisted men cannot afford to rent houses off the base in the San Diego market.
Personal Information: Property Tax Records. SB 663 (Speier), defeated with reconsideration granted, would require county assessors to restrict access to home address records to those with legitimate business or government purposes. The purpose of the bill, opposed by assessors, is to prevent stalkers from using information readily available by computers at assessor’s offices.
Sales and Use Taxes: Exemptions. SB 760 (Scott), approved by the committee, provides a permanent state and local sales and use tax exemption for public passenger transportation vehicles sold or leased by a transit authority or government entity, and then leased back to the entity. The bill, sponsored by the California Transit Association, removes a sunset in current law.
Also on the committee’s agenda were these committee bills that were approved on a consent calendar:
Water’s-Edge Elections. SB 1061, repealing the water’s-edge election contract process that, according to committee staff, has “shown itself to be both highly complex and of little value either to taxpayers or to tax administrators.” The FTB said there would be no revenue impact from this bill.
Federal Tax Elections. SB 1065 clarifies that an individual’s election for federal tax status, made prior to becoming a California taxpayer, is binding for California tax purposes.
The Senate Environmental Quality Committee on April 21 approved SB 981 (Soto), which would impose a 30-cents-per-barrel tax on crude oil refined into gasoline or diesel fuel that is consumed in California.
Senator Byron Sher, the committee chair, reiterated that the proposal has been deemed by the legislative counsel to be a majority-vote (Sinclair) “fee,” not a two-thirds-vote tax. A 5-2 vote sent the bill, which would increase taxes by $200 million, to the Senate Revenue and Taxation Committee.
Opponents, a coalition of business, labor and taxpayer groups, contend that SB 981, along with AB 1500 (Diaz), which would impose a $1-per-barrel “Sinclair fee,” are together proposing “hidden taxes” of nearly $1 billion a year on California motorists and business. AB 1500, with an impact of $700 million, passed the Assembly Environmental Safety and Toxic Materials Committee on April 8 (see April 11 Caltaxletter).
Senator Nell Soto’s chief witness was Riverside County Supervisor Roy Wilson, who is vice chair of the South Coast Air Quality Management District’s governing board. He said health costs due to smog in the South Coast district amount to $4.7 billion a year, and SB 981 will help the state Air Resources Board reduce emissions and fund programs to help those suffering from respiratory problems by providing such services as asthma clinics.
The lead-off witness against the bill was Dick Kreutzen, representing the Western States Petroleum Association. It is part of Consumers Against the Hidden Gas Tax, a coalition of over 40 groups, including Cal-Tax. Mr. Kreutzen said SB 981 imposes a “regressive and inefficient tax on a product that will result in high prices.” It is a “significant disincentive for refineries to expand” operations in California.
Senator Soto said the “opposition is trying to put up scare tactics – this is not a hidden tax … it is a life-saving bill.”
Kelly Jensen, representing the California Trucking Association, said the bill would have a serious impact on truckers, particularly when combined with other measures that have been proposed that increase the costs of commercial trucking.
The distinction between those taxed and the benefits they would receive is further blurred by the bill’s language that could make advocacy groups eligible for grants, said Jeff Sickenger of the California Manufacturers & Technology Association.
Meanwhile, the Consumers Against the Hidden Gas Tax (No on AB 1500 and SB 981) hit the road. In Salinas, Cal-Tax’s Vice President Carol Evans joined with Jim Bogart, president and general counsel of the Grower-Shipper Association, and Sharan Lanini, a third-generation farmer. “Of particular concern are two proposals that would raise our already high price of gas, diesel and other fuels, thus further stifling economic growth and job creation,” Ms. Evans said at an April 17 news conference. She urged the Legislature to “focus attention on what California needs most right now, and that is to encourage, rather than hinder, good people like Jim and Sharan to do what they do best – growing food, growing jobs and growing California’s economy.”
Legislation to make it easier to raise the sales tax for transportation at the local level has cleared the Assembly Transportation Committee. An 11-5 vote on April 21 sent ACA 7 (Dutra) to the Committee on Elections and Reapportionment.
The measure would authorize local or regional transportation districts to raise the sales tax by 0.5 percent if at least 55 percent of voters are in support. Existing law requires 66.67 percent voter approval for such a special tax.
The proposed constitutional amendment would go on the March 2004 ballot.
According to an Associated Press report, ACA 7 is the “latest in a wave of measures aimed at giving schools, law enforcement and public agencies an easier way to tap taxpayers’ pockets.”
Assembly Member John Dutra, the Transportation Committee chair, said roads and other transportation projects deserve the same lenient voting requirement that voters have adopted for local school bonds (Proposition 39), which has resulted in voter approval of $14 billion in K-12 and community college bonds since 2000.
Opposing the measure, Tim Bittle of the Howard Jarvis Taxpayers Association said, “The two-thirds requirement was put in the Constitution to make sure there’s a strong community consensus before taxes are increased.”
The idea to include a use tax return in the personal income tax booklet this year has been a flop so far, according to an April 16 story by Will Shuck in the Stockton Record. The state spent $120,000 on the effort, and has only received $20,000 so far from 322 people who voluntarily sent in the return. About 3.6 million use tax returns were sent to taxpayers, as an insert in the instructions for filing personal income taxes. A use tax is due on taxable personal property purchased out of state and used in California. The tax is the difference between the sales tax paid to the state of purchase and the sales tax that would have been paid if the item was purchased in this state.
Vic Anderson of the State Board of Equalization said the program is not a failure. He said, “We know what it cost us, and we’re still not there with the cost. But we’re still optimistic with it.” With forms still coming in, the total amount paid will obviously exceed the $20,000 figure.
Some have suggested placing a line on the personal income tax form as a way of collecting use taxes. This could lead to a different set of problems, including FTB audits, record keeping, notice to taxpayers on what is taxable and what is exempt, what tax rate to use in computing the tax, etc. Taxpayers not subject to income taxes would not be covered either.
How big is the problem? According to The Record, the state does manage to collect about $1.3 billion out of an estimated potential of $1.75 billion in taxes on out-of-state purchases. Much of the money comes from businesses that not only sell through catalogs or on the Internet, but also have nexus in California, making them legally responsible to collect sales taxes.
Other companies collect the taxes voluntarily, and many large purchasers, both individuals and businesses, also pay, Board of Equalization officials say. Vehicles purchased outside California are picked up on registration.
Another alternative for capturing uncollected use tax is being pursued through the national “simplified sales tax project.” Proponents of this approach favor state simplification of sales taxes and voluntary collection of use tax by out-of-state retailers that are not subject to California tax laws.
In a report released last week, Jean Ross, executive director of the liberal California Budget Project, calls the manufacturers investment tax credit a failure and urges the Legislature to discontinue it. The credit, which was enacted in 1993, allows manufacturers in specified lines of business to claim a 6 percent tax credit on costs of manufacturing equipment. For new businesses, a state sales tax exemption is available instead.
In her report, Ms. Ross said only 9.1 percent of the state’s manufacturing corporations used the exemption, and the largest corporations claimed 69.5 percent of the credit claimed. (Editor’s note: Neither of these statistics indicates failure of the credit.)
Ms. Ross also said manufacturing employment has declined 54,000 since the credit’s creation. According to her report, manufacturing employment in 2002 was just 5,000 higher than in 1993. (Editor’s note: The statistics on this point are somewhat confusing and fail to note that manufacturing employment had increased prior to the last few years, a period in which the Legislature enacted a number of “job-killer” anti-business bills and the dot-com speculative excesses collapsed.)
Hilary McLean, speaking for Governor Davis, said the governor is still solidly behind the extension of the credit. Senator Charles Poochigian told The Associated Press, “To eliminate a tool like this would be like waving the white flag and sending manufacturing jobs to other states.”
Chico’s 4.75 percent utility user tax is expected to jump to 5 percent on July 1, according to the Chico Enterprise Record. The tax rate used to be 5 percent prior to the energy crisis. The city lowered the rate as energy costs escalated. On April 15, the Chico City Council voted 4-3 against keeping the rate at the current 4.75 percent level for the next fiscal year.
Councilman Larry Wahl, who voted for the lower rate, said, “If we raise it back up, we will spend it. I think it’s appropriate to leave it with the ratepayers, the residents of Chico, as long as we can.” Mayor Maureen Kirk, who voted against the current rate, said, “I don’t like taxes, but there are a lot of unknowns.”
The Williamson Act is designed to keep property in agriculture and open space use, giving the owners lower property taxes in exchange for a contractual commitment to keep the property in such use for a specified period of years. In San Joaquin County, one property owner allowed a Gottschalks Department Store to be built on the property, while continuing to enjoy preferential assessment for two years, the Stockton Record reported on April 23.
In 1995, the developer, General Growth, agreed to pay $562,500 to settle the Williamson Act contract. The developer blamed the city of Tracy for the mix-up. “It wasn’t any problem that money couldn’t solve,” Tracy City Manager Fred Diaz said.
Supporters of AB 1492 (Laird) used the Gottschalks example to win approval of the bill by the Assembly Agriculture Committee on April 21. The measure increases the penalty for removing property in the act. A taxpayer would pay 25 percent of unrestricted value, rather than 12.5 percent of restricted value.
Eileen Reynolds, representing the California Association of Realtors, is seeking amendments to the bill. The group objects to a provision that gives taxpayers no chance to defend themselves if a county declares the act to be violated. Ms. Reynolds said the bill makes it too hard for landowners to divide their property to benefit heirs.
MIC Repeal. AB 122 (Calderon) was amended on April 21 to repeal the manufacturers investment partial sales tax exemption and tax credit on January 1, 2009.
Income Tax Checkoffs. AB 132 (Chavez) was amended on April 21 to establish the priority for adding new checkoffs to the income tax form. The priority is by date of enactment. The bill also gives the FTB authority to add two checkoffs to the form if there is room.
Corporate Minimum Tax. AB 484 (Cogdill) was amended on April 21 to limit the $800 corporate minimum tax on small businesses. The tax would apply only to the extent it exceeds a company’s net operating loss.
New Tax on Disposable Bags and Cups. AB 586 (Koretz) was amended on April 10 to delete prior provisions of the bill and add provisions imposing a new 2 cent tax on each specified disposable bag or disposable cup.
Conformity. AB 967 (Chavez) was amended on April 21 to conform to provisions of the federal Victims of Terrorist Act. The new amendments also establish a tax credit equal to the personal exemption credit, for a disability trust.
County Cigarette Taxes Authorized. AB 1040 (Leno) was amended on April 21 to strike out prior provisions and insert language authorizing counties to impose cigarette taxes.
New Fee on Railroads, Ports, Marine Terminals and Shipping Fees. AB 1063 (Firebaugh) was amended April 10 to authorize the South Coast Air Quality Management District to impose new fees on railroads, ports, marine terminals, and shipping companies to mitigate air pollution impacts of these operations.
Income Tax: Exclusion of Military Death Benefit. AB 1073 (Dutton) was amended on April 21 to delete prior contents and add provisions excluding from income tax the $6,000 death gratuity received by a survivor of a deceased member of the U.S. Armed Forces.
Local City Sales Tax Authorization. AB 1412 (Wolk) was amended on April 21 to add and subtract cities from the list proposed to be authorized to impose an additional local sales tax. Added to the list are Capitola, Santa Cruz, Santa Monica, Scotts Valley and Soledad.
Majority Vote for Special Taxes for Infrastructure. ACA 9 (Levine) was amended on April 21 to reduce the vote requirement for property parcel taxes for infrastructure from two-thirds to majority.
Reduction of Vote Requirement for Local Bonds. ACA 11 (Levine) was amended April 21 to reduce the voter approval requirement for a city, county or special district bond from two-thirds to 55 percent.
Reduction of Voter Approval Requirement for Special Taxes for Infrastructure. ACA 14 (Steinberg) was amended April 21 to reduce the voter approval requirement for local special taxes for infrastructure from two-thirds to 55 percent.
Change-of-Ownership Notice; Property Statement Expanded to Real Property. SB 17 (Escutia) was amended on April 21 to require a person or entity obtaining a controlling or majority ownership in a legal entity to file change-of-ownership statements. It imposes penalties for failure to do so. The amendments also require publicly traded corporations to file annually with the BOE a list of all real property owned by the company in the state.
Workers Compensation: Tax Credit for Employers with No Increase in Claims. SB 375 (Margett) was amended on April 21 to delete prior contents and add provisions establishing a 50 percent tax credit for employers for their workers compensation costs, provided the business did not experience an increase in workers compensation claims.
Tax Shelter: Voluntary Compliance and Increased Penalties. SB 614 (Cedillo) was amended on April 21 to delete prior contents and add provisions dealing with tax shelters. The bill directs the FTB to initiate a voluntary compliance program for taxpayers using abusive tax avoidance schemes, with the waiver of penalties as a carrot. The bill also increases the penalties for using abusive tax shelters.
Clean Air Bond Act. SB 701 (Florez) was amended on April 21 to delete prior contents and add provisions asking voters to approve a $4.5 billion clean air bond.
Property Tax Omnibus Bill. SB 1062 (Senate Revenue and Taxation Committee) was amended on April 21 to add and delete some of the provisions originally proposed. New amendments require notifying a Williamson Act property owner intending to bail out of the act of the new value of the property and appeal rights. A provision proposing to require a party that subpoenas a BOE employee to pay the cost was deleted.
Appropriations Limit. SCA 3 (McClintock) was amended on April 21 to change provisions in a revamped state spending limit. Subventions to local government are proposed to be included in the state’s limit and excluded from the local limit. Refunds of specified amounts over the state’s limit must go to personal income and corporate taxpayers.
A number of Los Rios Community College Classes Unlawful. A number of courses offered by the Los Rios Community College District (covering Sacramento, Yolo and El Dorado counties) are unlawful, The Sacramento Bee reported on April 16. These are classes offered high school students. According to The Bee, the district is not entitled to $1.3 million in state funding for these classes, as a result of findings of an internal probe. “Some of these findings are disappointing,” Los Rios Chancellor Brice Harris said in a statement. “We are a large district and concurrent enrollment classes are a small part of our total offerings, but that is no excuse for not maintaining complete records.”
Santa Barbara Official Gets Pension and $ for Doing Her Prior Job. Charlene Chase, former director of the Santa Barbara County Social Service Department, is getting paid as a consultant for filling her former job, the Santa Barbara News Press reported April 14. Ms. Chase retired on March 30, getting more than $80,000 a year in retirement benefits. She then came back to work the next day as a $68-per-hour consultant doing her old job (roughly the same rate of pay she got as a full-time employee). She also gets travel expenses, a cell phone and a car.
“She is double dipping, and the Board of Supervisors is allowing her to do so,” charged Joe Armendariz, executive director of the Santa Barbara County Taxpayers Association. The county’s grand jury recently censored the Department of Social Services for relying too much on consultants. County Administrative Officer Mike Brown said, “She said she would stay to help with the recruitment, she will help with the department budget and will help with the cuts. She has good contacts in Sacramento.”
Officials Refuse to Dissolve a Do-Nothing District. Efforts to dissolve the Los Medanos Community Healthcare District (in Eastern Contra Costa County) have been met with indifference and delay by county officials, the Contra Costa Times reported on April 10. The district gets $704,000 a year to retire debt and run a few youth programs. It lost its hospital to bankruptcy in 1994.
In 1998, the county’s grand jury called the district a “hollow public agency” that mishandled money and abused the public trust. Residents in 2000 gathered petitions signed by 8 percent of the districts voters to present to LAFCO to dissolve the district (only 6 percent is required).
But LAFCO voted in 2000 to postpone consideration until 2003. And in early April, LAFCO voted again to postpone consideration until 2005.
Healthcare district board member Allen Tomer, who was elected in November, said “We don’t do anything. Our board has shown a systematic pattern of delays, inaction and improper business behavior.” County Supervisor Federal Glover of Pittsburg said, “There has not been community outcry lately or folks banging down my door to dissolve the district.”
Waste in School Bond $ in L.A. According to an inspector general’s report obtained by the Los Angeles Daily News on April 19, the Los Angeles Unified School District paid enormous sums of school bond dollars for overhead.
The report (which was obtained from a source after several district officials refused to release it) found that the district contracted with real estate consultants at “absurd” rates without competitive bidding or any performance evaluation standards. For example, one invoice charged $3,000 for 12 hours spent at a chamber meeting; another charged $1,440 for 4.8 hours spent at a school board meeting.
Larry Kosmont, a nationally known real-estate expert in Los Angeles, said, “The school district should not be paying at this rate … it would be very reasonable that the school district should be able to negotiate a fee of $100 an hour or at the most $150 an hour.”
One consultant billed the district $1 million for two years work. Another submitted invoices on a single day for $478,000 for a two-year period. Two of the consultants lacked real estate brokers licenses.
The district’s chief of facilities, Jim McConnell, said the consultants helped the district acquire 440 acres of land in a short time, which required an exceptional effort. He also noted the consultant who got the million dollars was not hired on his watch.
REPORT: CITIES BACK AWAY FROM OPPOSING COPS PENSION HIKE. In a hard-hitting column April 15, Dan Weintraub of The Sacramento Bee says the state’s law enforcement unions hold the Legislature in a “death grip.” Their campaign endorsements are of immense value, and when they go for a bill to sweeten their pensions, it usually passes. Now it is reported that the League of California Cities, which once opposed SB 100 (Dunn), giving as much as 100 percent of highest salary to law enforcement pensions, has gone neutral on the bill. Is it mere coincidence that local government is counting on the clout of law enforcement unions to help make it easier to raise taxes? Mr. Weintraub thinks not, concluding: “So now the law enforcement unions are not only writing the bills that increase their benefits and pressuring state lawmakers to approve them, they are also leaning on local officials to refrain from opposing these measures. This takes political arrogance to new heights.”
REPORT CRITICIZES STATE PAROLE OFFICIALS. Last fall, when the Board of Prison Terms asked for 24 more hearing officers to conduct parole revocation hearings, Inspector General Steve White decided to look into the matter. What he found, reported The Sacramento Bee on April 13, was a board that could do its job with about half the officers it already has. Mr. White, appointed to the post by the Legislature, is prohibited by law from discussing the confidential reports his office produced. However, The Bee said it was among the most critical produced by the office. It said the $9 million-a-year board overestimated the number of hearing officers it needs because no one knows exactly how much work they really do. The report recommends that the hearings be taken away from the board and be conducted by the Department of Corrections. Mr. White’s report said that deputy commissioners “regularly misstate how long the hearing process took, sometime by as much as 150 percent.” According to The Bee, Mr. White tried to convince the Senate not to confirm Carol Daly, who heads the board as an appointee of Governor Gray Davis. She told The Bee that the board has taken steps to correct problems with the keeping of records. Bill Sessa, board spokesperson, said no doubt deputy commissioners work hard and are honest. ”We just weren’t able to document that with a piece of paper saying what a guy was doing on a particular day.”
PAID LEAVE COSTS MOUNT. Since 1999, Orange County District Attorney Tony Rackauckas has suspended 14 attorneys, investigators and clerical staff for a total of 1,602 days with full pay and benefits. The cost to taxpayers: $740,000. Plus, two of the employees have been reinstated with back pay of $600,000, bringing to more than $1.34 million paid or owed to district attorney employees for not working, reported the Los Angeles Times (April 13). Mr. Rackauckas has declined to discuss the issue but in February he told county supervisors that he has been unable to hire 13 prosecutors because of a serious budget shortfall. Tom Wilson, chair of the Board of Supervisors, said administrative leave is necessary during investigations but should not drag on for months.
PAID MORE TO STAY HOME. A bill sponsored by the California Professional Firefighters would consume more than a few tax dollars. AB 136 (Kehoe) would actually give firefighters and law enforcement officers more take-home pay if they stay home for up to two years to recover from on-the-job injuries. Existing law allows most disabled safety workers to receive full pay for one year – tax free – while recovering. This bill would make it two years – tax free – and extend the expanded benefit to all cities, counties and fire districts in the state. Not having to withhold taxes means the paycheck would be bigger than if the person were actually working. After the bill cleared the Assembly Insurance Committee earlier this month, The Sacramento Bee, in an April 8 editorial, called it “one of the most irresponsible bills introduced in the Legislature.” The 12-4 vote included the nay of first-term Republican John Benoit of Riverside, a former police officer, sheriff’s deputy and Highway Patrol officer. “ … he understands what injured in the line of duty means. He also understands the duty of a legislator to guard the public’s money, particularly in these hard times. Too bad so many of his colleagues don’t.”
REPORT: EX-LEGISLATOR WORKS FOR SURGERY CENTERS. The San Francisco Chronicle (April 17) reported that former Assembly Member Tom Calderon has a consulting job with Pacific Hospital, which operates eight surgery centers. These centers are able to charge unlimited fees for treating injured workers, because cost controls don’t apply to surgery centers, the newspaper reported, as last year’s major workers’ comp bill, authored by Mr. Calderon, had no limits on the surgery centers. Surgery centers spent $2.2 million lobbying the Legislature and the governor and other state officials in 2002. In 2001-02, Mr. Calderon received nearly $100,000. According to the Chronicle, Mr. Calderon is not prevented by law from working for Pacific Hospital, as long as he does not lobby the Legislature. Bob Stern, director of the Center for Governmental Studies in Los Angeles, told the newspaper’s Greg Lucas: “There’s nothing illegal about rewarding someone who has been your friend. The only question would be is he earning the money, or is it just a gift?” Mr. Calderon, who was termed out of the Legislature late last year, is a $99,000-a-year Assembly speaker’s appointee to the California Medical Assistance Commission. He did not return the newspaper’s calls. On his state disclosure reports, Mr. Calderon listed income of between $10,000 and $100,000 for his consulting business, which is located at the Long Beach offices of West Coast Surgery Center Management, Inc., which operates Pacific Hospital of Long Beach. His only other client, a water district, said it has a $5,000 contract with the ex-lawmaker, the Chronicle reported. Rand Martin, a West Coast lobbyist, said Mr. Calderon was hired “because of his knowledge base on workers’ compensation insurance.” Meanwhile, Senate President Pro Tem John Burton said legislation this year will impose a fee schedule on the surgery centers as the Legislature works to put the brakes on skyrocketing workers’ comp insurance costs.
EXPENSIVE LEGAL BATTLE OVER SCHOOL CONDITIONS. The state of California has spent $13 million in the last three years to fight a lawsuit that claims public school conditions are substandard. In an April 18 New York Times article, state Senator John Vasconcellos said, “To spend $13 million on lawyers from Los Angeles instead of on education is really a crime.” And, the newspaper reported, that figure is likely to increase. Williams v. State of California is a class-action suit filed by civil rights groups, and others, on behalf of school children. It contends the state allows students to attend poorly maintained schools, including unsanitary restrooms, with untrained teachers and inadequate resources (students having to share books). It focuses on 46 schools, where students are disproportionately non-white and many are learning English as a second language. According to the newspaper, the suit puts Governor Gray Davis in the awkward position of announcing state initiatives to improve education while his lawyers are arguing that many problems are not the state’s responsibility and should be dealt with by local districts.
$100 MILLION FOR OAKLAND SCHOOLS. The state Senate on April 24 approved SB 39 (Perata), which would bail out Oakland’s public schools with $100 million in state funds. Senator Don Perata said the mess in Oakland is not a result of fraud or malfeasance – no criminal conduct is under investigation. He said a new school board and administration, in its zeal to turn around a chronic under-achieving system, “lost sight of a fundamental issue: They have to pay for everything they do. There is no excuse.”
South Lake Tahoe Hotel Tax Increase Postponed. The South Lake Tahoe City Council voted 3-0 on April 15 to delay a scheduled 0.5 percent increase in the city’s hotel tax, the Tahoe Daily Tribune reported. Finance Director Bruce Budman estimated that the city is owed $630,000 in back hotel taxes, including penalties and interest. Jerry Birdwell, president of the local hotel association, said, “We feel that before any additional taxes be thrust upon us – from people who pay our taxes – these back taxes must be collected.”
Ventura Assessment Subject of Controversy. A proposed downtown business assessment that the Ventura City Council has voted to support under certain conditions has caused a rift among downtown businesses, according to the Ventura County Star. The assessment, which will vary by property, is projected to generate $428,000 in revenue for cleaner sidewalks, a marketing campaign, etc. Some business owners support the levy, while others are strongly opposed. A number of businesses are placing signs in shop windows saying they are being taxed out of town. They say they have already paid their fair share of the millions already spent beautifying sidewalks and planting palm trees. The City Council voted 4-2 to cast a “yes” ballot for the 13 percent of downtown property it owns if 90 or more of the remaining property owners vote in support.
BOE Sets Hearing on Taxpayers’ Change-of-Ownership Regulatory Changes. Changes suggested by Cary Maeder to amend BOE Property Tax Rule 462.180, relating to change of ownership, have been set for a public hearing by the State Board of Equalization on May 28 at 9:30 a.m. The proposed changes clarify that LLCs are included in provisions that treat partnership interests as capital and profit interests.
L.A. City Budget Balanced by Fee Increases. A proposed $5.1 billion budget for the city of Los Angeles for 2003-04, submitted by Mayor James K. Hahn to the City Council on April 18, is balanced with $31 million in fee increases. The most dramatic is the increase in the fee for residential garbage service from $6 to $10 per month. The budget states that at $10 it is lower than in most communities.
Other fee increases: a $7.44-per-year increase in sewer fees, a 75-cent increase in zoo admissions, and a $5 fee increase for golf on city courses.
One of the causes for the increases is the dramatic jump in workers compensation costs to the city. These costs are expected to climb $26 million in the budget year, after 20 percent and 11 percent increases in the past two years.
Farm Workers Union Seeks Tax Hikes on Farmers to Fund Health Care. The United Farm Workers Union, along with the California Medical Association, wants to squeeze more tax dollars out of farmers to fund a program to provide health care for farm workers, the Sacramento Bee reported on April 22. AB 923 (Firebaugh) is proposed to be amended to repeal the sales tax exemption granted farmers in 2001. The money would be diverted into an incentive program to provide health insurance to farm workers. The bill is supported by Speaker Herb Wesson. “This was one of the most historic tax packages in California history for agriculture because it allowed farmers to compete on an equal basis with their counterparts in other states, said John Gamper, director of taxation and land use at the California Farm Bureau. “We just got to a level playing field, and it would be a shame to thwart the policy this way.”
FTB Submits Dividend Deduction Regulatory Change as “Non-Substantive.” The Office of Administrative Law has approved a change in Franchise Tax Board Regulation 24411, relating to dividend deductions. The change is effective May 9. The FTB said the change was not substantive. No hearing was held on the regulatory change. This regulatory change was not on the FTB’s Web site as either a proposed or final regulation. According to the California Regulatory Notice Register, it adds language specifying “except as otherwise specifically provided” to take into account another effective date requirement in a different subsection.
Monterey County Budget Woes Worsen. Monterey County Auditor-Controller Mike Miller told county supervisors April 22 that the shortfall in the county’s 2003-04 budget could grow from $20 million to $40 million, the Salinas Californian reported. The trouble stems from the county’s Natividad Medical Center, which is losing $1 million a month. An advisory committee looking at the problem is expected to call for voter approval of an additional county sales tax to deal with the hospital’s financial crisis.
MIGDEN: SPLIT THE ROLL. State Board of Equalization Chair Carole Migden, appearing on the KQED-FM “Forum” on April 16, offered these key observations (none of which is unfamiliar to Migden watchers): (1) The manufacturers investment credit should be extended only if it can be demonstrated that the MIC generates “sustainable” jobs at livable wages; (2) Sales taxation of Internet transactions should be considered; (3) California should evaluate participation in the Streamlined Sales Tax Project – “$2 billion in uncollected catalogue sales tax,” and (4) a split property tax roll should be considered … “billions … are escaping assessment …” (This report is courtesy of Peter Michaels, Esq., of Cooper, White & Cooper LLP in San Francisco.)
PERATA: IS HE OR ISN’T HE? In a development that raises questions about the credibility of legal opinions from two highly placed sources, Attorney General Bill Lockyer says state Senator Don Perata can seek re-election in 2004, but the Legislative Counsel’s Office said he cannot. Obviously, one of the opinions is wrong. Assembly Member Wilma Chan, who wants to run for the Senate seat, has disputed the attorney general’s version and says it probably will be decided in the courts. Senator Perata, a legislative champion of the split roll property tax and author of bills to tax diapers and bullets, is ineligible to run for a third time because of term limits, the Legislature’s lawyer opined, since he was elected to finish more than half of the unexpired term of Congresswoman Barbara Lee on November 3, 1998. However, he delayed being sworn in until December 7, 1998, then was re-elected to a full term in 2000.
L.A. COUNCIL APPROVES TAX REFORM. Approving long-sought improvements to Los Angeles’ antiquated and burdensome business tax structure, the City Council on April 15 voted unanimously to adopt some simplifications. The changes allow companies to file under a single tax rate if 80 percent of their gross receipts fall under one category of commerce, reported the Los Angeles Times. The city has 64 categories and eight tax rates. The change is expected to reduce the city’s take from business taxes by $2.9 million. However, backers o