David R. Doerr,
principal contributor Vol. XVI, No. 26
Ronald W. Roach, editor
July 28, 2003
Budget Crisis: Senate leaders agree to compromise budget plan and more.
Legislative Roundup: Senate committee approves $100 million tax hike.
L.A.: City council approves simplified business license tax.
Riverside County Assessments: BOE recommends 43 improvements.
Potpourri: New Zealand taxpayers protesting "flatulence tax" and more.
California still has no 2003-04 budget, but Senate leaders announced on Thursday afternoon an agreement on a compromise spending plan. The plan was approved on Sunday July 27.In the Assembly, all bets are off as some far left elements in the Democratic caucus believe that a budget deadlock serves their political interests.
Senate President Pro Tempore John Burton and Senate Minority Leader Jim Brulte presented a proposal that contains no additional taxes (beyond the car tax increase already imposed by the Davis Administration) and rolls over $10.7 billion of the deficit into future years.
Because the amendments to effectuate the agreement are not in print, it is not possible to verify the details. But based on the statement of the Senators, comments from Capitol sources, and press reports, the agreement appears to include the following:
No additional taxes.
A shift of 0.5 percent of the local sales tax to the state to pay off $10.7 billion of the deficit. Property taxes will be shifted to cities and counties to offset the loss (with the state backfilling schools revenues). However, the bond repayment won’t begin until next year, allowing for about $2 billion in additional spending this year that will have to be cut out of next year’s budget.
A cost-of-living increase for welfare recipients (a non-negotiable Burton demand).
Maintenance of Proposition 98 school guarantees.
Additional cuts in health care, however, a number of optional medical services scheduled for the chopping black were saved.
A delay in opening of the University of California’s Merced campus.
It appears that the two leaders will be able to secure passage of the budget in the Senate, perhaps as early as Sunday. Whether it can pass the Assembly is an open question. Key Assembly players made only guarded comments on the proposal.
Cal-Tax President Larry McCarthy commended the Senators for producing a plan that eschews additional tax increases, saying such tax increases would damage economic recovery in California.
Assembly Member Joe Canciamilla told the Contra Costa Times, “I don’t think there’s any guarantee that we’ll get the votes on our side.”
No matter what version of the budget is finally adopted, it is likely that there will be no cuts in overall spending.
The final budget will be balanced by borrowing, “funny money” gimmicks, new taxes and “fees.” While there have been agreements on spending cuts in some programs, other programs have seen increases. What is masking the spending increases is that much of the spending is moved out of the General Fund. For example, the General Fund subvention to cities and counties for the vehicle license fee reductions is eliminated, resulting in a General Fund cut. However, it is replaced by a $4 billion tax increase. Another example is the cut in General Fund support for universities being backfilled in part by substantial tuition increases.
A July 14 report by the Legislative Analyst obtained by the Orange County Register shows that the most recent proposal by Senate Democrats actually spends $80.2 billion, up from $77.7 billion of General Fund spending in 2002-03. The Burton-Brulte compromise reportedly only reduces spending in the current fiscal year by an additional $700 million below the Senate Democrats’ budget (to $79.5 billion).
Senate Democrats rejected, by a 15-26 vote on July 15, a package netting $3.7 billion in cuts proposed by Senate Republicans, despite the fact that most of the cuts were suggested by Governor Gray Davis or the Legislative Analyst.
“When you are going broke, you have to tighten your belt,” Republican Leader Jim Brulte argued. He added that the budget should be balanced without rollovers and borrowing, but because excessive spending has nearly bankrupted the state, the problem cannot be fixed in one year. He told members to step up to the plate and stop increasing government spending, saying, “The first rule of holes is when you’re in one is to stop digging.”
Republicans wanted to debate each proposed cut one at a time, but Democrats refused to let them do it. Mr. Brulte also said 21 Senate Democrats voted to freeze the SSI-SSP COLA earlier in the year, but now are denouncing Republicans for proposing it as trying to hurt the poor. Senator Bruce McPherson lambasted Democrats for refusing to debate amendments one at a time, saying the action was “all about political spin.”
Senate President Pro Tempore John Burton responded that the values in the amendments are not his values or those of the Senate. He said the amendments pick on the poor and disabled.
The defeat of the Republican amendments led Capitol pundits to speculate that it would set the stage for negotiations between Senate leaders that eventually resulted in the July 24 compromise.
In the Assembly, the biggest news came from an unintended disclosure of budget discussions from the so-called “progressive caucus,” within the Democrat’s majority caucus. On July 21, they left the “squawk box” microphones on in Room 127 where they were talking budget strategy, letting the world hear their comments.
Members were discussing political advantages to Democrats of a budget deadlock. Based on a transcript of the comments, Assembly Member Jackie Goldberg said holding up the budget would build support for a public-employee initiative to reduce the vote for budget approval and taxes to 55 percent, and allow Democrats to approve both without Republican votes. She also said, “Some of us are thinking that maybe people should see the pain up close and personal right now.” Assembly Member Fabian Nunez of Los Angeles said, “If you don’t have a budget, it helps Democrats.”
Democrats who attended the meeting of the “progressive caucus,” (officially called the Democratic Study Group) were Merv Dymally, Ms. Goldberg, Mr. Nunez, Hannah-Beth Jackson, Patty Berg, Loni Hancock, John Laird, John Longville, Alan Lowenthal and Patricia Wiggins.
Republicans immediately charged that the truth is out that Democrats are holding up the budget for political gain. Dave Cox, the Assembly Republican leader, said Democrats have been caught “red handed.”
Senator Tom McClintock said, “What the transcript shows is elected representatives deliberately plotting to delay California’s budget indefinitely to advance their own political ambitions. And that is a disgrace that will be talked about in the Capitol for decades.” He added that he has been in the Capitol over 20 years and this is not politics as usual.
Assembly Republicans called on Speaker Herb Wesson to disavow the political strategy session. He refused, saying the members were valuable members of the Democratic caucus. Ms. Berg defended her participation, telling the Santa Rosa Pres- Democrat, “I view it is my responsibility to meet with anyone and everyone to resolve this problem [the budget].”
Cal-Tax President Larry McCarthy said, “It is the height of deception to stall a state budget to help pass an initiative (the so-called Blank-Check, 55 percent Vote Initiative) that proponents claim is necessary to ensure an ‘on-time’ budget.”
After a Tuesday press conference where Republican leaders criticized Democrats for seeking to delay the budget to further their political aims, Finance Director Steve Peace confronted Assembly Republicans’ budget point person John Campbell in a Capitol corridor and began shouting at him. According to the Los Angeles Times, a “seething Peace” shaking his finger at Mr. Campbell, started demanding that members stop making speeches and put up votes. He accused Republicans of engaging in “historic, comic book extremism.” “I’m pissed because you know better,” he said. Mr. Peace also said the Democrats in the meeting were “a bunch of fringe Democrats having a goofy conversation.”
Other budget developments:
California Bond Rating Lowered to Near
Junk Bond Level. Standard and
Poor’s downgraded California’s credit rating on Thursday by an unprecedented
three levels, from an “A” rating, to a “BB” rating. This is two steps above
junk bond status. California’s credit has never been so poorly regarded.
Controller Steve Westley said the ratings drop would cost the state “hundreds
of millions” in higher interest costs.
Senator Burton’s reaction, according to the Capitol Morning Report: “If
we said to them, ‘we’ve got an idea where we can go rob a bank and get the
money to pay off these bonds,’ they’d say ‘don’t tell us, that’s fine, we’ll
buy them.’ ”
MIC Extension Proclaimed Dead. The Burton-Brulte compromise does not include an extension of the manufacturers’ investment tax credit beyond its imminent sunset date in December. Senator Brulte has been trying to save the credit, but Democrats say a deal is impossible. “The MIC is dead,” said Senator Dan Perata. Jack Stewart, president of the California Manufacturers and Technology Association, said failure to renew the credit will send a signal to business that “Sacramento just doesn’t give a damn about business.”
Impact of the Recall Election of the
Governor on the Budget. On
Wednesday evening July 23, Secretary of State Kevin Shelley made the historic
announcement that enough signatures have been submitted to force an election
to recall Governor Gray Davis from office. Proponents submitted nearly 1.4
million valid signatures, substantially more than the 897,158 required to
trigger the election, which has been set for October 7.
This will be the first election in California
history to recall the governor. A poll by the Field organization, published in
the Sacrament Bee on July 16, showed voters favoring the recall by a 51
percent to 43 percent margin.
Two recent recalls of state officials have been successful. Two Assembly
members – Doris Allen and Paul Horcher – both Republicans, were recalled in
1995. There was no charge of malfeasance in office. The reason for the recall
was the fact that they acted to keep Democrats in control of the Assembly
after the Republicans had won a majority of Assembly seats in the 1994
election. Two other Legislators – Senator David Roberti and Assemblyman Mike
Machado successfully defeated recalls.
There is no consensus on what the impact of the recall election will be on the
budget mess. Some Democrats in the “Progressive Caucus” believe a budget
deadlock will make it easier to defeat the recall and help pass the labor
union’s 55% vote on the state budget initiative, the so-called “Blank Check
Initiative.” In the secret meeting unknowingly broadcasted on the Capitol’s
“Squawk Box,” Assembly Member Fabian Nunez was heard to say that lack of a
budget will help the governor defeat the recall. However, the Field poll
suggests that voters are more likely to vote for the recall if the budget is
not passed.
Other speculation by Capitol observers on the impact of the recall on the budget:
Additional budget cuts beyond those in the Senate agreement are unlikely, as is any kind of fiscal restructuring program. Instead, optimistic estimates, accounting gimmicks, and borrowing will be used to shift much of the problem into next year. This would be similar to what was done last year to get through the 2002 election.
Additional dollars may be needed to cover the budget deficit as taxpayers must pay for the governor’s campaign costs if he is not recalled.
The governor will try to distance himself from the cuts he proposed in January and May that are not in the final budget and won’t be proposing additional cuts.
There could be additional long-term goodies for public employee groups. In an editorial on July 16, the Sacramento Bee said real taxpayers need to worry about what public employee unions “may try to extract from a governor desperate to keep his job. In recent days, a bill long sought by fire and police unions to force binding arbitration on local government has started moving aggressively through the Legislature.” The paper noted that the firefighters’ union has contributed $168,000 so far to help defeat the recall.
The Bee concluded, “Firefighters are not alone in this, of course. Any number of interests – gambling tribes, prison guards, trial lawyers, … – are likely to try to take advantage of the situation to wring promises from a badly wounded governor facing recall.”
O’Connell Plans to Ask Court to Invalidate
Two-Thirds Vote Requirement.
Buoyed by a Nevada Supreme Court decision on a similar issue (that was
subsequently put on hold and is now moot), state schools’ chief Jack
O’Connell said on July 16 that he will ask the State Supreme Court to
invalidate the two-thirds vote requirement for passing the state budget and
increasing taxes.
Mr. O’Connell said that without a budget, school children will be hurt, as 23
percent of the July payments to schools will be on hold. State Treasurer Phil
Angelides immediately jumped to support Mr. O’Connell’s effort.
Taxpayers viewed the announcement as a declaration of war, saying they will
fight it with everything they’ve got. Jon Coupal, president of the Howard
Jarvis Taxpayers Association, said, “We will have run-away taxation without
the two-thirds vote. We will not stand for this. We will fight it with
everything we’ve got.”
In Nevada, after the Supreme Court handed down its decision, the U.S. 9th
District Court of Appeal got involved, putting the decision in limbo until a
late August hearing.
Meanwhile, late in the evening on July 21, the Nevada Legislature passed a tax
bill by a two-thirds vote. The bill raises existing cigarette, alcohol
beverage and gaming taxes. It also imposes new taxes on live entertainment,
real estate transfers and business payrolls. Nevada Governor Kenny Guinn
signed the bill on Tuesday, defusing the crisis.
Davis’ Appointees 5 Percent Pay Cut Rescinded. The 5 percent pay cut Governor Davis asked his appointees to take in February will end this month, the Sacramento Bee reported (July 24). The end of the cut will come when state workers’ take home pay will be reduced by 5 percent in the absence of a budget. Ed Riquelme, a state union activist, said the move smacked of “hypocrisy” and would further erode state worker trust of the Administration.
Student Fees Raised Again.
Fees imposed on university students were raised again by the University of
California and the California State University on July 17 and July 16
respectively. CSU fees were increased by 30 percent, while UC fees were
boosted by 25 percent (with a possible additional 5 percent hike depending on
the state budget).
The fee increases are really quasi-taxes, as they are not intended to pay for
additional services or even pay for cost-of-living increases. In effect,
students and their families are being asked to dig deeper into their pockets
to help solve the state budget shortfall, as funds generated by the fees will
supplant General Fund appropriations.
According to the San Francisco Chronicle, Lillian Taiz, vice-president
of the California Faculty Association, denounced the CSU fee hike, saying her
students are not “frivolous party animals,” with money to burn. She added,
“These are hard-working men and women working desperately trying to pull
themselves up by their bootstraps. Raising the fees this much is tantamount to
taking away their boots.”
Charles Reed, CSU Chancellor, and UC President Richard Atkinson said the
universities had no other choice in light of significant budget cuts.
Lieutenant Governor Cruz Bustamante, who opposed the fee increase, startled
observers with his behavior. He jeered at Larry Hershman, vice-president for
budget at UC, and said, “Liar, liar, pants on fire.”
Eight students from the University of California’s Berkeley Boalt Hall law
school filed suit Thursday to try to prevent the fee increase.
The UC Regents also took action to prevent faculty from dating their students.
Transportation Construction Shutdown
Avoided. The prospect of a
transportation construction shutdown due to the budget crisis was avoided as
contractors and local governments have agreed to loans to keep projects moving
ahead. According to the San Jose Mercury-News (July 19), a number of
contractors, including Granite Construction, have agreed to continue to work.
State officials had been warning that the budget crisis would cause the
temporary halt to more than 200 projects around the state.
Myths Still Prevail in Budget Crisis Perceptions. In discussions of the current state of California’s budget crisis, several myths continue to be bandied about:
Myth #1: No Tax Increase Budget v. Tax Increase and Cuts Budget. People are still framing the issues in current budget debate on alternatives between a no-tax increase budget v. a budget balanced with tax increases and cuts.
Facts:
Taxes have already been increased to balance the budget. The car tax
increase will raise more than $4 billion a year. Fees, such as student fees,
are also going up.
There is no absolute cut in spending. Cuts in some programs are offset by
increases in others. The Legislative Analyst says that, while General Fund
spending is shown to be down, actual spending is up by $2.5 billion (see
above). While spending growth is slowed by historic standards, it is still
3.2 percent above last year in the Senate Democratic version of the budget,
or near the increase in inflation and population.
The current debate is whether taxes should be raised even more, such as
sales and income tax increases, or spending growth be curtailed somewhat.
Actually, most of the budget solution is neither, but rather a reliance on
borrowing and accounting gimmicks.
Myth #2: Origins of the Car Tax Trigger. The trigger pulled by the Davis Administration in June that increases the car tax by $4 billion is said to be a trigger put in place by former governor Pete Wilson.
Facts: The current car tax trigger that was pulled was enacted in AB 1121 (Nakano), passed in 1999 and signed by Governor Davis. This replaced the original car tax trigger in AB 2797 (Cardoza), signed by Governor Wilson in 1998. Under the 1998 trigger, the car tax could only be raised by up to 1.5 percent, rather than to 2 percent that was done under the 1999 trigger.
Myth #3: Appropriations to Schools Require a Two-Thirds Vote of the Legislature. This is the most pervasive budget myth in Sacramento, and stems from the fact that school spending is included in the overall budget, which requires a two-thirds vote. The proposed suit by Mr. O’Connell, seeking a majority vote on the budget due to harm to schools, reinforced the myth.
Facts:
Appropriations for public schools require only a majority vote of the
Legislature. Article IV, Section 12(d) provides: “Appropriations from the
General Fund of the State, except appropriations for the public schools, are
void unless passed in each house by a roll call vote entered in the journal,
two-thirds of the membership concurring.”
If school appropriations were removed from the budget, they can be passed by
a majority vote. They are included in the overall budget by the majority
party to maximize pressure to approve the rest of the budget.
The First District Court of Appeal on July 22 firmly rejected a legal ploy by the Franchise Tax Board to keep a rice farm’s tax refund (J.H. McKnight Ranch, Inc. v. FTB).
In 1995, the FTB informed the J.H. McKnight Ranch that it owed $97,000. The board offered to deny the ranch’s refund claim summarily so the dispute could go to court. According to the First District panel: “The Board now concedes that under the contested liability doctrine, no tax was ever owed. It nevertheless suggests that because of its summary denial of McKnight’s refund claim, McKnight failed to exhaust its administrative remedies and the Board should be allowed to retain the excess tax.”
The court ruled against the FTB saying: “Equity does not allow such a result. The common law rule that the government could not be estopped was abandoned in California more than a century ago. Where equity requires it, as where a government agent’s actions have induced noncompliance with procedural requirements, the government may be estopped from asserting those procedural bars against a citizen’s recovery. We affirm the trial court’s grant of judgment in favor of McKnight.”
At issue originally was an attempt by the FTB to collect an additional tax from the Butte County rice farm on the basis that the discharge of a Bank of American loan was income. The court said:
“Ordinarily, the discharge of a loan will give rise to taxable income. ‘The discharge-of-indebtedness doctrine applies when a taxpayer who has incurred a financial obligation is thereafter relieved of liability, in whole or in part’ …
“However, an exception arises when the ‘discharge’ results from a dispute over whether the greater amount actually was owed. ‘Under the contested liability doctrine, if a taxpayer, in good faith, disputed the amount of a debt, a subsequent settlement of the dispute would be treated as the amount of debt cognizable for tax purposes. The excess of the original debt over the amount determined to have been due is disregarded for both loss and debt accounting purposes.’
“Here, McKnight contends that it disputed in good faith the amount it owed the Bank of America. Consequently, under the contested liability doctrine, the Bank of America’s cancellation of $2.25 million of the purported $2.4 million debt owed by McKnight would not be taxable income, but imply a bookkeeping consequence of the parties’ liquidation of the amount of the disputed debt. At the close of the trial, the trial court agreed with McKnight, adopted McKnight’s proposed statement of decision, and held that under contested liability principles, McKnight owed no tax on the cancelled portion of the Bank of America debt.”
Legislation estimated to increase corporate taxes by $100 million over the next 10 years (SB 1067, Speier) was approved by the Senate Appropriations Committee July 21 by a 7-5 party-line vote (Democrats-yes; Republicans-no). The bill requires corporations that move their headquarters outside the USA to keep such corporate headquarters within the “water’s edge” for computing amounts of income apportioned to California for corporate tax purposes.
Senator Jackie Speier said the bill closes a loophole. Critics believe the bill erodes the concept of the water’s edge election and allows the FTB to tax income earned overseas. The bill is sponsored by State Treasurer Phil Angelides. The Department of Finance voiced a neutral position. The Legislative Counsel keyed the bill as a tax increase requiring a two-thirds vote.
Other legislative developments:
Silicon Valley Transit Assessment Bill Pulled Back From Governor’s Desk. Legislation authorizing the Santa Clara Valley Transportation Authority to impose a special assessment on land values around its stations (AB 935, Diaz) was pulled back from the governor’s desk on July 17 and sent back to the Senate. The bill had passed the Senate on July 7 and was sent to the governor (see Caltaxletter of July 11). Critics believe provisions of the bill that allow the agency to impose an assessment without voter approval are unconstitutional.
Airline Assessment Jurisdiction Bill Placed on Suspense. Legislation shifting responsibility for assessing airline personal property (SB 593, Ackerman) was placed on the Senate Appropriations Committee “suspense file” on July 14. Responding to industry’s concern about multiple tax filings, the bill shifts assessment responsibility from assessors to the BOE.
S Corp Revisions. Legislation revising tax provisions relating to Subchapter S corporations that proponents allege are technical revisions (AB 967, Chavez) was approved 35-0 by the Senate on July 21.The bill also contains technical corrections to state provisions conforming to the Federal Victims of Terrorism Act.
Property Tax: Assessment Appeals Boards. A bill sponsored by county clerks and tax collectors clarifying assessment appeals board action in equalizing property and making other minor changes (SB 1063, Senate Revenue and Taxation Committee) is on its way to the governor’s desk. It passed the Assembly July 14 by a 73-0 vote and the Senate concurred in Assembly amendments on July 21 by a 35-0 vote.
California’s workers’ compensation crisis went from bad to worse this week when independent auditor PricewaterhouseCoopers declined to certify financial statements by the workers’ compensation fund. According to the Los Angeles Times (July 23), the auditor said the insurer needs to set aside an additional $1 billion to pay future claims.
According to the audit report, the fund can meet its obligations for about a year, but its financial condition has worsened to the point where the Department of Insurance would be justified in taking control. State Fund spokesman Jim Zelinski reassured its policyholders that the fund is solvent and will continue to meet claims.
Insurance Commissioner John Garamendi told the Sacramento Bee that “I have directed my department to work with the (State Fund) to construct a plan that addresses immediate problems,” and will outline steps to address the reserve shortfall in a week.
California businesses are outraged at recent rate hikes, and another round of double-digit rate hikes are projected in 2004.
In a comprehensive report on the crisis, the Santa Barbara News-Press (on July 20 and July 21) cited problems of Roberto Najera, who has run a successful concrete business for 22 years. Mr. Najera may be forced out of business due to increasing workers’ compensation costs.
During the past four years, his costs have increased four fold. He took a 50 percent salary cut and laid off 40 of his 60 employees. He said, “If things don’t get better soon, I’m going to have to say adios.” The paper said Mr. Najera’s experience mirrors that of millions of other business owners around the state. The effect of the workers’ compensation crisis negatively affects state tax collectors, contributing to state budget woes.
On July 23, the governing committee of the State Workers’ Compensation Insurance Rating Bureau recommended that insurers adopt an average 12 percent increase for “pure premium rates” next year, the Sacramento Business Journal reported.
In floor action on Thursday, July 24, the Senate non-concurred in Assembly amendments to various workers’ compensation bills, indicating that there will be a conference committee organized to attempt to develop a workers’ compensation reform package.
Governor Gray Davis on July 23 signed AB 1043 (Liu), a measure sponsored by the State Board of Equalization to continue its managed audit program.
Until this year when its authority expired, the board had a managed sales tax audit program, which is essentially a self audit. The board identified participants in this program that met specified criteria and instructed them how to perform the audit. In return for performing the managed audit, taxpayers are liable for only half the normal interest on underreported sales.
The prior program had advantages for both the BOE and taxpayers, and the board judged it successful. It allowed the board to use audit resources more efficiently.
Board staff estimated that, under the previous managed audit program, the board saved 4,292 audit hours for a savings of $686,720. The foregone interest amounted to $532,069, for a net benefit to the state of $154,624.
A single-category payor system for the Los Angeles city business license tax, a long-sought goal of the business community, is one step closer to reality as a result of action by the Los Angeles City Council on July 22. Under the plan adopted and sent to Mayor James Hahn for his approval, approximately 11,000 businesses would be able to file under one category, rather than a multitude of categories.
Businesses that receive 80 percent of their revenue from one form of commerce will be able to use the one category system. The change is estimated to reduce revenue by $2.9 million a year, a sum that will be covered by city reserves.
Councilwoman Wendy Greuel, who spearheaded the changes, said, “The city of Los Angeles should have a business tax system that is simple, equitable and works to attract business and jobs to the city.”
Ms. Greuel said she hopes to make further reforms in the tax and got the council to approve a study of the “pass-through” tax, in which the tax is imposed on payments to subcontractors.
Brendan Huffman, speaking for the Los Angeles Chamber of Commerce, said the action was part of the long-term process of reforming the city’s business tax. “A lot of neighboring cities have a much simpler tax system and some don’t have business taxes at all,” he observed.
According to Julie Wong, a spokesman for Mayor Hahn, the mayor supports the change and will sign the proposed change.
(This report is based on stories in the Los Angeles Times and Los Angeles Daily News.)
The Senate Revenue and Taxation Committee on July 16 made several changes to Assembly Member Jerome Horton’s hotly debated AB 71, increasing cigarette taxes and enforcement rules, before sending it to the Senate Health and Human Services Committee. The measure was approved by a 4-0 vote.
Among many other provisions, AB 71 would impose a one-time, one cent-per-pack cigarette tax (called a fee) on manufacturers and importers of cigarettes, and require licensing of all manufacturers, importers, distributors, wholesalers and retailers of cigarettes and tobacco products. Another provision, granting specific BOE employees the power of peace officers to make arrests, was amended as several committee members sought to limit these powers, including any enhanced retirement benefits. The purpose of the measure is to establish “a statewide licensure program to help stem the tide of untaxed distributions and illegal sales of cigarettes and tobacco products to be administered by BOE,” as described in the committee’s bill analysis. The Board of Equalization estimates that California loses $288 million of excise taxes annually due to illegal tobacco sales.
Opponents speaking against the measure, ranged from tobacco companies to health associations. First to speak in opposition, Terry Flanigan, representing R.J. Reynolds Tobacco Company, strongly objected to the assessment of the one-time administrative fee that would be imposed on manufacturers. He said his client is the second largest tobacco manufacturer in the U.S., and it maintains approximately 23% of the US market share. Since the measure intends to raise $12 million for the fee, $3.7 million would come from R.J. Reynolds. “Now that’s $3.7 million to solve a problem which frankly…, my client had no role in creating or fostering,” he said, noting that R.J. Reynolds is a wholly domestic company and therefore does not experience many of the problems the bill seeks to address.
Susan McCabe, an advocate for the Lorillard Tobacco Company, also voiced opposition to AB 71 based on its “funding mechanism and the one-time aspect.” Despite the sunset in the bill, there will be “out-year funding problems,” forcing companies to pay the fee “on more than this one-time basis,” she said.
Paul Knepprath of the American Lung Association expressed concern that the bill does not reduce the impact on illegal sales to minors, which could result in a revenue loss to the state. He explained that California currently receives more than $100 million in federal drug abuse and prevention funds as long as the illegal sales-to-minors rate stays at 20% or below, and it’s currently at 19.3%. “Should California’s illegal sales rate pop above 20%, you are potentially at risk of losing $100 million,” he said. Los Angeles County alone would lose $26.7 million and San Diego, $8.7 million, according to Mr. Knepprath. He criticized the measure as being “half baked,” because it lacks provisions for a comprehensive licensing program. After lengthy debate, the author agreed to add clarifying language that would revoke the license of those found guilty of selling tobacco products to minors.
Speaking on behalf of the American Heart Association, Jamie Morgan, voiced opposition to another controversial issue: If the increased revenues don’t fully cover program costs, would tobacco tax revenues that fund projects of Propositions 10, 99 and the breast cancer fund be put in jeopardy? To relieve apprehension, Mr. Horton accepted amendments to hold harmless the funds from these projects. However, in defense of his measure, he said the opposite funding impact would occur: “This bill will give a “windfall” to breast cancer, Prop. 10, Prop. 99 automatically. The fees that are collected, they get a percentage of that fund automatically.”
If the bill, described as being very late in the process, is approved by the Senate Health and Human Services Committee, it will be referred to the Senate Appropriations Committee.
Other committee developments include:
Sales Tax Exemption: Meals Furnished by Vets’ Organization. AB 189 (Cogdill), exempting from sales tax meals and food products furnished by non-profit veterans’ organizations, was approved.
Income Tax Checkoff: Veterans. AB 214 (Shirley Horton), establishing an income tax checkoff for contributions to a Veterans’ Quality of Life Fund, was approved.
Use Tax Increase on Vehicles, Vessels and
Aircraft.
AB 694 (Levine), would expand
use taxes on vehicles, vessels, or aircrafts purchased outside of the state if
the vehicle, vessel, or aircraft: (1) was purchased by a California resident,
(2) was subject to California's registration or property tax laws during the
first 12 months of ownership, or (3) was used or stored in California more
than half of the time during the first 12 months of ownership. However, the
bill, which was approved by a 4-2 vote, exempts from the use tax vehicles,
vessels and aircraft brought into the state for repair or modification. The
BOE estimates that AB 694 would raise state and local use taxes by
$54.6 million.
Representatives from the California State Association of Counties, the League
of California Cities, and the California Tax Reform Association voiced support
for the measure. A spokesperson for the Recreational Boaters of California
voiced opposition on grounds that the tax would drive boat sales – and the
significant property tax revenues that they generate
– out of this
state.
Business Trusts Taxation. AB 1239 (Wiggins), allowing a business trust to hold the reserves that a corporation engaged in the business of selling money orders, money grams and the like is required to maintain under California law, was approved.
Income Tax Checkoff: Dependents of Deceased Veterans. AB 1416 (Vargas), establishing an income tax checkoff for contributions to a California State Freedom Endowment Fund to provide financial assistance for children or dependents of veterans who are killed in action or war, failed passage. However, reconsideration of the measure was granted to the author.
San Mateo County Car Tax Increase. AB 1546 (Simitian), would authorize the San Mateo County Association of Governments to impose a $4 car tax for management of traffic congestion and storm water pollution without a vote of the people as required by Proposition 218. The measure was moved as an intent bill and sent to the Senate Appropriations Committee. It now expresses legislative intent to explore the idea of allowing all counties to impose an added car tax for auto-related impact abatement activities. Expressing opposition, a representative for the Department of Motor Vehicles (DMV) said the DMV could not absorb the $194,000 in implementation costs.
Federal Income Tax: Deductibility of Long-Term Care Insurance Premiums. AJR 8 (Mountjoy), memorializing Congress and the President to increase the deductibility of long-term care insurance premiums, failed passage.
About 30,000 of Fresno County’s property owners face big property tax increases, some as much as 30 percent, Assessor-Recorder Bob Werner said Tuesday. These properties had previously been reduced in value under Proposition 8’s decline-in-value provision, and due to a booming real estate market, are now being revalued up to their Proposition 13 cap.
According to the Fresno Bee, Mr. Werner said most of the 30,000 taxpayers will see a 10 percent to 15 percent increase in taxes. The county will mail out notices to property owners affected.
Based on a decision by an Orange County judge, now under appeal, the 2 percent assessment increase cap in Proposition 13 may apply to the proposed increases, although taxpayers have lost on the issue in other counties. Mr. Werner said he expected the Orange County assessor to win the appeal.
San “Feesisco” has indulged in another round of fee increases to help balance its $4.9 billion budget, which was approved by supervisors this week. According to a report in the San Francisco Chronicle (July 21), many residents are opposed to a number of new fees.
For example, a new $40 license fee for a burglar alarm has Betty Cable of St. Francis Wood upset. “I can understand penalties for false alarms, but I don’t see why we are penalized for having a burglar alarm,” she said. This fee, which was imposed without voter approval, could be a tax, observers speculated.
Supervisor Chris Daly, echoing the views of the liberal San Francisco Board of Supervisors, said, “There were cut proposals out there, and we ended up hearing loudly and clearly from the public that they were not acceptable.”
Among the fee increases, according to the Chronicle:
The Muni’s monthly Fast Pass will go up to $45, a $10 increase.
A new licensing fee for burglar alarms will be imposed – $40 for residences, $60 for commercial properties.
Riding the cable car will cost $3, a $1 hike.
Residents’ discount card to play golf at the public courses doubled to $40.
Fortune tellers, for the first time, will have to pay a yearly $357 permit fee.
The rental of a stall at the flea market jumps $15, to $45.
Parking meters will cost 50 cents more an hour. Depending on the neighborhood, it will cost $1 to $2 an hour to park.
A day in the AIDS unit at San Francisco General Hospital will cost $2,475, a $225 increase.
Fire inspections for high-rise buildings will be $7.06 for every 1,000 square feet, an increase of 40 cents.
The charge for bounced checks written to the treasurer/tax collector will go up to $35 from $25.
Monthly 911 fee on phone lines will go up 50 cents, to $1.75.
Parking fines will go up. Examples: a $5 jump, to $35, for parking in a street-cleaning zone; blocking a driveway will cost $75, a 50 percent increase.
The city will install parking meters in several now-free spots in the eastern end of Golden Gate Park.
Getting a tooth pulled by a city dentist will cost $110, a $10 boost.
The regular adult fare for the Municipal Railway will jump 25 cents, to $1.25.
The price of a child’s ride on the Golden Gate Park carousel will go up 50 cents, to $1.
Day camp fees have been raised to $85 a week, from $35.
The price of after-school latchkey programs has doubled, to $20 a week.
Annual City Hall lobbyist’s fee will increase $200, to $500.
The Petaluma City Council on July 15 placed a 5 percent utility tax for street repairs on the November 4 ballot, as expected. However, there may be opposition from persons who do not think the city is spending enough on street repairs.
According to the Santa Rosa Press-Democrat, Pierre Miremont, leader of the Petaluma Pothole Patrol, says his group may oppose the tax if the city council does not spend a larger percentage of current revenue on street repair. Petaluma’s streets are ranked the worst in the Bay Area.
Councilman Bryant Moynihan, who voted against the utility tax, said the idea is a good one. Councilman Mike Healy said he is not taking Mr. Miremont seriously.
Other utility tax developments:
Jarvis Organization Wins Attorney Fees in
Roseville Utility Tax Suit. The
Third District Court of Appeal, in an unpublished decision on July 22, awarded
the Howard Jarvis Taxpayers Association attorneys’ fees for their successful
effort to invalidate Roseville’s utility tax (Howard Jarvis Taxpayers
Association v. City of Roseville). The court concluded in the case that
the in-lieu fee for Roseville’s water, sewer and garbage utilities was a
property ownership-related fee that violated Proposition 218.
In awarding attorneys’ fees, the court said, “The Jarvis litigation
served to vindicate an important public right … [and] upheld the State
constitutional principle that a local government fee imposed for a
property-related service must be tied properly to the cost of providing that
service.”
In addition, the court said the Jarvis suit conferred a significant benefit to
the public and imposed a financial burden on the plaintiffs which was out of
proportion to its individual stake in the matter.
The State Board of Equalization’s report on Riverside County assessment practices that was released this week makes 43 recommendations for improvement. The county was found to be assessing property at 97.25 percent of acquisition value, and in a number of areas, the county is doing exemplary work. For example, the report notes the assessor’s staff was well prepared and made effective presentations at assessment appeals hearings. County Assessor Gary Orso has also taken a proactive approach to declines in value.
Many of the recommendations relate to rather technical problems. Some of the more significant are:
Develop a complete operations manual. “Several sections of the existing operations manual are incomplete or non-existent,” the report states.
After a change of ownership, enroll the verified sales price as required by Rule 2. “During the sampling of real property change of ownership assessments, we found that the purchase price … is not always enrolled at full cash value,” the report states. It further states, “Only in cases where there is a preponderance of evidence that the price is significantly different than the full cash value should the market value be enrolled instead. Insignificant adjustments of the reported sale price are not authorized. The enrollment of a value different from the actual sale price may cause an incorrect base year value to be established and incorrect supplemental bills to be issued.” Mr. Orso said current rounding practices, when posting change-of-ownership values, are being reviewed and adjusted so actual purchase price equivalents will be used when there is no preponderance of evidence showing a 5 percent deviation.
Assess all taxable possessory interests. The report states, “The assessor has not requested or obtained the necessary information to determine whether these gaming operations in Riverside County (on Indian lands) are taxable possessory interests.” The report notes assessing lessees holding possessory interests on Indian land is permitted by law. Mr. Orso responded by asking the BOE to provide the information.
Clarify all manufactured losses not on permanent foundations as personal property. “We found that all manufactured homes were being assessed as real property,” the report stated. Mr. Orso said his process treats such homes not on foundations as personal property.
Discontinue percent good factors on older equipment. The board states, “Use of arbitrary minimum valuation factors may value some equipment correctly but will substantially over value most items of older equipment.” Mr. Orso defended his use of a minimum percent good factor, which is a factor equal to 125 percent of the assets estimated economic life.
Voters said no to new taxes in two local tax elections held this month. The results:
Cloverdale. A property assessment, averaging about $70 a year for a single family home for construction of a new fire station in Cloverdale (Sonoma County), failed by a 44 percent to 56 percent margin. Fire chief Brian Elliott said, “We failed miserably.”
Santa Ana.
A proposed assessment for street and park maintenance was rejected by Santa
Ana property owners by a whopping margin. Only 29.4 percent of the weighted
vote was cast in favor, with 70.6 percent against. The proposed assessment
would have added $33 per year to a homeowner’s tax bill, and $24 per unit for
apartment owners. For industrial property, the fee was $256 and for
commercial, the fee was $328. City Manager David Ream said, “We’re surprised
at how big a loss it is.” Jeff Adler, a political consultant hired by the
city, said, “We got caught in the political riptide of fiscal woes, [the
governor’s] recall and a very angry electorate that I do not think will cool
down for quite a while. This will be the political reality in California for
at least a year.”
The city spent $275,000 on the election. (This article is based on reports
from the Santa Rosa Press-Democrat and Los Angeles Times.)
Domestic Partners Gross Income. AB 205 (Goldberg), giving a number of rights to domestic partners, was amended on July 16, to define adjusted gross income of domestic partners filing a joint return to be the gross income reported on the federal income tax return of each partner.
Elimination of Deduction for SUVs. AB 848 (Nation), a bill to eliminate a business expense deduction for purchase of SUVs, was amended July 14 to provide an income tax credit of $1,000 for purchase of a reduced-emission vehicle. The credit, however, is limited to the estimated amount of the increase of revenue due to the denial of the deduction. Thus, the actual credit may be less than $1,000, and the revenue increase may or may not equal the revenue decrease, depending on the number and types of vehicle sold. However, the amendments change the bill’s vote requirement from two-thirds to a majority.
New amendments also allow taxpayers in agriculture, timber or construction to continue to claim the deduction on purchases of SUVs.
Local Car Taxes. AB 1546 (Simitian) was amended on July 22 to state legislative intent to examine the idea of allowing all counties to impose car taxes without voter approval to mitigate auto-related impacts, such as traffic congestion, storm-water pollution, etc.
Taxpayer Rights: Tax Shelters. AB 1601 (Frommer), legislation to eliminate the roofs of tax shelters, removing some taxpayer rights and protections in the process, was amended July 16 to require the FTB to report taxpayer sanctions, fiscal impact and costs to the FTB.
Local Income Tax. AB 1690 (Leno) was amended on July 16 to remove prior language and add provisions declaring intent to examine allowing local governments to impose an income tax.
Income Tax: Failure to File Penalty. AB 1740 (Assembly Revenue and Taxation Committee), dealing with non-resident income tax calculations, was amended July 17 to provide that an income tax late filing penalty does not apply if the taxpayer files a federal tax return after the due date, and the FTB proposes a deficiency assessment based on a final federal determination and the IRS abates the federal late filing fee.
Property Tax Advice Fiscal Effects. AB 1744 (Assembly Revenue and Taxation Committee), relating to property tax administration, was amended July 15 to drop out of the bill a proposed requirement that the BOE furnish fiscal estimates on its property tax advice to assessors.
Fresno County Transportation Tax. SB 673 (Florez), was amended on July 14 to delete prior contents and add a provision deleting a 20-year limit on Fresno County’s 0.5 percent sales tax for transportation.
Rental Car Company Car Tax. SB 849 (Torlakson) was amended on July 23 to require rental car companies to impose on renters of cars a separately stated, specified vehicle license transaction fee. Legislative Counsel said the amendment is a tax increase, requiring a two-thirds vote.
Governor’s Ride Home Costly to Taxpayers. Governor Gray Davis’ ride home from Riverside County to his West Hollywood digs was an expensive one for taxpayers. According to the San Francisco Chronicle (July 13), a CHP helicopter was called in from Auburn to give the governor a lift. According to KXTV Sacramento (July 11), two pilots had to be called in and required to fly the craft 3 hours from Auburn to Riverside. The cost to fly the helicopter, including pilot’s time, was estimated by the T.V. station to be around $3,000. A Davis spokesman said, “His number one concern is to protect taxpayer dollars.”
Critics noted that the governor has been visiting several Indian tribes lately. His foray into Riverside County included a ribbon-cutting at an Indian casino. On July 2, the governor invited himself to a private meeting of the California Nations Indian Gaming meeting at the Biltmore Hotel in Santa Barbara, according to the Santa Barbara News-Press. He arrived and left through a service entrance in back. The meeting was not on his public schedule.
MEDI-CAL FRAUD IN SAN JOAQUIN COUNTY? The FBI is investigating Medi-Cal fraud at the San Joaquin County Mental Health Department, the Stockton Record reported on July 19. On July 18, federal agents appeared at the county’s mental health building, and left with reports on a number of cases. One question being asked is whether Medi-Cal was billed for visits that never took place.
Engineer on Oakland Payroll Gets $273,000. Kenny Lau, a civil engineer in Oakland’s Building Services Department, was paid $273,000 in 2001-02, thanks to many hours of overtime, according to the Oakland Tribune (July 22). This was a substantially higher sum than earned by the city manager of $224,000.
Mr. Lau logged 3,124 overtime hours, (which works out to be 60 hours a week overtime, every week of the year). Mr. Lau is paid a base salary of $76,000. The Alameda County Grand Jury criticized the department for allowing Mr. Lau to take one vacation day at a time while logging overtime in the same week.
If Mr. Lau worked eight hours on every Saturday and Sunday, he would have still would have to worked an additional 9 hours on every weekday (or 17 hours a day). Mr. Lau was not available for comment.
Taxpayers Pay for $36,000 Wheelchairs. Wheelchairs made in Sweden costing $36,000 – more than the cost of a C-Class Mercedes Benz – are being paid for by Medi-Cal (taxpayers), the Los Angeles Times reported (July 20). In the past five years, the cost to provide wheelchairs to Medi-Cal recipients has doubled, to $66 million a year. According to the Times, “State officials have made only sporadic and largely futile efforts to control what they spend on the most expensive piece of equipment Medi-Cal buys. They have repeatedly bent to political pressures and jettisoned their own cost containment rules and initiatives.”
Apparently, California is the only state in the nation to pay the retail price for wheelchairs. It has also failed to regulate effectively the numbers and types of chairs it supplies to recipients, the paper said.
Audit: Transit Agencies Misspent Funds. Two Coachella Valley transit agencies misspent public funds according to an Ernst and Young audit, the Los Angeles Times reported (July 17). According to the audit, the SunLine Transit Agency and SunLine Services Group misspent $751,000 in taxpayer funds for transit projects and illegally offered charter service. “Hopefully, it doesn’t go beyond unintentional negligence,” said Riverside Supervisor Bob Buster, who sits on the Riverside County Transportation Commission that oversees the two agencies. The Commission is reportedly asking for an additional, independent audit.
Alameda Grand Jury Critical of County Educational Officials. In a report issued July 21, the Alameda County Grand Jury is critical of the monitoring of school district budgets by county educational officials. According to the Tri-Valley Herald (July 22), the report said it “defies belief” that neither the district nor county officials discovered the $40 million annual deficit in Oakland Unified’s budget. County Superintendent of Schools Sheila Jordan issued a scathing response saying the Grand Jury relied on questionable witnesses and failed to “exercise its authority responsibly.”
Monterey Schools Criticized by Paper on Roofing Contract. The Monterey Peninsula Unified School District picked an out-of-state, “high end” company to supply roofing materials to the district, causing the Monterey County Herald (July 22) to suggest the district is paying twice what it should to re-roof schools. The sum could run into the millions, the paper said. Superintendent Daniel Callahan said we got a good deal with its contract with the Garland Company of Ohio. The district eschewed competitive bidding for the project and considered only Garland for roofing supplies.
City of Santa Barbara Consulting Contracts Under Fire. Use of consultants, at considerable expense to taxpayers, has come under criticism in the city of Santa Barbara. According to the Santa Barbara News-Press, last week the city hired a Sacramento based executive search outfit (Shannon Associates) at $30,000 to recruit a new city attorney. The city spent more than $738,000 last year on consultants despite a $3.1 million budget shortfall.
Joe Armendariz, executive director of the Santa Barbara Taxpayers Association, said, “The city needs to be looking at every single expenditure that they have, and they need to do that in the context of fully funding only the most basic, legitimate public services.”
Bruce Rittenhouse, a frequent critic of the city council, said the expenditure is a waste of money, because Assistant City Attorney Stephen Wiley is “a qualified individual who’s been preparing this for twenty years.”
Other consulting contracts included $217,000 for a master plan to improve walking paths, $150,000 to study city fees, $75,000 to develop Chapula Street design guidelines and $128,403 for advice on how to develop an “inclusionary” housing ordinance.
Take-Home Cars of LA County Employees Has Doubled in Decade. The number of county-owned vehicles that county employees take home at night has doubled in the past decade, the Los Angeles Daily News reported (July 23). The sheriff has 666 employees, double that of 6 years ago, that go home on the taxpayer tab with free gas and maintenance, costing $2.3 million a year. A department official, who declined to be named for fear of retaliation, said many are driven by executives who are not required to respond to crimes. He added that only 150 are necessary. Staffs of elected county supervisors drive 67 county vehicles home, up from 45 in 1993. (Supervisor Yvonne Burke’s staff drove 16 cars home, for example.)
Attorney General To Probe Government Credit Card Use by Stanislaus Officials. Attorney General Bill Lockyer is going to review the use of government credit cards by several government officials in Stanislaus County, the Modesto Bee reported on July 23. Deputy District Attorney Kay Paden used her county credit card to buy airline tickets to Hawaii in 1999, but has since reimbursed the county, the paper reported. Also under review is credit card use by Hughson Mayor Bart Conner, who is accused of using his city credit card to make $3,000 of personal purchases.
Last month, Modesto Councilman Denny Jackman used a city credit card to by $2,700 worth of airline tickets to Hawaii. He has repaid the amount and will not be charged. He admits, however, to doing a “dumb thing.”
According to the Bee, Mr. Lockyer will also be reviewing the District Attorney’s investigation of Modesto Mayor Carmen Sabatino’s use of credit cards.
san bernardino puts parcel tax on november ballot. Voters in the city of San Bernardino will be deciding in November whether to approve a parcel tax to supplement library funding. According to the Riverside Press-Enterprise, the city council on July 21 voted to ask voters to approve parcel taxes of $20 for homes and $50 for commercial parcels. The city estimates that tax would generate $1.2 million for libraries. Councilman Neil Deny voted no, saying the city’s first priority should be public safety. The measure will require a two-thirds vote to pass.
Tahoe Hotel Tax Amnesty Plan Falls Flat. South Lake Tahoe city officials must be feeling like the proverbial host who throws a party and no guests show up. A much ballyhooed hotel tax amnesty plan netted only one taker, according to the Tahoe Daily Tribune.
City Finance Director Bruce Budman in May estimated that $660,000 was due the city in unremitted hotel taxes.
By the July 15 deadline, only the Sunshine Inn came forth with a payment. The tax is 10 percent, except for properties in the redevelopment zone that pay 12 percent, plus $1 per room per night.
Special BOE Meeting This Afternoon. The State Board of Equalization is holding a special board meeting this afternoon (July 25) to discuss personnel matters in closed session. The meeting is to be held at 3:00 p.m. in Sacramento. The board is expected to discuss a response to the Department of Finance’s request to cut personnel.
New Zealand Taxpayers Protest “Flatulence” Tax. According to an Associated Press story (July 15), New Zealand farmers are protesting a “flatulence” tax on greenhouse gas emissions from their animals by mailing sheep and cow manure to legislators. The protest campaign has been dubbed the “Raise a Stink” campaign. The tax is intended to raise 8 million New Zealand dollars ($4.7 million in U.S. dollars). The millions of sheep and other animals are thought to emit 55 percent of the country’s greenhouse gases. California legislators, who have proposed over $60 billion in new taxes this year, have not yet thought of a “flatulence” tax.
Pregnant Pigs Initiative Cleared for Circulation of Petitions. Secretary of State Kevin Shelley has given the green light to proponents of the pregnant pigs initiative to circulate petitions for signatures. The measure would make it a crime for a person to confine or tether a pregnant pig to prevent the animal from turning around. The proponent of the initiative is Eric Sakach, who is available through the law offices of William Yeates of Sacramento.
Fire in Governor’s Office. While red-faced Finance Director Steve Peace was overheated in a hallway exchange Tuesday with legislators on the budget, it was an overheated lamp that sparked a fire in the governor’s office Tuesday. Firefighters were alerted at 10:19 p.m. when a CHP officer noted smoke coming from beneath the doors of the governor’s office, and a blaze in a cluster of ceiling tiles was extinguished in about 10 minutes by tearing down a portion of the ceiling.
Orange County Increases Dog Fees. Dog owners in most of Orange County are going to be paying more in fees to the county, as a result of action taken by county supervisors on July 22. According to the Los Angeles Times, the annual dog license fee was increased by 20 percent for neutered dogs and by 27 percent for dogs that are not neutered. There are nearly 100,000 neutered dogs and 31,000 unneutered dogs subject to the increases. The new fees are effective in the unincorporated area of the county and 19 cities, including Anaheim, Fullerton, Garden Grove, Huntington Beach, Orange and San Juan Capistrano.
NOTE TO SUBSCRIBERS: THE NEXT CALTAXLETTER WILL BE PUBLISHED AUGUST 1, 2003.