CAL-TAX ANnual meeting:
State Finance Director Tom Campbell is dead set against raising taxes in the context of the state's current budget debate. He says he's supported higher taxes in the past, but this is not the time.
Raising taxes would be sending a message that California's fiscal mismanagement – overspending – is going to continue with even more spending, Governor Arnold Schwarzenegger's chief fiscal adviser told the Cal-Tax Annual Members' Meeting on April 5.
The state's budget woes – $5 billion in new revenue but autopilot spending growth of $10 billion – stem from spending one-time revenues for ongoing programs, he said, including Proposition 98 and CalWorks (welfare). Education advocates (who aren't telling the truth, he said, in their anti-Schwarzenegger advertising by calling a 7.1 percent increase a cut) want more spending. What they want is a 12 percent increase, he said, while not wanting to reduce spending elsewhere.
"So why don't we just increase taxes?"
He said the "honest participants in the debate" who favor more taxes say "we understand there is some waste but we really should be spending more (on education and welfare) and we're prepared to make the taxpayers of California pay for it by having the position of an increase in taxes. Those people who represent that position have my respect. I disagree, but they have my respect.
Referring to the education lobby, he added, "What is beneath respect are folks who fib; who call a 7.1 percent increase a cut; who say that we are Draconian, that we are slashing when the numbers are as I describe."
Further, he said the opinion polls that have said the public favors higher taxes are all about "taxing someone else." Voters last fall agreed to tax millionaires for mental health programs, and he said he understands an initiative for universal preschool is aiming for the June 2006 ballot and will propose raising taxes on those with incomes of half a million dollars.
The pro-tax lobby is big on compassion, Mr. Campbell said, regarding programs and services for the needy, but he stressed: "Ask how compassionate it is to lose your jobs." Between 2000 and 2005, he said, the Silicon Valley lost 20 percent of its jobs. It was like the Great Depression localized in the Silicon Valley, said the former Stanford law professor who is now on leave as dean of the Haas Business School at UC Berkeley. With unemployment came social ills such as spousal abuse, abandoned families, alcoholism, drug use, crime and truancy.
The most compassionate answer to human hardship is jobs, and jobs can go elsewhere, he said. The movers and shakers of the Silicon Valley felt they were "nimble" enough to adjust to any economic threat. However, the collapse of the dot-com industry happened and many Silicon Valley jobs went elsewhere.
California needs to put its fiscal house in order so that Wall Street investment counselors take note and resuscitate the state's credit rating. Because California has a spending problem, a tax increase would be "clear proof" that California cannot be a responsible money manager, he said.
Why would a company plant roots in California or pour cement in California when they can choose a state that is friendly toward business? he asked.
He cited study after study, including a California Business Roundtable report that found 55 percent of mobile sector companies on record as looking elsewhere if they were going to expand. Further, Chief Executive Magazine last January, based on a survey of 450 CEOs, found California ranking worst, just below New York, Massachusetts and the District of Columbia, as a state to expand employment based on business regulations, costs including tax rates, infrastructure and quality of life. Texas was number one.
Cisco Systems' John Chambers said last December in a letter to the governor that his company would not grow operations in California due to a hostile business environment of increased regulations, the threat of new taxes, etc., Mr. Campbell said.
Companies fear taxes and fees will go up and up, he added. But what about tax burden? He noted the spending lobby argument that Californians aren't shouldering enough tax weight, and promptly dispelled that notion with studies and statistics. Only Pennsylvania has a higher corporate income tax rate than California's 8.84 percent, he said.
Mr. Campbell stated that the U.S. Bureau of the Census ranks California per capita tax burden 10th among states, or 18.5 percent above than the national average. (See the government Web site -- www.census.gov.) This is the meaningful measurement for employers, not taxes as a percentage of gross domestic product, which ranks the state about 30th. Employers rely on tax burden per capita when they consider whether they can afford to pay salaries that are enough for employees to live in California.
He invited the audience to check out the Washington, D.C., Web site (www.cfo.dc.gov) for a study of tax levels in cities as the nation's capital tries to lure jobs from elsewhere. Los Angeles ranks seventh highest in taxes for those above $150,000 per year and ninth highest for those under $25,000 a year – people who are in poverty in California.
Ernst and Young studied tax burden a year ago for the Committee on State Taxation (COST) and found only six states – including California – had business taxes that increased faster than state taxes as a whole.
California is one of only three states that charge the full sales and use tax on the purchase of equipment used in manufacturing, he said, while citing a McKenzie report for the California Manufacturers and Technology Association, among others, that companies in California pay more than 60 percent above the national average for their energy supplies.
"For those arguing all we need to do is raise a tax, they miss a very critical component that sends a message: we are not responsible," Mr. Campbell said. "And they miss the data on which I base my present judgment. I do not say never. I do not say under no circumstances. I say not under these circumstances. Because losing a job brings a compassionate consequence at least as much as the other side argues."
On other issues addressed by the finance director:
State Budget and Tax Amnesty. The budget-related news of the week was the $3 billion in taxes paid by corporations in the final days of the tax amnesty program – and the need to keep the money from being spent since a significant amount (some say 80 cents on the dollar) is likely to be refunded. Taxpayers were protecting their rights to appeal and to avoid huge penalties associated with liabilities that are held out of the amnesty arena.
"Unless one believes in theft, we need an expedited process" of handling cases where taxpayers are protecting their rights and sending in money under protest, he said. When refunds are handed out, in cases that will take months if not years to settle, taxpayers are denied use of their money and the state pays very little in interest on the refunds.
He suggested that the FTB could take some action in June to relieve the situation, but meanwhile the $3 billion that companies have paid to protect their rights should be sequestered. It should not be counted as general fund revenue until the assessment is upheld on appeal. Even those assessments that are upheld should be treated as a revenue spike and should not be allocated to ongoing programs, he said.
Tax Agency Consolidation. As a state senator, Mr. Campbell supported legislation to abolish the FTB. He suggested that the governor may yet weigh in on a proposal to consolidate the FTB and the State Board of Equalization as the issue progresses.
Limiting Spending vs. Restricting Budget Growth. He defended advising the governor against a Gann-type spending limit (in the Deficit Prevention Act, which is an initiative sponsored by Senator John Campbell (no relation), Cal-Tax and the Howard Jarvis Taxpayers Association). He said it comes down to "don't spend more than you have." If the Legislature wants to increase taxes and get the two-thirds vote to do it, OK, as ill-conceived as that may be. It would be unwise to tell voters their elected representatives could not vote to raise taxes.
"My advice to the governor is driven by pragmatic politics." Under the Live Within Our Means initiative backed by the governor, he said, if there is a one-time blip in revenue, it can't be spent in the next two years, which would level it out. And, he reminded, taxes cannot be increased without a two-thirds vote of the Legislature.
"We have a huge win in the governor's proposal," he said, noting that it would forbid borrowing from government agencies, such as the state highway account. He said if there was an absolute cap on taxes, every local government entity would be passing taxes and calling them fees.
Discussion of Tax Agency Consolidation and Simplified Sales Tax Highlight "Breakfast with the Board." Tax agency consolidation and the status of the simplified sales tax project dominated much of the discussion at the annual "Breakfast with the Board" segment of Cal-Tax's Annual Members' Meeting. Four BOE representatives present (Chair John Chiang, Bill Leonard, Betty Yee and Marcy Jo Mandel, representing Controller Steve Westly) offered their insights on various issues.
On the issue of tax agency consolidation, Mr. Leonard voiced support for consolidation and said an elected tax board concept is the best concept for tax administration.
He distributed a "top 10" list of reasons why consolidation of the tax agencies is important. Among the reasons: simplicity, improved communications, consistency, culling out the underground economy, lower tax administrative costs, increased taxpayer privacy, heightened protection of taxpayer rights, strengthened accountability and a single address, telephone number under taxes, etc.
Ms. Yee said there are several issues to be considered in developing a consolidation proposal. First and foremost: What does consolidation mean for taxpayers? Ms. Yee said taxpayers will find the BOE less formal and more comfortable in terms of a taxpayer's experience. Taxpayers will find a professional staff that is accessible. She added BOE staff works well in trying to resolve taxpayer issues at the lowest level. In formulating a consolidation plan, Ms. Yee also said the practical aspects need to be addressed so it can work.
In response to a question on the status of the simplified sales tax project, Mr. Chiang said there are lots of significant problems for California. Ms. Yee said one of the provisions – the allocation of local sales tax on a destination basis – turns current California tax law on its head and has local governments concerned. Mr. Chiang pointed out California would provide major funding for the organization but have only one vote. As a result, California would have to give up state sovereignty to a national body dominated by small states.
On the question of tax amnesty, board members noted that there are unintended consequences and taxpayers shouldn't be punished unintentionally.
Ms. Mandel said the board is considering reorganization of its legal branch and asked for taxpayer input. She also announced that Chris Cazadd has been appointed as the new BOE chief counsel. He succeeds Tim Boyer, who retired several months ago.
Ms. Yee noted that the Legislature looks at the BOE as "Fees R Us" and is imposing more and more fee collection duties on the board. This often puts the board in an untenable position because the board has no say in designing the fee. She added that the board needs added resources for these new duties. An example of the problem is the new electronic waste fee where there is bifurcated responsibility for the fee. She added that the fee may not generate enough revenue to support the program as originally envisioned.
Mr. Chiang praised the current board, saying it is the most collegial he has worked on. He said board meetings will run a little longer than in the immediate past because he believes in full development of the issues. He said his efforts have been made to build public trust by being innovative and efficient. In this context, he pointed out the benefits of services the board is providing taxpayers, particularly with the non-profit tax seminars he has pioneered. Over time 35 seminars have been held.
Ms. Mandel said the controller will be working on property tax rules that impact affordable housing.
Ms. Yee reported that the board has embarked on an update of its business coding systems, without spending any new revenues. This will help the board do its business better.
Caltaxletter April 8, 2005
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