Assembly Tax&Rev
A proposal to amend the state Constitution to create the California Tax Commission, merging the Franchise Tax Board into an enlarged State Board of Equalization, cleared the Assembly Revenue and Taxation Committee on May 9.
The 4-2 vote sent ACA 14 (DeVore) to the Appropriations Committee after considerable discussion and author Chuck DeVore's agreement to accept an amendment offered by the committee chair, Johan Klehs, to have the commission nominate an executive director who would be confirmed by the Senate.
ACA 14 is sponsored by State Board of Equalization Member Bill Leonard, who told the committee that the key to successful consolidation is to have an expanded State Board of Equalization become the California Tax Commission. Under this proposal, Mr. Leonard said that "aggrieved taxpayers are not at the mercy of unelected tax bureaucrats." The existing BOE – four members elected by district plus the state controller – would become seven elected-by-district members, plus the state controller and a member appointed by the governor.
If placed on the June 2006 ballot and approved by voters, the new commission would be created by January 2007, Mr. DeVore said. The Klehs amendment would allow the commission to fire the executive director without cause, although Lenny Goldberg of the public employee union-backed California Tax Reform Association, an enthusiastic booster of the current FTB staff led by Executive Officer Gerald Goldberg (no relation), lobbied to give the executive officer more job security.
Mr. Klehs objected to Lenny Goldberg's suggestion, calling such concern naïve since the current top bureaucrat for income taxes has operated for decades as a Senate-confirmed executive serving at the pleasure of differing Franchise Tax Board membership combinations.
Cal-Tax's Teresa Casazza testified in support of the consolidation. "We see consolidation offering more direct accountability, convenience to taxpayers and eliminating the confusion of separate tax agencies in California." She said such a commission "would consolidate a vast and fragmented tax administration function in California and have it run by elected officials. It provides greater certainty, predictability and fairness for all taxpayers."
The vote: Ayes (4), Democrats Klehs and Canciamilla; Republicans Devore and Walters. Noes (2), Democrats Jones and Lieber. Not voting (counts the same as a nay) (1): Democrat Chu.
In other committee actions:
Property Taxes: Welfare Exemptions. A 5-0 vote approved AB 722 (Emmerson), expanding the definition of a welfare exemption. It allows a non-profit charitable, religious or hospital entity to recoup the exemption retroactively to cover the time that passes (up to three years) between an application to build on property and actual construction.
Sales and Use Tax Exemptions and Credits. Sent to the suspense file was AB 1644 (De La Torre), providing one-year suspensions of specific exemptions and credits, such as the sales and use tax exemption for purchases of farm equipment and the research and development tax credit. The bill also requires that Subchapter S corporations be limited to those with income of less than $20 million for a taxable year. Assembly Member Hector De La Torre originally called for repeal of the tax incentives, but amended the measure to one-year suspensions to crank up more tax revenue. He said the state budget should be seen as a "moral" document and he found it immoral to reduce spending on programs for the needy.
A coalition including Cal-Tax, the California Chamber of Commerce, the California Manufacturers & Technology Association, American Electronics Association, the California Bankers Association, TechNet and California Aerospace Technology Association combined to argue against the incentive rollbacks. Such action would send the wrong message to employers while giving advantages to prime competitors in such areas as Texas, North Carolina and Massachusetts. "Elimination of the R&D credit would certainly ensure that more businesses locate elsewhere," the coalition said in a letter.
The California Farm Bureau Federation led a host of agricultural interests noting how other states provide more favorable tax treatment for purchases of farm equipment.
On the S corporation issue, the coalition argued that the bill would put California out of conformity. Further, the bill would use gross receipts as a measurement of S corporation size, when no such limitation exists under federal law. Such a definition "does not accurately reflect whether an entity is a small business," the coalition stated. Even worse, a business could flip back and forth from S corporation to C corporation from year to year based solely on gross receipts from a given year.
Current federal and state laws require that an S corporation can have up to 100 shareholders.
Water's Edge Election: Tax Haven Countries. Placed on suspense was AB 34 (Ruskin), limiting the practice of shifting income to offshore tax havens. The bill's major supporter, Lenny Goldberg of the California Tax Reform Association, said it is designed to target a subsidiary formed to hold onto royalties on intellectual property developed in the United States, such as pharmaceuticals. These ventures were not envisioned when the state expanded the water's edge election, he said.
Cal-Tax's Casazza said the FTB "should not be in the foreign relations business, determining what internal policies of other countries they do not like. This bill could interfere with U.S. foreign policy objectives. Further, corporations that elect a water's edge apportionment should be allowed to stay on the water's edge. The state should not be expanding the overseas income it taxes."
She said there are "major complications (such as huge currency fluctuations) when trying to graft overseas income and factors into a U.S.-only apportionment."
The bill defines a "tax haven" as any of the 39 jurisdictions included on a list from the Organization for Economic Cooperation and Development as of December 2002. They include Guernsey and Jersey, which, it was noted, are islands in the English Channel that were the only British turf occupied by the Nazis in World War II.
Kathy Hatch of AeA said the bill undermines the "basic structure" of water's edge. Erika Frank of the California Chamber of Commerce said the chamber is concerned with the impact on trading relations with other nations and existing contracts.
CTRA's Goldberg suggested that a company could opt out of its seven-year water's edge contract without violating the agreement. He also said the FTB, by regulation, or the Legislature, by statute, could make sure that the bill addresses the "mail drop in the Cayman Islands" and not a Marriott Hotel that has an obvious business investment in the country.
Credit Tax Surcharge. Another suspense bill was AB 1375 (Nation), imposing an additional 2.5 percent tax on banks or financial institutions that extend credit on inequitable terms to consumers. The author, Joe Nation, said he had just amended the bill to narrow the scope to the "credit card industry." It is not intended to affect the mortgage lending industry, he said.
Jamie Clark of the California Bankers Association said that he had not seen the amendments taking mortgage lending products out of the bill, but there remain concerns that the bill still impacts bank credit cards or credit lines. He said it is a tax. Others said the measure would put state-chartered lenders at a disadvantage with national charters.
Cal-Tax's Casazza also opposed the bill, saying it represents a significant tax increase on banks and financial institutions that "are already heavily taxed and higher taxes will make California a more expensive, less-desirable place to live, resulting in further loss of jobs as investment moves out of California."
Tax Credits: Medical Care Professionals. Sent to suspense was AB 218 (Maze), allowing a nonrefundable tax credit to certain medical care professionals.
Sales Tax Exemption: Alternative Fuel Passenger Buses. Sent to suspense was AB 1618 (Klehs), exempting from the sales and use tax tangible personal property sold or leased to be used to manufacture alternative fuel prototype buses pursuant to a qualified research and development contract.
Sales and Use Tax. Mr. Klehs announced the "gutting" of his AB 1613. He then placed it on the suspense file to be a spot bill available for the future use of "anybody" on the committee. As introduced, the bill specified that construction contractors are consumers of solar energy systems.
Caltaxletter
May 13, 2005
©
2005 California Taxpayers' Association. All Rights Reserved.