August 2002

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Cal-Tax Commentary 

Larry McCarthy is president of the California Taxpayers’ Association. This commentary was released August 8 in response to proposed higher taxes to deal with the state’s budget problems.

With each passing day, the state budget process in Sacramento becomes a bigger nightmare for taxpayers. An additional $500 million in tax increases were put on the table this week. This is one-half billion dollars more than the car tax (vehicle license fee) increase that is being set aside in the new deal as proposed in SB 1849 by Assembly Speaker Herb Wesson.

Remarkably, the Legislature is looking at tax increases that have never had a legislative hearing. From a good-government public policy standpoint, efforts to enact laws without public input are akin to a sneak attack. Whether you support or oppose higher taxes in this latest proposal, the abuse of constitutionally prescribed process and time-honored legislative rules should alarm all Californians. The Legislature has once again shown a willingness to abandon legislative procedures and protocols that are designed to produce quality laws and guard against flawed statutes that can create massive problems.

There are enormous defects in taxes put into play by SB 1849 that should be explored in public hearings. For example:

Satellite TV. Impose a new 5 percent excise tax on charges for satellite television services, increasing taxes on those who subscribe to satellite TV by $55 million a year.

Issues: This new tax would initiate a new era in California with a tax on services. California policy-makers have rejected taxing services in the state because of serious negative consequences for business and individual taxpayers. What consumer services will be next – legal service, health care services, dry cleaning? California voters in the past turned down a tax on pay-TV and other services.

Stock Options and Bonuses. Increase the rate of withholding to the maximum 9.3 percent rate for stock options and bonuses, for a one-time exaction of $400 million from taxpayers getting stock options and bonuses.

Issue: For many taxpayers who have been hurt by the stock market decline, this change will over-withhold from their paychecks.

Real Estate Sales. Impose withholding (at a rate of 3.3 percent of the sales price) on real estate sales by California residents for a one-time exaction of $225 million.

Issue: For sellers who end up not making a profit, the bill says the Franchise Tax Board can take this into consideration, but there is no guarantee on how that will work.

Tobacco Tax. Increase the 87-cents excise tax by $2.13 per pack, bringing the total tax to $3 per pack, highest state tax in the nation. Proponents hope to increase revenue by $1.689 billion a year.

Issues: Had there been a public hearing on this proposal, a series of questions would have been asked, such as:

What is the likelihood that so many smokers will be priced out of the market that they will either quit, evade the tax by bootlegging, use the Internet, or steal to support their habits?

How much does this tax increase invite organized crime to participate in the cigarette delivery in California?

What are the future consequences of heavy reliance on a revenue source that stands to be diminished?

How does the tobacco tax increase the cost of borrowing against the tobacco Master Settlement Award?

How accurate is the revenue estimate? What do experts say?

(The governor had proposed a 50-cents-a-pack increase, and Democrat leaders had embraced a 63-cents hike to $1.50 per pack. Because the sales tax is applied to the price of the product, including the excise tax, the true increase in taxes on cigarettes is $2.26 to $2.31 per pack, depending on the county tax rate.)

Cal-Tax reiterates the need to take immediate action on high-profile fraud, wasteful and low-priority spending before asking taxpayers to increase taxes. Cal-Tax continues to emphasize that incorporating taxes into the budget-balancing effort without public hearings is a violation of the fundamental legislative process. This process should provide time for public review of proposals, including noticed hearings and draft language of bill amendments.

Editor’s Notes: For more from Cal-Tax on tax threats and examples of misused and abused tax dollars see The Accountability Files at Cal-Tax Online (www.caltax.org).