David R. Doerr,
principal contributor Vol. XVI, No. 16
Ronald W. Roach, editor
May 2, 2003
After weeks of foot-dragging over solutions to a worsening state budget deficit, the Legislature reached accord on borrowing to make public pension payments, while the state Supreme Court ruled that state employees shouldn’t be paid full wages if the budget isn’t passed on time.
In a week of significant developments, Assembly Republicans unveiled their budget-balancing plan, which Democrat Governor Gray Davis called unworkable, and a “Citizens’ Budget” was presented. Both of these eschew higher taxes. April income tax revenues were down, prompting predictions that Governor Davis’ scheduled May 14 budget update will show a significant worsening of the deficit.
There was some speculation that the court’s edict will prod the Legislature to knuckle down and enable Governor Davis to enact a budget by the start of the fiscal year July 1. Otherwise, the unanimous high court ruling on May 1 said state employees who are paid by the hour are generally entitled to the federal minimum wage of $5.15 an hour. However, as the San Francisco Chronicle reported, state Controller Steve Westly, who signs the checks, saw wiggle room in the court’s order and said he intends to issue full paychecks, budget or no budget.
Mr. Westly said that while the court said most employees would be paid the minimum wage without an enacted budget, it “left the door open for the controller to determine whether this is feasible. We will not put state employees on the minimum wage plan,” he said, as public employee union officials applauded, reported the Los Angeles Times.
If the controller pays regular salaries without a budget, he will be violating the state constitution and will be sued, vowed Richard Fine, lawyer for the Howard Jarvis Taxpayers Association, which brought the original pay suit in 1998.
While the court was handing down its ruling, the Senate and Assembly on May 1 passed a $3.6 billion dent in the state’s whopping deficit that has been estimated at between $26 billion and $35 billion. The centerpiece of the compromise is the issuance of pension obligation bonds of between $1.8 billion and $2.2 billion that will be repaid over five years. “It buys us some time,” said Assembly Budget Chair Jenny Oropeza. “Without it, we will have a more drastic and deeper hole to fill.” With that, the Assembly, 71-5, approved SB 29X, which had earlier in the day cleared the Senate, 27-7, the bare two-thirds vote needed.
The pension bond bill must be signed by the governor by May 5 to enable the state treasurer to include the October 1 employer payment of more than $500 million. The pension bonds were proposed by the governor in January, but Republicans held out to leverage additional spending cuts.
In March, the Legislature passed a $3.3 billion package of cuts, borrowing and deferrals.
Assembly Speaker Herb Wesson said that counting carryover reductions in the budget year and the anticipated $4 billion increase in the car tax, the Legislature has addressed about $12 billion of the problem, with much more to do. “Never have we done so much so soon,” he said. A week earlier, the speaker drew a cool GOP reception to his $6 billion “compromise,” which had been released to the news media before Republicans got a copy.
Senate Republican Leader Jim Brulte, at a gathering of the four legislative caucus leaders to announce the budget breakthrough, said, “The good news is we closed about $3.7 billion of the budget year problem. The bad news is we have about $29 billion” to go.
Virtually everyone in and around the Capitol expects the governor, in his May 14 budget revision, to declare that the state lacks revenue to continue to afford reductions in the vehicle license fee that were approved when the state was flush with cash. Thus, under existing law, the tax can revert to 2 percent of value instead of .67 percent. Increasing the tax without additional legislation could face a court challenge, however.
The Legislature has yet to come to grips with the governor’s proposed tax hikes of $8.2 billion for the 2003-04 fiscal year, including higher income tax brackets, an additional penny on the sales tax and a huge boost in tobacco taxes. While Republicans helped Democrats pass the pension bonds, they still have their heels dug in against raising taxes.
In the package of legislation adopted May 1, the pension bond issue drew most of the attention. It is the first time the state has opted to sell bonds to put off employer obligations, which will cost the state some $485 million in interest. Senator Tom McClintock questioned the legality of incurring more than $300,000 in carryover debt from one year to the next without voter approval, a constitutional issue. “This is going to come right back and bite the state,” he said, particularly if the economy doesn’t grow enough to bring in additional revenues to meet the enlarged obligations down the road.
Among additional spending cuts are $327 million from education and $316 million from health or human services programs. The governor’s pet program, $500 scholarships to high-scoring math and science students under an $18 million program, was axed, and the governor’s press secretary, Steve Maviglio, told The Times that he will still sign the package of bills.
One of the major cost-cutting elements is to require Medi-Cal recipients to confirm eligibility twice a year. Republicans wanted the reporting done quarterly to cut down on fraud, which news reports have indicated is rampant, draining the system of at least $2.5 billion a year.
The package of legislation, authored by the Senate Budget and Fiscal Review Committee, is comprised of SB 20X, SB 24X, SB 25X, SB 26X, SB 28X and SB 29X.
Assembly Republicans’ Budget. On April 29, Assembly Republicans offered a no-new-taxes plan that hinges on borrowing and spending reductions to close the budget gap. While calling additional borrowing – $10 billion to cover the current year’s budget deficit – repulsive, “it’s a better idea than tax increases and so we offer it as a compromise,” said John Campbell, the Assembly Republicans’ lead budget-writer. This is a major concession, he said.
Governor Davis criticized the proposal as “fuzzy math … it doesn’t add up.”
It calls for the dedication of a half-cent of the existing state sales tax to pay off the bond over the next five years.
Finance Director Steve Peace said he doubts the banks will view it as a credible plan because they would prefer a new source of revenue – higher taxes – to pay off the bond.
The Assembly Republicans also call for a constitutional spending limit, a ban against future debt financing and a requirement that two-thirds votes of the Senate and Assembly be required to increase fees. Democrats are threatening to raise numerous “fees” by majority votes – so they don’t need Republican support.
The Republicans call for a 10 percent cut in state spending, to save $940 million a year, but would maintain health insurance for the poor, including dental care, that the governor would cut under his January budget proposal.
There also would be cuts of higher education by $600 million a year, and a requirement for higher community college fees.
The GOP would reduce prison spending by $500 million a year by reducing inmate health care and prison substance abuse programs.
The Republican plan would increase state borrowing over the next few months to a “staggering $30 billion or more,” wrote Sacramento Bee columnist Dan Walters, including cash-flow loans as well as revenue anticipation warrants and bonds paid off by the state’s share of tobacco settlement payments.
Citizens’ Budget. A plan to balance the California state budget over two years – without raising taxes or making Draconian cuts in services – was unveiled as the “Citizens’ Budget 2003-2005” by the Performance Institute and the Reason Foundation.
Carl DeMaio, director of the project team that spent the past five months analyzing spending practices of each state agency, told an April 30 Capitol news conference that more than $18 billion in possible savings were found. Balancing the budget over two years requires that only $11.7 billion in reductions be made.
The research found that compared with spending in other states, “California taxpayers are paying more and getting less in services than any other state,” Mr. DeMaio said. “Every time we compared what other states are paying, California came up short.”
Instead of across-the-board spending cuts, the plan calls for evaluating each state program and consolidating and streamlining them accordingly, with a commission set up to review 20 percent of the state’s agencies each year. Such a process in Texas has abolished 44 agencies and consolidated 11. The proposal calls for limits in state revenue growth pegged to population and inflation increases.
It would “restore teeth” to a modified “Gann” spending limit, referring to the 1979 limitation that was later emasculated. There would be a balanced budget “trigger,” so the Legislature could make midyear adjustments. There would be the opening of dialogue on fundamental tax reform in quest of a more stable tax system, Mr. DeMaio said.
The biennial budget plan, besides holding the line on tax and fee increases, would reform workers’ compensation insurance, and help make California the most business-friendly state in the union, he said. “Now the state has a sign up that says we are closed for business.”
April Revenues are Down. The state’s revenue shortfall is getting worse, said Finance Director Steve Peace. On April 29, he said income tax payments received since April 15 were $600 million below Department of Finance estimates of last January, when the administration said the deficit was as large as $35 billion over the next 18 months.
(Others have said the deficit is more like $26 billion, accusing the governor of fudging it upward to dramatize the need for deeper cuts and more taxes. He has proposed about $8 billion in higher taxes by imposing a penny more on the sales tax, adding higher income tax brackets and hiking the tobacco tax.)
Mr. Peace said the deficit could be billions of dollars worse when the governor presents his May revision, with fresh economic forecasts, on May 14.
Temporary Taxes. According to the Los Angeles Times, Democrats will try to persuade Republicans to agree to a new tax that would be temporary, such as a half-cent sales tax increase that would raise $2 billion a year.
But, according to Assembly Member Ray Haynes, one of the most outspoken anti-tax Republicans, “We will not compromise on taxes.”
Republicans also have threatened to go to court and try to block the anticipated increase in the car tax, which lawyers for the governor and the state controller have said can be triggered without a vote of the Legislature or additional legislation. When the governor releases the May budget revision, he is expected to announce that declining state revenues have necessitated an increase in the car tax, tripling vehicle license fees to raise about $4 billion a year.
Global Settlement. California expects to get about $40 million from the global settlement that imposes $1.4 billion in penalties on Wall Street firms. Governor Davis congratulated the Securities and Exchange Commission, the New York attorney general and others for the settlement stemming from an investigation of conflict of interest in Wall Street analyst research. According to California Corporations Commissioner Demetrios Boutris, the settlement will help fund the financial education and consumer protection program that the governor put in his budget last year.
After listening to a discussion and critical comments at the April 29 Franchise Tax Board meeting about the staff’s e-filing program, Controller Steve Westly, chair of the board, directed the staff to submit a report with recommendations on the programs. He said the report should be prepared with input from the private sector.
Major concerns surfaced about the new “netfile” program and the failure of the FTB Web site to allow taxpayers to download tax forms during key hours on April 15.
According to Lisa Crowe, chief of the FTB’s filing division, only 12,000 taxpayers have taken advantage so far of the new direct e-filing “netfile” program that was approved by the board last fall. She said it cost $260,000 to develop. She added that the program protects taxpayer privacy.
Doug Farry, representing Intuit, said the IRS e-filing model, which works in conjunction with private enterprise, is a better model for California. He said there was a substantially greater percentage increase in federal e-filing than in California.
He also said the savings to the state resulting from e-filing is the same, whether it is through a private-sector program or through the state’s “netfile” portal. However, the state can avoid the added costs of the “netfile” portal by using private enterprise e-filing programs.
Cal-Tax’s David R. Doerr pointed out that it cost the state around $22 for each return filed with the new “netfile” filing portal. He said it is unfair to the taxpayers of this state that they have to pay the tax filing costs for a handful of taxpayers who want to use the “netfile” portal, particularly in light of the current budget crisis.
Expressing a contrary view, Lenny Goldberg, representing the California Tax Reform Association, said the board should continue the direct e-filing through the “netfile” program.
In a press release, Jason Mahler, vice president of the Computer and Communications Industry Association said, “Today’s report by the Franchise Tax Board provides further evidence that California is headed in the wrong direction in its attempt to promote greater use of the Internet for tax filing. The report raises more questions than it answers as to whether the FTB has truly considered the full cost implications of trying to reinvent the wheel with its own online tax preparation solution.
“Having examined those costs, the IRS and six states (Arizona, Georgia, Massachusetts, Michigan, Mississippi and New York) chose instead to enter a partnership with private tax preparers. As a result, they have experienced tremendous growth in the number of e-filers at virtually not cost to their budgets.”
During the discussion on the FTB’s Web site failure on April 15, Ms. Crowe emphatically said the FTB site did not “crash.” Noting press reports that gave that impression, Board Member Carole Migden pointedly asked, “Was the system down or wasn’t it?” FTB Executive Officer Gerald Goldberg responded that staff took the Web site down for about two hours, due to the heavy volume of requests for forms.
Mr. Westly said staff failed to anticipate demand, and needed to do a better job.
Other FTB meeting developments:
FTB
Meeting Protocol.
Mr. Westly promised that an announcement would be made about scheduled meetings
for the rest of the year. He said that the board would hold three meetings a
year and a schedule would be adopted to allow taxpayers to calendar them. The
next meeting will be in September. He said he planned to run the meetings
informally but expeditiously. He added he wanted to give interested parties a
better opportunity to participate, and balance taxpayer rights and the
application of the law.
Representing the Director of Finance at the meeting was Floyd Shimomura, chief
counsel.
Positions on Legislation. FTB staff had prepared a list of 20 tax bills, and its recommendations for a board position on each. Ms. Migden suggested the board forestall taking early positions on bills. “They change,” she said. There was a brief discussion by staff of AB 735 (Campbell), the taxpayer privacy rights bill. However, the board decided not to take a position on any of the bills on the agenda.
Action
Deferred on Staff Attempt to Resuscitate Two Regulations on Short-Term Financial
Instruments Defeated by a Prior Board. FTB staff urged the board to revive two regulations
defeated by the prior board, but action on the request was deferred until the
next board meeting.
One regulation (Regulation 25120) would have defined “gross receipts.”
FTB staff has taken the position that holding investments in short-term
financial instruments to maturity is a return of capital that is excluded from
the sales factor. There are six suits pending for refund on this issue.
The other regulation (Regulation 25127c) would have provided that only
the net gains from the sale of short-term financial instruments in conjunction
with a business’ treasury function are includable in the sales factor.
Palo Alto attorney Pat Powers (Baker and McKenzie) and Los
Angeles attorney Charles Ajalat both spoke against the regulations. They both
said the matter is one for the Legislature to decide and is not appropriate for
regulation. Mr. Ajalat said the board “would be taking an illegal act” if it
adopted the staff proposal.
Mr. Powers, who is co-counsel for Microsoft in a case involving the issue (Microsoft
Corp. v. FTB, pending in San Francisco Superior Court), said when the
regulation was previously rejected in 1998, FTB staff acknowledged that the
proposed regulation conflicted with statute.
BOE Chief Counsel John Davies said the issue is not a pure policy decision and
said $242 million in refund claims are pending.
Report on “Tax Expenditures.” Staff was directed to prepare a report that will evaluate various tax expenditures, including, presumably, the manufacturers’ investment tax credit. Ms. Migden urged the staff to complete the work in time for use in budget discussions. FTB estimating guru Phil Spilberg said they couldn’t do all of them in the time allotted. Mr. Westly said his views on tax incentives differ from Ms. Migden’s views, but urged the staff to “do what you can.” He referred staff to work done on the subject by Professor Annette Mellon at San Jose State University.
Regulation on Property Factor When Natural Resource Property of Another is Used. Staff submitted a report indicating that problems are being worked out with interested parties regarding proposed regulations (Section 25137b and 25130). The changes address how to calculate the net annual rental rate of a taxpayer for property factor purposes for the use of natural resources property (oil, mineral, timber). The board authorized staff to commence the formal regulatory process for these regulations.
Regulation on Credits for Taxes Paid to Another State. The board gave staff a green light to proceed into the regulatory process with Regulation 18000-1, relating to credits for taxes paid to another state. Currently, the regulation, which provides for a credit for taxes paid in the same year, conflicts with statute that does not limit the credit to the same year.
Real
Estate Withholding Program Costly to Administer. The controversial real estate
withholding program adopted by the Legislature as part of the budget compromise
is costly to administer. According to FTB budget chief Titus Toyama, the FTB is
going to need an increase of $2.8 million and 56 positions to administer it, in
addition to what the FTB is currently spending.
Since the estimated on-going revenue from the real estate withholding program is
in the $2 million range, the on-going additional revenue would appear to be less
than administrative costs. (The $2 million ongoing figure comes from the Senate
Revenue and Taxation Committee analysis of
SB 1012, which would repeal the requirement.)
FTB Now
Set to Occupy All of the New Butterfield Road Building.
Because of its fast-growing staff, the FTB approved a staff request to occupy
all of the new building (Phase III) being constructed at the Butterfield Road
site. In 1999, the board authorized staff to use 58 percent of the space in the
new building. This decision was based on staffing levels at that time. A
performance audit had recommended reducing FTB staff by 621 positions between
1998-99 and 2002-03. However, only 74 positions were eliminated.
FTB now projects that its staff will expand to use the entire building within
five years.
Tax Shelter Conference. Executive Officer Goldberg asked for, and was granted permission to hold a tax shelter/tax avoidance seminar later this year in conjunction with UC Davis. Will taxpayers attending the conference get tips on how to shelter income from tax, despite the obvious intent to crack down on such activities?
Regulation Relating to Senior Citizens Property Tax Relief. The Franchise Tax Board administers the Senior Citizens Property Tax Relief program and the board approved a staff request to notice comprehensive regulations defining certain unclear terms (see proposed regulations Sections 20501-20504). The staff intends to bypass the symposium process because “the regulations are not anticipated to raise any substantial public controversy.”
Symposium
for Regulation on Income From Intangible Property. The board approved a staff request to
hold a symposium to kick off a regulatory project (Regulation 17952) on
the timing and sourcing of gains from intangible property. Tentatively, the
symposium will be held on August 19, but if no interest is expressed by July 8,
the symposium will be canceled and the formal regulatory process on the
regulation will be initiated.
Gina Rodriquez, representing Spidell Publishing, expressed concerns about the
regulation.
Confronted by an independent analysis that would likely turn voters away, a public employees union has pulled back an initiative that sought to make it easier to raise taxes.
The action by the Service Employees International Union (SEIU), which represents thousands of state and local government employees in California, came on the eve of the measure’s April 30 due date for delivery to the secretary of state for clearance to circulate petitions. The measure was withdrawn from the Attorney General’s Office, where it had been submitted for title and summary – and analysis of fiscal impact.
The withdrawal also came days after the California Taxpayers’ Association and the California Chamber of Commerce joined forces to submit initiatives to the attorney general that are intended to counter the SEIU initiative and protect taxpayers from excessive taxation.
Nicknamed the “Budget Accountability Act” by its sponsors, the proposed constitutional amendment – targeted for the March 2004 statewide primary election – would have reduced the vote requirement in the Legislature to pass the state budget or raise taxes from two-thirds to 55 percent.
In their analysis of the SEIU proposal, nonpartisan Legislative Analyst Elizabeth Hill and state Finance Director Steve Peace concluded that it would result in “potential major increase in state tax revenues and spending, depending on future legislative action.”
Commenting on developments, Allan Zaremberg, president of the California Chamber of Commerce, said: “When you make it easier for the Legislature to raise taxes, California’s citizens are going to pay more taxes – and further impact our already struggling economy. That, in essence, is what this measure would have done. We believe that California voters would have soundly rejected the initiative after learning of the costly implications from the legislative analyst.
“If they decide to rework the proposal and refile the initiative, we are fully committed to educating California voters on its true provisions, which would cost taxpayers untold millions. We are confident that a similar measure would be defeated.”
It was not known whether SEIU would modify and resubmit its initiative, hoping for a more favorable fiscal impact analysis. It would become a more expensive venture with union dues to pay for professional signature-gatherers over a shortened timeframe, and backers are believed to be reluctant to put it off until the higher-turnout general election in November 2004. (As Caltaxletter went to press, there were rumors that a rewritten initiative would be resubmitted as early as today, May 2 – Editor.)
After 32 years with the State Board of Equalization, Executive Director James E. Speed announced his decision early this week to retire, effective May 9.
“He just decided it was time to retire. He was not forced out or anything like that,” said Dean Seavers, a board spokesperson, when asked about the sudden timing of the retirement. Considering his age and years of service, it would appear that he has maximized his state retirement benefits.
At Caltaxletter press time, the board had not issued a news release to officially announce Mr. Speed’s retirement decision.
Mr. Speed, 57, joined the board as an auditor in San Francisco. He has been in the Sacramento headquarters for the past 10 years, the last three as executive director.
The board will appoint an interim director while it conducts a search for a successor, Mr. Seavers said.
After listening to nearly two hours of testimony on the manufacturers’ investment tax credit on April 30, the Senate Revenue and Taxation Committee took no action on any of the four bills on the subject on calendar. Presumably, the committee will decide the fate of the credit at a future meeting.
Representatives of a number of businesses and business groups, too numerous to mention in this space, pleaded with the committee to continue, and in some cases to expand, the credit.
The four MIC bills are not all identical. SB 2X (Poochigian) simply repeals the sunset date, as does SB 47 (Ackerman). SB 137 (Morrow) repeals the sunset date and also increases the credit from 6 percent to 8 percent. SB 454 (Vasconcellos) extends the MIC sunset date to 2009, changes eligibility from Standard Industrial Classification codes to the new NAICS codes, and requires companies claiming the MIC to report a substantial amount of information on wages paid employees.
The Franchise Tax Board asserts, on a static basis that does not consider the economic effects that are the reason for the legislation, that passage of any of the bills will result in revenue losses as follows: 2003-04: $40 million; 2004-05: $195 million and 2005-06: $345 million.
Senator John Vasconcellos told the committee that there should be more effort to grow the economy. He said the drop in manufacturing jobs has occurred, not because the MIC does not work, but because the economy “went south.” He urged extension of the MIC for “good” businesses that could otherwise leave the state. Senator Charles Poochigian said allowing the MIC to expire would be “wrong-headed.” He expressed concern about the loss of tens of thousands of manufacturing jobs. Senator Bill Morrow said added stimulus is needed to secure an economic rebound for California. He said an increase in the MIC is sound policy.
Senator Dede Alpert, who appears to be leaning in support of an extension, said sending a signal to business is important and added new tests need to be developed to evaluate the credit’s effectiveness. She said a sunset date must be a part of an extension.
Comments from Senate President Pro Tem John Burton were critical of the current form of the MIC. “It’s bizarre,” he said. He added that it makes more sense to give a tax credit for stuff manufactured in California.
Chris Micheli, with Carpenter Snodgrass & Associates, said the job creation standard in the MIC doesn’t count the multiplier effect and the MIC is responsible for more job creation than official figures show. In response to criticism of recent State Board of Equalization decisions on the MIC, he said the board had decided the cases correctly. He criticized the Franchise Tax Board for positions inconsistent with the statute.
Ray Rossi, representing Intel, said the credit is largely self-funded because a sales tax is paid on property purchased that is eligible for the credit.
Barry Broad, representing unions including the Teamsters, supported extension of the MIC, but said it needed to be balanced with high-wage jobs.
Dorothy Rothrock, representing the California Manufacturing & Technology Association, said a new sunset date would be counter productive as it will reduce the incentive effect of the credit.
The only opposition was voiced by two witnesses who have been out for MIC’s scalp for many years. Jean Ross, executive director of the California Budget Project, said a small minority of businesses use the credit and that big firms claim larger credits than small firms. She also credited Proposition 13 with providing more substantial tax savings to business than the MIC.
Lenny Goldberg, representing the California Tax Reform Association, said the MIC is one-tenth of one percent of the cost of doing business. He questioned the policy of allowing the MIC to firms that have to be in California.
Other committee developments:
Who Should
Assess Airline Personal Property?
The airline industry turned out in mass to support legislation shifting the
assessment jurisdiction over airline personal property from local assessors to
the State Board of Equalization. They argued that streamlining reporting would
benefit taxpayers and government. Apparently California is the only major state
in the nation where airlines must report to multiple jurisdictions.
A spokesman for United Airlines said the company files 200 property tax returns
in the United States
and 80 of those are in California. Sacramento attorney Eric Miethke (Neilsen,
Merksamer et al), speaking in behalf of the bill, said there would be no change
in amounts of tax paid by airlines.
According to the staff analysis of
SB 593 (Ackerman), county assessors currently assess aircraft owned by
air carriers based on a formula derived from negotiations between assessors and
airlines in 1998 and 1999. The negotiations established the assessment
methodology to be used by assessors for 1998-99 through 2003-04; the settlement
was seen as the alternative to protracted litigation between assessors and
airlines.
Assessors and county representatives objected to the bill. Los Angeles County
Assessor Rick Auerbach explained why he thought the bill was a bad idea and
wouldn’t work in practice. He said the BOE does not have the experience or staff
to assess airlines and noted the assessment methodology for airplanes is set
forth in Revenue and Taxation Code 401.15. He added that fixtures, which are
real property, would still be assessed locally. Because of this, there could be
double taxation as the county might classify a property as a fixture that the
BOE would pick up as personal property. Yolo County Assessor Dick Fisher pointed
out that only one-half of United’s value at the San Francisco Airport was
aircraft value. Pat Leary, representing counties, objected to provisions
transferring funds from the grant to county assessors for assessment
administration to the BOE.
Senator Burton said his main concern with the bill was that he did not trust the
State Board of Equalization to set correct values. “As bad as local assessors
may or may not be, there is nothing like the Board of Equalization,” he said.
Committee Chair Gil Cedillo said the bill will be held in committee to give
proponents time to work out amendments to deal with problems raised.
Business
Changes-Of-Ownership Reporting and Penalties: Prelude to a Split
Roll?
Legislation expanding reporting requirements for businesses and increasing
penalties for non-reporting of changes of ownership (SB
17, Escutia) was approved on a 4-3 party-line vote, with Democrats
voting aye and Republicans voting no.
SB 17 began life as a “split roll” property tax assessment bill, seeking
to remove Proposition 13’s acquisition value assessment provisions from publicly
traded corporate property. However, it was amended on April 21 to require all
publicly traded corporations to file an annual real property statement with the
BOE. The bill also increases the penalty for failure to file a
change-of-ownership statement to the greater of $10,000 or 10 percent of current
year’s taxes. It also adds a new penalty for misrepresenting the occurrence of a
change of ownership equal to the greater of $25,000 or 25 percent of current
year’s taxes. The Franchise Tax Board would also be required to report to the
BOE the names of all corporations that do not answer the change-of-ownership
question on tax returns.
Lenny Goldberg spoke in support of the bill, saying it will address reporting
and enforcement issues.
Matt Sutton, speaking for the California Manufacturers & Technology Association,
objected to the increase in penalties. Concern was also expressed by other
business lobbyists that the provisions in the bill are simply a prelude to a
split roll.
Earned Income Tax Credit Touted. California does not have an earned income tax credit as federal law provides, and Senator Cedillo wants to change that. His SB 224 would provide a California refundable earned income tax credit equal to 15 percent of the federal credit. He said the proposal will help stimulate the economy as recipients of the tax largesse will spend the money. The Franchise Tax Board has scored the bill as a $640 million revenue loss. Speaking in support were Ms. Ross and Mr. Goldberg. Due to the revenue loss, the bill was placed on the suspense file.
Helping
Spouses of Armed Forces Personnel Who Died on Duty. With the country celebrating a victory
in the war with Iraq,
the committee decided to lend a helping hand to the spouses of members of the
armed forces killed on active duty.
SB 948 (Morrow), which was approved unanimously, exempts the income of
such spouses from California
income tax in the year of death and three following years.
Senator Morrow reported that 16 servicemen from California have been killed in
Operation Iraqi Freedom.
Authority for Higher Sales Tax in Los Angeles County Approved. Los Angeles County Sheriff Lee Baca has his sights set on an increase in the sales taxes in Los Angeles County to offset budget cuts to his department. The committee approved legislation he sponsored (SB 566, Scott) that raise the cap on sales taxes imposed by Los Angeles County from 1.5 percent to 2 percent and allows sales tax increase proposals to be placed on the ballot by initiative. The current combined rate in the county is 8.25 percent.
NOL
Suspension and Real Estate Withholding Criticized.
Last year’s tax provisions suspending
the net operation loss carryforward for two years and imposing a withholding
requirement on specified sales of real estate by California
residents came under sharp criticism at the hearing. However,
SB 1012 (Poochigian), repealing last year’s action on these provisions,
went to the suspense file due to an estimated $1.225 billion revenue loss.
The California Association of Realtors voiced strong support for the bill,
saying the withholding provisions result in forced overwithholding. Gina
Rodriquez, Spidell Publications Sacramento editor, said the withholding
provisions are a mistake and government should not ask taxpayers to pay more
than they owe. She added that the government doesn’t require overwithholding on
wages.
Lenny Goldberg of the California Tax Reform Association spoke against the bill,
saying last year’s NOL provisions were part of a deal to increase the NOL
eventually to 100 percent.
Local Tippler’s Tax Bill Put Over. Legislation authorizing counties, with voter approval, to impose a “tippler’s tax” on alcoholic beverages (SB 726, Romero) was put over until the committee’s May 7 hearing, as witnesses had to catch a plane back to Los Angeles.
Sales of Tobacco Products. The committee approved SB 1016 (Bowen), prohibiting mail-order sales of cigarettes in California unless the sellers comply with the federal Jenkins Act regarding reporting. Senator Debra Bowen said the bill was modeled after a New York law.
Capital Gains Exemption: Small Business Stock. Legislation to exempt from income the gain on sales of small business stock (SB 935, Knight) was sent to the suspense file. Mr. Goldberg pointed out investors would get a California tax break for investments all over the world (even in France).
Local Sales Tax Authorization for City Park Purposes Fails. A precedent-setting bill to authorize two cities to levy a sales tax for the purposes of a Recreation and Park District (SB 402, Florez) was defeated by the committee. Both the cities of Coalinga and Huron would have been authorized to impose a 0.25 or 0.5 percent sales tax, with two-thirds voter approval. However, revenues could only be used for park and recreation activities within the Coalinga-Huron Park and Recreation District. The bill was given a courtesy reconsideration.
Disabled Veterans’ Property Tax Exemption Increase Sidetracked. Disabled veterans told the committee that their property tax exemption had not kept pace with the increases in the value of homes. The committee, however, sent SB 764 (Morrow), doubling the exemption to $200,000, to the suspense file.
Consent Calendar Bills Approved. Four bills on the committee’s consent calendar were approved. They were: SB 615 (Cedillo), eliminating an obsolete notation on the property tax roll; SB 1060 (Senate Revenue and Taxation Committee), containing minor sales tax changes suggested by the BOE; SB 1063 (Senate Revenue and Taxation Committee), containing minor property tax changes suggested by county clerks, and SB 1064 (Senate Revenue and Taxation Committee), exempting limited liability companies from tax if they are federally exempt title holding companies.
After considerable arm-twisting, a bill to restructure local government tax revenue sources barely cleared the Assembly Revenue and Taxation Committee on April 28 in the face of opposition from cities that now enjoy high sales tax revenue.
The bill, AB 1221, is co-authored by Darrell Steinberg, a Sacramento Democrat who chairs the powerful Assembly Appropriations Committee, and John Campbell of Irvine, the ranking Republican on the Assembly Budget Committee. They are trying to encourage more residential and manufacturing development in zoning decisions, addressing so-called fiscalization of land use with local governments competing for sales tax-producing retail outlets.
The bill would require cities and counties to give one-half of their Bradley-Burns sales tax revenue to the state in exchange for equal value of the property tax. From a base year of 2004, cities and counties would have the same amounts of revenue as before. However, from that point forward, they would decide whether they would allow more residential or retail development, knowing that property tax revenue is a more reliable, faster-growing source, Mr. Campbell said.
The California Chamber of Commerce, the California Labor Federation and the California Home Builders Association, among others, lined up in support.
However, lobbyists for cities that have so-called “big box” retailers or auto malls opposed the bill, as did an association of contract cities. Dwight Stenbakken, head of the League of California Cities, said 85 percent of the Bradley-Burns sales tax goes to cities. He said the bill needs to be linked to some constitutional protections so that the state doesn’t rip off cities’ revenues. Mr. Campbell said the bill contains a “poison pill” so that if the state tries to pull property tax revenues away, the system would revert back.
Mr. Steinberg urged passage, saying four out of five cities support the bill. “The time is now,” he said, expressing doubt that contract cities will even come to the table and negotiate. “You don’t want to stop common-sense reform just because you can’t fix everything at one time.”
Mr. Campbell said the opposition is based on a “fear of change” at the expense of taking a realistic look at a problem. The authors said they were open to considering constitutional protections, reported the Inland Valley Daily Bulletin.
Following testimony in opposition, Diane Williams, a Rancho Cucamonga council member, told the newspaper: “This is an awful bill, just awful.” The city of San Bernardino’s lobbyist, Charles Bader, said the bill would deprive the city of $4 million over the next five years. “Losing city control over the sales tax is a horrible thing,” he said.
The initial roll call was far short of the four votes needed for passage, but Huntington Beach Republican Tom Harman and Democrats Marco Firebaugh of South Gate and John Laird of Santa Cruz switched from not voting to support, joining San Francisco Democrat Mark Leno. Mr. Firebaugh, the Assembly’s majority floor leader, said he was “very worried about this measure … I will oppose it on the floor in its present form.” Committee Chair Ed Chavez, D-City of Industry, abstained, along with Vice Chair Mark Wyland, R-Escondido, and Joe Simitian, D-Palo Alto.
Other committee actions:
Farmworker Health Care. A party-line vote with the committee’s five Democrats in favor and two Republicans opposed approved AB 923 (Firebaugh), which would repeal certain agricultural sales and use tax exemptions and funnel the revenue into tax credits for farmers who provide health insurance for farmworkers. This fast-tracked legislation is sponsored by the United Farm Workers and the California Medical Association.
“Nearly 70 percent of farmworkers lack health care coverage,” said Assembly Member Marco Firebaugh, who was added to the committee for this meeting.
The California Farm Bureau Federation was among opponents, arguing that it would benefit large agribusinesses at the expense of small family farmers. “It’s going to take a sales tax (exemption) and redirect it to those who are already providing insurance. It is robbing Peter to pay Paul,” said Farm Bureau lobbyist John Gamper.
Effective next January, sales and use tax exemptions would be repealed for purchases of liquefied petroleum gas for farming; timber harvesting equipment and machinery; diesel fuel used in farming and food processing, and racehorse breeding stock. The tax credits for providing health insurance would be capped so they would not exceed the amount that the state would collect without the exemptions. According to the committee analysis, the State Board of Equalization has estimated that about $80 million in revenue may be available for tax credits in 2004.
Real Estate Withholding. AB 1338 (Chavez), permitting a seller of real estate to elect to determine the amount of withholding based upon the maximum tax rate for the expected taxable gain, was passed out of the committee from the suspense file. The April 22 amended bill removes all sales of principal residences from the withholding requirements, thus making it consistent with the governor’s 2003-04 state budget proposal, according to the committee analysis. The FTB estimates a net cash flow loss to the state of $30 million in the 2003-04 fiscal year and $3 million annually thereafter.
Another bill, AB 628 (Runner), which would have eliminated the requirement to withhold 3.3 percent of the sales price of real property on certain properties, was held in the committee.
Also held in the committee was AB 1490 (Benoit), which would have expanded the withholding exemption for the principal residence of the seller to any residence that was owned and used as a seller’s primary residence.
Tax Shelters. AB 1601 (Frommer), giving the Franchise Tax Board more time to audit and penalize abusers of tax shelters, was passed out of the committee from the suspense file. This bill may be broader in its application than advertised.
Sales and Use Tax: Reporting. AB 1741 (Committee on Revenue and Taxation), was approved. It authorizes a voluntary use tax reporting program for qualifying purchasers to voluntarily register with the BOE and pay their past-due use taxes in exchange for a reduced number of years of past-due liabilities.
Minimum Franchise Tax. AB 678 (Firebaugh), providing a small business exemption from the $800-a-year minimum franchise tax, was placed on the suspense file. So was AB 484 (Cogdill), allowing a small company, in a net operating loss position, to file for a refund of the minimum franchise tax. The California Tax Reform Association opposed both measures, with Lenny Goldberg complaining that subsidiaries of huge companies would benefit. “I have never seen a small business where the minimum franchise tax is a problem,” he said.
Authors of both bills said it was their intent to limit the tax break to small and deserving companies.
Taxpayer Privacy. AB 735 (Campbell), which would have prohibited the FTB from allowing confidential taxpayer information to be made public as part of a legal proceeding – unless there is a reasonable showing of necessity – was held in committee. This “Taxpayer Privacy Bill of Rights” proposal was prompted by the case of Gil Hyatt, a former Californian who moved to Nevada and recently prevailed in the U.S. Supreme Court to gain the right to sue the California income tax agency for alleged intentional torts committed during his residency audit. (See Caltaxletter of April 25.)
Natural Heritage Preservation. AB 1502 (Laird), allowing bond funds to reimburse the general fund for credits issued under the Natural Heritage Preservation Tax Credit Act, was approved.
FTB Debt Collections. AB 1742 (Committee on Revenue and Taxation), was approved. The bill would help the FTB collect non-tax debt by using new-hire and contractor registry information. Most of the $2 million or more a year that would be raised would come from delinquent vehicle registration collections, with the rest attributable to court-ordered debt collections. The bill also would clarify existing law on how the FTB calculates interest on erroneous refunds. It allows businesses that incorporate within 15 days of the end of a fiscal year to disregard that period as a taxable year when determining whether they are eligible for a minimum franchise tax exemption during their first taxable year.
Personal Income Tax: Alimony Deduction. AB 612 (Campbell), conforming to a U.S. Supreme Court decision allowing nonresidents and part-year residents to proportionately deduct out-of-state alimony payments, was placed on the suspense file. Mr. Campbell said there is an unequal enforcement problem because the FTB will advise a taxpayer to do one thing – pay the tax – and, if they don’t, they don’t pursue because of the 1998 (Lunding) court decision involving a New York tax dispute. Gina Rodriquez of Spidell Publishing said this has been a long-festering issue with tax preparers and the FTB’s estimate of revenue loss ($5 million) was “completely overstated” when the issue first surfaced. Mr. Campbell said the revenue loss to the state would be about $300,000 – “not very much.”
BOE: Managed Audit Program. AB 1043 (Liu), approved from the suspense file, reauthorizes the BOE to administer a managed sales and use tax audit program.
Income Taxes: Designated Contributions. AB 132 (Chavez), approved on consent, provides rules that the FTB must use when adding income tax check-offs to the personal income tax return.
The Assembly Local Government Committee on April 30 defeated what supporters called “equity and fairness” legislation designed to require cities to shoulder the actual costs when they take over an electricity utility’s property instead of shifting some of the burden to taxpayers elsewhere.
A 3-2 vote rejected AB 1378, authored by Assembly Member Jerome Horton and sponsored by Cal-Tax. The bill would have protected taxpayers in the event of a city choosing to municipalize a public utility and taking utility property off the tax rolls. Needing five votes, the measure received support from committee Chair Simon Salinas, D-Salinas; Gene Mullin, D-San Mateo, and Jay La Suer, R-La Mesa. In opposition: Mark Leno, D-San Francisco, and Lynn Daucher, R-Brea. Not voting: Darrell Steinberg, D-Sacramento; Bonnie Garcia, R-El Centro; Sally Lieber, D-San Jose, and Patricia Wiggins, D-Santa Rosa.
Under current law, when a city chooses to condemn public utility property and convert to a city-owned utility, that property is taken off the tax rolls, reducing the amount of property tax dollars allocated to everyone in the county (whether served by the new municipal utility or not). AB 1378 would have required a city to account for that loss in revenue by re-allocating future property taxes from that city to those that lost revenue due to the city’s municipalization effort.
“This is an issue of equity and fairness,” declared Mr. Horton, who noted that every time there is a city condemnation of investor-owned utility property, “the state takes a hit” because it has to replace revenue lost by school districts in the affected county. This is a straight-forward bill, said Greg Turner, Cal-Tax general counsel and legislative director. Southern California Edison’s Tim Schmelzer argued that in all fairness the jurisdiction choosing to municipalize should bear the full costs.
Opposition from the League of California Cities was largely based on concern over the precedent-setting nature of the bill. Currently, when a city condemns private property, no reimbursement is required to those jurisdictions losing the property tax revenue. They fear AB 1378 sets a precedent for future efforts at backfill. The California Municipal Utilities Association also opposed the measure, arguing that the bill was simply an attempt by investor-owned utilities to thwart the will of the voters to approving municipalization of utility service by making it more expensive.
How many tax dollars are involved? That hasn’t been broken down, but proponents said whether it is $100,000 or $10 million, the basic fairness argument could not be denied.
Observers were surprised that two Republicans failed to support the bill, although one of them, Ms. Daucher, is a former city of Brea council member and is rumored to have been lobbied by the city just prior to the committee vote. It was noted that the majority of cities in the state would benefit from the measure, causing proponents to question whether the league’s position was an accurate representation of its membership’s interests.
Because the bill was fiscal, it is likely dead for this year, despite having been granted reconsideration, as a rule waiver would be necessary for the bill to be reconsidered. Rule waivers require a two-thirds vote on the Assembly floor, and Republicans have thus far indicated such a waiver will not be granted to any bill.
Saying he didn’t want to interfere with negotiations on the state’s budget deficit, Assembly Transportation Committee Chair John Dutra persuaded his panel to hold up action on an oil refinery tax bill. He said the cumulative effect of various tax and fee measures may make the budget agreement more difficult to reach.
Assembly Member Manny Diaz, author of the refinery tax, AB 1500, pulled the bill from the committee’s April 28 agenda.
The committee passed a bill that would let San Francisco impose its own car tax, or vehicle license fee. The vote was 11-7 on AB 574 by Leland Yee, who emphasized his bill is not a fee but merely enables the city and county of San Francisco to raise taxes. Committee Member Todd Spitzer, challenging the measure, questioned why the bill did not have a provision to allow San Franciscan’s a two-thirds vote on the tax. Brian Maas of the Motor Car Dealers said an increase in the VLF on motorists in San Francisco would be inappropriate.
Legislation authorizing San Mateo County to impose a $4 car tax (AB 1546, Simitian) was approved by an 11-7 vote.
Also on the Assembly Transportation Committee calendar were:
AB 935 (Diaz), authorizing the Santa Clara Valley Transportation Authority to impose special benefit assessments and issue specified rail transit bonds, was approved by a 13-4 vote. (See separate story on the VTA below.)
AB 1063 (Firebaugh), authorizing 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, failed passage but reconsideration was granted.
Meanwhile, in other legislative action, the Senate Appropriations Committee on April 28, by a 7-3 vote, approved SB 103 (Alpert), providing that an out-of-state retailer is obligated to collect tax on sales to California customers if it has representatives who repair or service property bought from the retailer, if it has an ownership interest in a California business or if it sells the same products under the same name as the California business.
The committee also moved SB 80 (Oller), which would let a taxpayer claim a theft loss from a prior tax year, to the suspense file.
In the Assembly Governmental Organization Committee, legislation authorizing counties to impose taxes on cigarettes (AB 1040, Leno) was defeated by a 4-9 vote on April 28. Courtesy reconsideration was granted.
Legislation imposing an unspecified payroll tax on California employers to fund a health care program (AB 1528, Cohn) was approved by a 17-4 vote of the Assembly Health Committee on April 29.
The chair of Governor Gray Davis’ tax policy commission – a cable industry executive – has laid out a “game plan” to tax the competition, prompting protest from the rival satellite television industry.
Eric Daniels, director of state and local government affairs for the California Space Authority (CSA), on April 29 distributed a letter to “interested parties” in which he attached William Rosendahl’s communication to fellow members of the Governor’s Commission on Tax Policy in the New Economy. Mr. Rosendahl, the commission chair as an appointee of the governor, is vice president of political affairs for Adelphia Communications, a cable company, and he is chair of the California Cable Telecommunications Association.
Mr. Daniels provided an April 24 e-mail from Mr. Rosendahl to commission members entitled “The Game Plan.” It calls for the establishment of “single statewide utility taxes” and a change in the way “the delivery of TV service is taxed so cable and satellite are on a level playing field.”
Taxing direct broadcast satellite (DBS) service will give the state a more reliable tax base, Mr. Rosendahl wrote, because migration of customers to DBS will no longer result in decreased revenues. The state tax will neutralize any overall revenue reduction, he wrote.
Specifically, Mr. Rosendahl recommended a statewide DBS tax that approximates the tax and fee burden on cable TV operators and subscribers: “an 8 percent tax on the total gross of DBS subscribers’ monthly bill is an equitable solution to ensure that similarly situated taxpayers are taxed similarly.”
According to Mr. Daniels, the commission chair “is clearly using his position … to influence tax policy in favor of his industry and at the expense of those that compete against his industry.”
Mr. Rosendahl, in his memo, said the recommendation of a DBS tax “is consistent with the commission’s charge under Revenue and Taxation Code Section 38065. He said 14 other states tax DBS service at rates ranging from 4 percent to 13.17 percent.
The CSA has attempted to present its case before the commission and, through lack of advance notice of a meeting, was thwarted in that effort, Mr. Daniels said. However, he said he has been assured of more advance notice in the future. However, as of April 29, none had been forthcoming as the commission prepares for a mid-May delivery of its next interim report to the governor and Legislature, Mr. Daniels said.
Mr. Daniels said he wrote Mr. Rosendahl on December 16, 2002 to express the CSA views, but has not noticed that they have been “heard” by the commission.
In that letter, Mr. Daniels said the two television provider mechanisms are different and the taxing structure that exists for cable “cannot be equated” for satellite TV. Cable companies pay a fee, much like a business license fee, to be “the exclusive provider,” he said. Satellite TV service providers “do not monopolize a community, (so) there is no need for such contracts with local governments. He also said that satellite TV technology does not use wires that require cutting of streets, which is a justification for levying utility user taxes.
As Caltaxletter went to press, Mr. Rosendahl had not replied to a message seeking reaction to Mr. Daniels’ assertions.
Senator Don Perata’s plan to increase tolls on San Francisco Bay Area bridges by 50 percent (from $2 to $3) cleared the Senate Transportation Committee on April 29 by a 7-2 vote. SB 916 (Perata) would generate $140 million a year in added revenues from bridge users. If the measure passes the Legislature, it still will require approval of Bay Area voters by a majority vote.
Funds would be used for more trains, buses and ferries, in an attempt to reduce bridge congestion. One-half would be used for construction and one-half for operating expenses.
“Today’s vote brings us a step closer to solving Bay Area gridlock,” Senator Perata said.
There are critics of the plan. Senator Tom McClintock expressed concern that the bill focuses on transit when funds are needed for road construction and maintenance. The Contra Costa Times (on May 1) reported the bill is drawing few Contra Costa fans. County Supervisor Mark DeSaulnier said, “Given the fact that four of the seven bridges touch this county, I don’t think the bill has enough in it for us.” Senator Tom Torlakson of Antioch said, “I’m adamant that the (fourth bore) for the Caldecott Tunnel be included.”
Other critics site the woes of the Santa Clara County Transportation Agency as evidence that the public is not that interested in transit and such expenditures will constitute a waste of public money.
The light rail system operated by the Santa Clara Valley Transportation Agency (VTA) is one of the worst in the country, according to an internal report reviewed by the San Jose Mercury-News (April 28.)
What the Mercury News found:
Slow: “Operating at an average speed under 15 miles an hour, Silicon Valley’s light-rail network is the slowest among comparable urban systems in the nation.”
Costly: “It is also the most costly to operate per passenger mile.”
Subsidy: “And, it’s one of the most heavily subsidized transit operations in the country.”
In the Gilroy Dispatch (of April 28), VTA employee Kim Wayne, noting that the VTA has a “huge bureaucracy,” said county transit riders are not getting what they pay for. According to the VTA employee, “The existing light rail system, which is full of engineering foul-ups and cost overruns, is pressing on … New light rail cars are being delivered, but can’t be used because of platform heights miscalculated. Bus divisions are being expanded, yet the newest division in the northern most tip of the county may be mothballed.”
Robert Peskin, a light rail expert with AECOM Consult, Inc., a firm hired by VTA to review its operations, told the Mercury-News, “The public is voting with its feet.” Ridership has fallen by 32 percent (to 2,550 weekday trips) in the past three years. Operating costs have soared from 86 cents per passenger mile in 2001 to $1.55 per passenger mile in 2002. This is the highest cost among peer agencies.
In the 1970s and 1980s rail boosters said that light rail could eventually entice 30 percent of motorists to leave their cars at home. Yet, public transit now accounts for only 3 percent of all trips in Santa Clara County.
With respect to fair-box revenue, VTA collects only 12 percent of operating costs from fares, well below the 30 percent to 35 percent average of peer agencies.
The average speed of light rail is about 15 miles an hour. The Mercury-News said it takes an hour and twenty minutes to get from the Santa Teresa Station in South San Jose to Lockheed Martin in Sunnyvale. This is a considerably longer time than driving, even during the economic boom when valley roads were more congested. (Editor’s note: A trip down Highway 17 between Los Gatos and San Jose at evening commute time on April 25 found the freeway uncongested and cars traveling at the speed limit.)
As California’s business leaders singled out workers’ compensation insurance as their biggest single cost problem, Governor Gray Davis and Insurance Commissioner John Garamendi announced a plan to reduce costs by $1.5 billion.
However, according to a report in the San Francisco Chronicle (May 2), the governor refused to say that legislative approval of the ideas would end the doubling and even tripling of workers’ comp premiums facing big and small employers in both the private and public sectors.
According to the Chronicle, the $20 billion system, created in 1913, has become a “tangled thicket that either ensnares or enriches some of the most powerful interests in the Capitol.” The paper quoted Mr. Garamendi: “There will be very significant opposition from people who don’t want to see a smaller piece of the pie.”
The business community has been lobbying for years for tighter controls that would give legitimately injured workers the benefits they deserve from a system that is among the most expensive in the country. Too many dollars are siphoned away by lawyers and medical providers.
Among the proposals touted by the governor is SB 228 (Alarcon), which requires a fee schedule for unregulated outpatient surgery centers – one of the major cost drivers in the system, the governor said in a May 1 news release. There also are provisions to ensure access to health care services, ensuring that doctors and health providers are paid promptly, and a requirement that insurers accept or reject a benefit claim in a timelier manner.
Anti-fraud elements of the package are expected to be addressed in SB 354 (Speier), which proposes larger fines for false or fraudulent statements in connections with claims or premium costs.
Meanwhile, the California Chamber of Commerce and the California Business Roundtable (CBR) issued the 13th annual Business Climate Survey. It is a gloomy outlook of the economy and mood of leaders. The workers’ comp problem topped the list of the biggest concerns facing California business.
“The results of this year’s survey, while not surprising, are disturbing and underscore the need for the Legislature to take a hard look at measures that will help stimulate the economy and keep businesses and jobs in the state,” said CBR Chair Dick Kovacevich, chair and CEO of Wells Fargo and Company. “We haven’t seen this level of pessimism among the state’s business leaders in the survey’s 12-year history.”
Ray Holdsworth, state chamber chair and president of AECOM Technology Corporation, said, “The Legislature must focus on stimulating the economy and creating jobs.”
The report also came out during a week in which one of the biggest business-bashing bills of the year was described by the Los Angeles Times (April 30). Senator Gloria Romero is carrying SB 335, which would impose a “three strikes” law against companies, allowing trial lawyers to feast on so-called white-collar crime. A 5-2 vote approved the bill in the Senate Judiciary Committee, despite opposition expressed by the California Chamber of Commerce’s Dominic DiMare. According to The Times, he said it was so broadly written that the activity of only one company executive could set off a chain of events to bring an entire corporation down, including subsidiaries in other states. “It takes people to do the crime, not the corporation,” he said.
Split Roll Property Assessments: Non-Residential Property Loses Proposition 13 Acquisition Value Assessment Protection. ACA 16 (Hancock) institutes a “split-roll” beginning with the 2005 lien date. Non-residential, other than commercial agricultural property, would be assessed each year at fair market value, rather than on acquisition value as provided by Proposition 13.
Protection of City and County Revenues. ACA 17 (Daucher) prohibits the Legislature from reducing local Bradley-Burns sales taxes below 1.25 percent. It also allows a city or a county to give up 0.5 percent of its sales tax rate to schools in exchange for an equal amount of property tax from schools and prevents the Legislature from passing a law decreasing the electing jurisdictions total amount of property tax, adjusted for inflation.
MIC Repeal. AB 651 (Corbett) was amended on April 24 to phase out the manufacturers’ investment tax credit over five years and phase-in a new 2 percent (growing to 7 percent) tax credit for taxpayers participating in a Career Technical Education Campaign.
Corporate Apportionment Formula Revisions. AB 809 (Harman) was amended on April 30 to require specified multi-state taxpayers to use for 2005 an apportionment formula of property, payroll and sales weighted by a factor of six. For 2006, specified taxpayers would be required to apportion income using a single sales factor.
Repeal of Farm Sales Tax Exemptions. AB 923 (Firebaugh) was amended on April 24 to delete prior contents and add provisions repealing sales tax exemptions for farm equipment and machinery, timber harvesting equipment, race horse breeding stock, diesel fuel used in farming and LPG used in farming. The bill also provides a tax credit for employers for part of the costs of providing health insurance. The credit is a pro-rata amount determined by the amount of increased revenue created by the repeal of the farm exemptions. May 1 amendments add provisions authorizing the Employment Development Department to charge taxpayers a fee for applying for the credit.
Counties Authorized Increased Sales Taxes. AB 1065 (Longville) was amended on April 24 to authorize all counties to impose a 0.25 percent sales tax. No mention is made of voter approval requirements.
Fee for Continuing Education. AB 1182 (Ridley-Thomas) was amended April 24 to authorize the California Debt and Investment Advisory Commission to impose fees for its continuing education program.
Real Estate Withholding. AB 1338 (Chavez) was amended on April 22 to remove provisions extending the requirement to sales of principal residences. The committee analysis of the bill also says the amendments remove withholding on all sales of principal residences. However, the Legislative Counsel’s digest of the bill states that the bill extends withholding to the gain on sales on specified personal residences. The bill was amended on May 1 to also exclude general contractors operating as sole proprietors.
Local Sales Taxes. AB 1412 (Wolk), authorizing a gaggle of cities to impose added sales taxes, was amended on April 30 to add the cities of Pacific Grove, Malibu, Monterey and West Hollywood to the list.
Payroll Tax on Employers Imposed. AB 1528 (Cohn) imposes an unspecified payroll tax on employers that do not provide health insurance as a fringe benefit. Presumably, the tax will be imposed at different unspecified rates for employers with fewer than or more than 200 employees.
Boycott of Retailers That Don’t Collect Sales Taxes. AB 1632 (Leno) prohibits government from buying products from retailers that refuse to collect sales and use taxes. The BOE would be required to make public a list of retailers that do not collect (which will alert consumers on where they can buy products without paying a sales or use tax).
Minimum Corporate Tax. AB 1742 (Assembly Revenue and Taxation Committee) clarifies that inactive corporations with a taxable year of 15 days or less would count against the first year exemption from the $800 minimum corporate tax.
Omnibus Budget Tax Trailer Bills: Some Tax Preparers Must E-File Returns: Property Tax Allocations. AB 1748 (Assembly Budget Committee) and SB 7X (Senate Budget Committee) were amended April 28 with a massive number of new provisions.
Income tax preparers who prepared more than 100 individual income tax returns are required to e-file income tax returns. The penalty for transgressors is $50 per return.
The amendments also contain a number of fee increases. In addition, $50 million of property tax revenues going to redevelopment agencies is shifted to schools.
The bills would appear to violate the single subject clause of the California Constitution. The bills are also all screwed up, as the provisions don’t match either the title sections or the Legislative Counsel’s digest.
Income Tax Exclusion: Qualified Interests Paid to Widows and Kids of Dead Servicemen. SB 4 (Hollingsworth) was amended on May 1 to delete prior contents and add provisions excluding from income qualified interest paid widows or children of servicemen killed on active duty. (What about widowers?)
Fee on Manufacturers of Diapers. SB 204 (Perata) was amended on April 24 to impose on manufacturers a fee of $.0025 for each diaper manufactured and sold in California. In the prior version of the bill, the tax was imposed on diaper consumers.
Los Angeles County Transportation Sales Tax. SB 314 (Senate Transportation Committee) was amended on April 30 to delete prior contents and add provisions authorizing the Los Angeles County Metropolitan Transportation Authority to impose an additional 0.5 percent sales tax, with two-thirds voter approval.
City Sales Taxes for Coalinga and Huron. SB 402 (Florez) was amended on April 24 to authorize the cities of Coalinga and Huron to impose a 0.25 or 0.50 added sales tax, with approval of a two-thirds vote of the people.
Tax Agencies Authorized De Novo Review of BOE Decisions. SB 548 (Burton) was amended on May 1 to add provisions authorizing the executive officers of the State Board of Equalization or the Franchise Tax Board to file for a de novo review in court of any BOE decision. Two members of the BOE or one member of the BOE and the Director of Finance may also request de novo review.
Tax on Timber Products. SB 557 (Kuehl) was amended on April 29 to impose a 1 cent-per-board foot excise tax on timber.
Property Tax: Sale of Tax-Defaulted Property. SB 663 (Speier) was amended on April 28 to delete prior contents and add provisions to require tax collectors to make added contacts with homeowners prior to the sale of tax-defaulted property.
County Alcoholic Beverage Tax. SB 726 (Romero) was amended on May 1 to allow counties to impose a “tippler’s tax” at a rate between one-eighth of one percent to five percent of the sales price. Previously, the bill did not have a limit on the size of the proposed “tippler’s” tax.
FTB to Collect Use Tax. SB 1009 (Alpert) was amended April 22 to delete prior provisions and add provisions allowing taxpayers to make an irrevocable election to report use tax liabilities on the personal income tax return.
Fiscal Impact of BOE Advice to Assessors. SB 1059 (Senate Revenue and Taxation Committee) was amended on May 1 to delete a proposed provision requiring the State Board of Equalization to make a fiscal impact on property tax regulations, forms, handbook for assessors, etc.
Water’s-Edge Elections: Certain Corporations Ineligible. SB 1067 (Speier) was amended on April 24 to delete prior contents and add provisions prohibiting any foreign incorporated entity that is treated as an inverted domestic corporation from making a water’s-edge election.
REPORT: MEDI-CAL FRAUD SOARS. According to the Orange County Register’s John Howard, California’s efforts to combat fraud in the Medi-Cal program are failing to stop fraud that is siphoning away as much as 35 percent of the $29.2 billion program. In an April 27 column, Mr. Howard notes that Professor Malcolm Sparrow of Harvard University’s Kennedy School of Government believes from 10 percent to 35 percent of all Medi-Cal funds, about half state and half federal, are being wasted. The professor testified before a recent Senate Government Oversight Committee hearing. Prior reports, quoting federal authorities, have pegged fraud in Medi-Cal at 10 percent, or $2.9 billion, a year. If Professor Sparrow is correct, that number is $10.2 billion. This means the state’s anti-fraud efforts are underfunded or overwhelmed, or both, Mr. Howard suggested. In an April 9 report. The legislative committee said that at the attorney general’s 60-agent Medi-Cal fraud prosecutions unit, 42 percent of pending criminal investigations into welfare fraud are not being worked. Of 973 pending cases, the attorney general’s 60-agent Medi-Cal fraud prosecutions unit had a backlog of 411. The report said another Medi-Cal fraud investigation unit, involving the Department of Health Services, the FBI and the U.S. Attorney’s Office, has been effective and Attorney General Bill Lockyer should consider hooking up with it. Most of the fraud is not committed by the patient, but by the legal and medical systems that provide services for which the state reimburses.
Use of Marin County Cars Under Review. After the arrest of a Marin County supervisor’s husband for alleged drunken driving while driving a county car, the use of taxpayer-funded vehicles has been called into question. According to the April 29 Marin Independent Journal, County Administrator Mark Riesenfeld said the guidelines for use of county cars do not spell out whether county supervisors may allow others to drive their county-provided vehicles. The county is self-insured and accidents involving a county car could involve costly legal bills for taxpayers.
Supervisor Annette Rose’s husband, Christopher Hardman, was arrested on March 30 when a blood test showed he had twice the legal limit. He was not jailed, however. Ms. Rose said she was in the vehicle when they were coming home from a fund-raiser and her husband was driving “perfectly fine.” Sausalito police disagree, citing erratic car movements. A county audit in 2000 found Ms. Rose had charged $32,000 in personal expenses, including kitchen cabinets, on her county credit card. She later repaid the county and the incident resulted in tightening use of county credit cards.
Promises Unfulfilled on Use of Santa Barbara Hotel Tax $. Voters in the city of Santa Barbara were promised in 2001 that if they approved a hotel tax increase, the funds would be used to clean up the city’s creeks. Two years later the creeks are still strewn with garbage, the Santa Barbara News-Press reported (April 28).
Joe Armendariz, executive director of the Santa Barbara Taxpayers Association, said “We predicted that Measure B wasn’t about better beaches. It was about bigger bureaucracies. The creeks are not in any way shape or form cleaner today than they were two years ago. City officials are urging patience, saying they must complete long-range studies to attack the problem.
The hotel tax increase is generating $2.1 million that was supposed to go to creek cleanup. Steve Cushman, executive director of the Santa Barbara Region Chamber of Commerce said, “Two million is a lot of money. If you are going to clean the creeks, I want to see people in the creeks picking up the trash.” According to the News-Press, only $100,000 was spent to remove trash last year.
Government Reorganization Bill Moves Forward. Legislation by Senator Tom McClintock to establish a “Bureaucracy Realignment and Closure Commission” (SB 9) cleared the Senate Governmental Organization Committee by a 7-2 vote on April 29. The bill is modeled after the federal military base realignment and closure program that identifies obsolete bases and recommends closure. “I think we all agree that this government could operate a lot more efficiently,” said Senator McClintock. “If we can duplicate the success of the Federal BRAC, it means future legislatures will be spared the specter of $30 billion plus budget deficits.” Voting against the bill were Senators Chesbro and Soto.
Union city Seeks Lighting Assessment Increase. Union City (in Alameda County) is asking property owners to approve an assessment increase for lighting and landscaping purposes. If approved by a weighted vote on a mail-in ballot, which will be sent to voters next week, property owners will pay an additional $945,000 for city services. The measure appears to be a partial bait-and-switch proposal. Because money is fungible, the Oakland Tribune reported that the assessment would be used to free up $500,000 in the city budget, now spent for lighting and landscaping, to be used for any purpose. Voters have 45 days to return the ballots.
Atwater Gouges Homebuilders. The Atwater City Council on April 28 voted 4-1 to increase fees on homebuilders from $4,600 per residential dwelling to $11,500. According to the Merced Sun-Star, Atwater City Manager Greg Wellman said, “This is the cornerstone of a 20-year plan to get our financial house in order.” Council Member Andy Krotik voted no. Other cities in Merced County are also eyeing development fee increases, the paper reported.
L.A. City Deficit Could Hit $280 Million in 2004. Projections that the deficit in the Los Angeles city budget could hit $280 million in 2004 stirred up an April 28 meeting of the City Council’s budget committee. According to the Los Angeles Times, several members expressed concern about the mayor’s nonchalant attitude about the problem. The mayor’s office downplayed the estimates, saying the forecasts are based on factors likely to change. Council Member Jack Weiss said, “I am as alarmed as I think my colleagues are at the potential of a billion dollars of budget deficits” over the next five years. Monday’s hearing was the first on Mayor James Hahn’s $5 billion budget for 2003-04.
Monterey County Raises Fees. Monterey County supervisors on April 29 raised most fees on the books, the Monterey County Herald reported. They also began consideration of options to raise taxes prepared by county staff including a sales tax, utility tax and business license tax. The fee increases are estimated to generate $4.3 million in additional revenue. Among the fees: $150 for fortune tellers to open a new business (up from $100); $165 to ask the coroner to move a body (up from $65); $97 to spay a dog at the county health center; $69 for a marriage license (up from $54).
More Costly Light Rail Plans Brewing. New light rail plans under consideration in the North San Francisco Bay counties come with a big pricetag and, according to critics, wildly inflated predictions of ridership by proponents.
The Marin Independent Journal reported a line from northern Napa County to Vallejo and Fairfield would cost more than $200 million. A 68-mile line between Cloverdale and San Rafael would also cost about $200 million. Proponents say annual ridership on the Napa line would reach 1.4 million by 2010. (Editor’s note: Before accepting those estimates, readers should read Santa Clara County’s experience, compared to projections, above.) Both rail systems would require local sales tax increases.
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May 5 |
ASSEMBLY GOVERNMENTAL ORGANIZATION
COMMITTEE HEARING |
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May 5 |
ASSEMBLY REVENUE AND TAXATION
COMMITTEE HEARING |
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May 6 |
STATE BOARD OF EQUALIZATION
MEETING |
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May 7 |
SENATE LOCAL GOVERNMENT COMMITTEE
HEARING |
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May 7 |
Senate
revenue and taxation committee hearing |