David R. Doerr, principal contributor
Ronald W. Roach, editor
Citing the need to nourish California's rebounding economy, Governor Pete Wilson is pushing for a tax cut, urging the California Legislature to reduce the corporate income tax by 10 percent over the next two years.
More tax relief for businesses is needed, the governor told the Senate and Assembly in his annual State-of-the-State address last Tuesday, "to keep the 'California Comeback' rolling."
Mr. Wilson pledged to work closely with new Assembly Speaker Cruz Bustamante and Senate President Pro Tem Bill Lockyer, noting that California has become the first state with a trillion-dollar economy. He said there are bullish forecasts for continued economic growth.
About 330,000 jobs were created in the past year, but Mr. Wilson said California is growing by 300,000 people a year and faces sharp competition from other states that would lure away those needed jobs.
"Last year, we provided tax relief to create jobs," he said. "Economists already report that our tax cut has spurred job creation in high technology and other emerging industries. That may explain why 28 other states cut their taxes."
Last year's AB 3499 (Pringle) reduced the corporate income tax rate from 9.3 percent to 8.84 percent, saving taxpayers about $85 million in the current fiscal year and close to $300 million a year when fully implemented. Also approved in 1996 was SB 38 (Lockyer), which provided 25 targeted tax cuts, including an increase in the research and development tax credit.
The governor's plan, to reduce the rate 5 percent on January 1, 1998 and 5 percent on January 1, 1999, would result in a rate of 8.4 percent, then 7.96 percent. Taxpayers would save $88 million in the fiscal year starting July 1; $329 million in 1997-98, and $555 million in 1999-2000, according to the Department of Finance. The corporate income tax produced $5.86 billion last year.
While most of his 33-minute speech was focused on education and welfare reform, the Republican governor, beginning his seventh of eight years in the office, served notice that last year's 5 percent reduction in the bank and corporation tax rate did not finish the job. He had initially proposed a 15 percent across-the-board reduction in personal and corporate income tax rates in his 1995 and 1996 agendas. The Democrat-controlled Senate refused to go along, forcing the smaller reduction in 1996.
Will Democrats, who now control both the Senate and the Assembly, support the tax cut this year? It would appear to be an uphill battle for the governor.
Mr. Lockyer told reporters after the speech: "We just did it, so why don't we see how it works?" He also cited a state Department of Finance analysis last summer that 18 percent of the corporate tax cut being debated at the time would be recouped through the economy.
Cal-Tax President Larry McCarthy said: "The governor's plan will keep California moving in the right direction. The state's corporate tax rate is still among the highest in the nation. Reducing this tax will send a message that California will compete for jobs. It tells those who would create jobs that California wants their business."
Lenny Goldberg, leader of the California Tax Reform Association and sponsor of huge tax-increase initiatives rejected by voters in recent years, said he prefers higher corporate taxes. "If there are tax cuts, they should be earned income tax credits for the poor who are coming off welfare. They are hit the hardest," he told The Sacramento Bee.
The governor's tax cut plan "makes California much more business-friendly," said Bill Hauck, president of the California Business Roundtable.
Assistant Finance Director H.D. Palmer said the only other tax cut in the governor's 1997-98 proposed budget, to be unveiled later last week, deals with Subchapter S conformity. By broadening and conforming to federal law -- increasing the number of allowable shareholders from 35 to 75 -- state revenues will be reduced by $5 million in the upcoming budget year and by $7 million a year thereafter, Mr. Palmer said.
John Chiang, who was Brad Sherman's top aide, has assumed the post of "acting member" of the State Board of Equalization, and, based on an opinion from Attorney General Dan Lungren, he may serve the remaining two years of Mr. Sherman's term unless the Legislature allows a nominee of the governor to take the job.
State law provides for top deputies to succeed constitutional officers pending an election or confirmed nominee of the governor.
Mr. Sherman, elected to Congress, resigned from the BOE in early January after naming Mr. Chiang (pronounced "Chung") as chief deputy to represent the district, which is most of Los Angeles County. The BOE has four members elected in districts to four-year terms. The fifth member, elected statewide, is the state controller (Kathleen Connell).
Mr. Sherman, in a letter to business interests and others who follow the BOE, praised Mr. Chiang, writing: "He will continue the tradition of voting in a manner which will promote business expansion."
Meanwhile, Governor Pete Wilson has yet to nominate a successor to Mr. Sherman. "We are seeking a legal opinion," said the governor's press secretary, Sean Walsh. "Obviously, we want to fill that position."
There is speculation, however, that unless the governor names a Democrat, or perhaps a former legislator who might sit in the $95,052-a-year office as an interim caretaker, majority Democrats in the Senate and Assembly would reject a nominee.
Board Member Dean Andal, a Republican, told The Sacramento Bee that the attorney general's opinion is correct. But he said it is based on bad law that may prove to be unconstitutional. Meanwhile, he said Mr. Chiang, a Democrat, "is a solid guy and I can work with him."
Mr. Chiang, 34, is a former Internal Revenue Service attorney. He earned his law degree from Georgetown University after graduating from the University of South Florida.
In his letter, Mr. Sherman added: "In effect, John Chiang will serve as a voting member of the board unless and until the governor appoints someone who is confirmed by both houses of the Legislature. I doubt that this process would yield a board member any more dedicated to business and economic growth in California than John Chiang. The confirmation process for replacing elected constitutional officers has traditionally been highly partisan."
Local governments' efforts to regain property tax revenues are being renewed with the strength of a new coalition that is demanding action from Governor Pete Wilson in 1997.
Cities and counties hired contract lobbyists and formed a coalition with the California Chamber of Commerce, the Building Industry Association, the California Association of Realtors and labor unions representing public employees. They want the governor to reduce or eventually eliminate the transfer of property tax revenues from local governments to schools. Of the $3.6 billion annual shift in revenue, about $2.6 billion is at the expense of county governments.
Mr. Wilson vetoed a bill last year that would have limited the tax shift at certain levels and allowed local governments to keep growth in property taxes.
Assemblymen Michael Sweeney, a Democrat, and Fred Aguiar, a Republican, joined the coalition efforts, which were described at a news conference last Tuesday. Mr. Sweeney called it "one of the most critical issues facing the state ... the challenge is to engage the governor in a serious way in this debate." The two legislators are developing a bill to place a cap on the tax shift and transfer back the original $3.6 billion to local government over 10 years. A proposed constitutional amendment would put the question to voters, bypassing the governor.
The state has provided a voter-approved sales tax hike for local government public safety measures, according to those who say the property tax transfer has been mitigated. Further, the Wilson administration will support more budget flexibility for local governments and some fiscal relief in yet-to-be-released 1997-98 state budget plans, according to Assistant Finance Director H.D. Palmer.
The Property Tax Committee of the State Board of Equalization has recommended that the full board authorize for publication several change-in-ownership amendments to Property Tax Rule 462.
Meeting last Wednesday in Sacramento, the committee approved proposed amendments on tenancies in common, trusts, interspousal transfers and transfers that do not constitute an ownership change. On interspousal transfers, it will be made clear that interests in legal entities qualify for the interspousal exclusion. Members of the board's legal staff worked with county and private bar representatives on the proposed amendments.
Amendments dealing with joint tenancy and legal entities were taken off calendar for future consideration.
In other action, the committee recommended amendments to the board's rules of practice and approval of a general aircraft value guide. The Aircraft Bluebook Price Digest was adopted as the basic valuation guide for general aircraft. The VREF Aircraft Value Reference was approved as an alternate guide if the aircraft is unlisted in the Price Digest. Assessors would use 90 percent of the retail price listed as the starting point and make appropriate adjustments to reflect the overall condition of the aircraft and its equipment.
The full board was scheduled to consider the committee report at last Friday's meeting, after Caltaxletter went to press.
-- By Marcy Jo Mandel, O'Melveny & Myers.
Bonds may be issued for expansion of the San Diego Convention Center without voter approval, according to a recent decision of the Fourth District Court of Appeals (Rider v. The City of San Diego).
The San Diego Port District (which owns the center) and the city have agreed to expand the center, financed by a lease-back financing arrangement, through a Joint Powers Authority (The Convention Authority). The Authority will issue bonds, not to exceed $205 million, to finance the expansion. These bonds will be paid by city rental payments and support payments made by the Port Authority. San Diego did not agree to encumber funds for any fiscal year to pay the rent.
Plaintiffs, including Libertarian leader Richard Rider, said the scheme was unconstitutional under Article XVI, Section 18, which prohibits the city from incurring "any indebtedness...without the assent of two-thirds of qualified electors." They also argued the scheme violated the city charter.
The court said the Legislature has passed laws permitting joint powers agencies to issue bonds without voter approval. It further said the joint powers agency is a separate entity from the city.
The court concluded, "Because the Convention Center financing is a primary purpose of the JPA (Joint Powers Authority) and because the Convention Authority's bond issuance is the method the parties selected to achieve this goal, the JPA plainly provides the authority with the power to accomplish this goal by issuing bonds without voter approval."
Observers noted that under Proposition 218, the city will not be able to raise taxes to fund any rental payments to the center without voter approval.
Without such approval, the city will have to finance its rental payment from funds it generates from the convention and existing city revenues.
The State Board of Equalization has scheduled another batch of regulatory changes for a February 4 public hearing. Revisions to the following rules are being proposed:
The changes incorporate provisions of SB 44 (Kopp) of 1996 that exclude short-term subleases of possessory interests from a change of ownership.
The proposed amendments also clarify aspects of the rebuttable presumption which underpin three subsections of Rule 462.200, establishing that certain transactions constitute changes in ownership.
Proposed Rule 370 establishes the procedure for selecting counties at random. Counties will be divided into three groups (small, medium and large). A selection of one county from each group will be done by lot.
Proposed Rule 371 defines "significant assessment problems." The term means problems in an assessor's operations that indicate a reasonable probability that the property in the county is not assessed in the aggregate at 95 percent of the level required by statute or the differences (over and under assessments) from what is required by law do not exceed 7.5 percent of that level.
Among other things, the board will be looking for uniformity of treatment for all classes or property, newly constructed property, proper assessment of changes of ownership, correct assessment of property with a decline in value, and proper administration of a possessory interest program in accordance with Revenue and Taxation Code Section 107 et. Seq., including 107.7 (relating to cable TV possessory interests).
The proposed amendment states, "An ATM installed in the wall of a building is personal property because there is little or no physical attachment, the ATM can be removed and used elsewhere without damage to the ATM and with little or no damage to the structure, and the realty was not designed or extensively modified for the purpose of housing the ATM. An ATM installed in a structure that was built primarily for the purpose of housing the ATM is a fixture because the realty cannot perform its desired function without the ATM."
The hearing will begin at 1:30 p.m. in Room 121, 450 N Street in Sacramento.
The Franchise Tax Board has launched a pilot program to electronically accept Partnership K-1s, which is expected to mean a lot less paper pushing and significant savings in time and money for taxpayers and tax regulators. California receives about 2 million returns a year from securities and real estate partnerships, and this program is designed to ease taxpayer reporting burden by eliminating the need to fill out paper forms.
The FTB utilizes TaxConnect as its value-added network service provider. TaxConnect is a state-controlled electronic commerce resource offered to governmental tax authorities by TaxNet Governmental Communications Corporation (TGCC), a non-profit organization based in Washington, D.C. Electronic Data System Corporation (EDS) is TGCC's technology partner. EDS provides a suite of electronic commerce services to states which subscribe to TaxConnect. The FTB will select products and services to implement a cost-effective electronic tax-filing program.
Also, the FTB uses a national Electronic Data Interchange standard data format for tax reporting. This means the state will process the tax report and create an electronic acknowledgment which will be posted to the taxpayer's secure electronic mailbox for retrieval.
Mitch Gorsen of EDS noted that some brokerage firms now have to wheel in boxes with thousands of forms to various states. "I am sure the state will save some money, and the taxpayers would prefer to eventually electronically file two million forms," he said.
Under the one-year pilot program, up to 200,000 returns can be accepted electronically, said Jim Shepherd, FTB spokesman. He said it will be easier on businesses to file their K-1s in one kind of clearing house for different states, instead of filling 20,000 in one state and 10,000 in another spot. With this program, the K-1 is filed in one spot and California then gets it electronically.
"It now costs 16 cents to key a K-1 into the computer, and it will be about half that to get the data electronically, and we will get complete information," Shepherd said. Last year, he said "about 500,000 returns were received on computer discs, so it is clear taxpayers want to provide it this way."
The FTB will continue to accept K-1s as it has in the past, he said.
If successful, Shepherd said the pilot program may be expanded, and eventually be used for other types of business returns.
The State Board of Equalization is commending Colusa County Assessor Dan O'Connell for "his early and continuing attention given properties that have suffered declines in value below their factored base-year value," according to a recent assessment practices survey of the county. The board's Assessment Standards Division sample of the county included 11 properties that had declined in value and board appraisers agreed with the assessor's value reduction for 10 of the 11.
The board also commented favorably on the county's change-of-ownership reassessment program, except for legal entity changes of ownership where the county had missed all such changes (37 changes affecting 309 parcels) over an 11-year period.
With respect to new construction appraisals, the board's sampling team discovered no major escapes. In Colusa County, appraisers continuously survey their assigned areas to discover construction being done without permits.
For business property, the small business property staff (one auditor/appraiser and one clerical position) has been unable to complete all mandatory audits required by law. The assessor plans to obtain from taxpayers waivers of the four-year statute of limitations on properties not yet audited.
Steve Kamp, long-time legal counsel to former Board of Equalization Member Brad Sherman, is the new chief consultant to the Assembly Revenue and Taxation Committee under new committee chair Louis Caldera. The committee's principal consultant is Karen Greene, who was chief consultant to the Assembly Banking and Finance Committee when it was chaired by Mr. Caldera. Ms. Greene spent the past year as a member of Mr. Caldera's personal staff and advised the Assembly Democratic Caucus on banking issues.
Lynette Iwafuchi has replaced Carlos Zamarripa as assistant executive officer over the Franchise Tax Board's Audit Branch.
The FTB has tax forms, the answers to the most frequently asked tax questions, and other information on the Internet (http://www.ftb.ca.gov).
Taxpayers who are traveling in Florida next month may want to stop and say hello to FTB Chief Counsel Glen Rigby, who will leave prospectively cold, foggy and soggy Sacramento to be in the Sunshine State on February 28 as a panelist at a Committee on State Taxation (COST) income tax conference. He is on a mock alternative dispute resolution panel.
Sacramento City Treasurer Tom Friery, in the Christmas Day edition of The Sacramento Bee, was quoted as saying, "I kind of feel they put a lump of coal in our sock." He referred to Moody's Investors Service, which reduced the city's credit rating for the first time in more than a decade. Moody's lowered the city's rating for general obligation bonds to Aa from Aa1, citing less flexibility to raise revenues as a result of voter approval of Proposition 218 on the November 5 ballot. San Diego's credit rating also has taken a slight dip, with officials citing the impact of the ballot initiative that requires voter approval of general taxes and most property-related assessments. Joel Fox, president of the Howard Jarvis Taxpayers Association, the primary sponsor of Proposition 218, said it was not the intent of the initiative to increase taxpayer costs of bond financing. He says voter-approved taxes will strengthen cities' credit ratings in the long run.
The Franchise Tax Board has announced its TeleFile program will be available for about 1.6 million California taxpayers who qualify to file their 1996 state income tax return by telephone. Those who take advantage of the program will be promised their refund checks in the mail in about 10 days. The FTB last year invited 100,000 taxpayers to participate in a pilot program, patterned after the Internal Revenue Service's program. About 10 percent responded, according to FTB spokeswoman Denise Quade. The FTB would like to see 30 percent response in 1997.
Conformity: Small Business Expensing. AB 41 (Murray) conforms California personal income tax law to federal law on amounts that may be expensed by small business. California law currently provides for expensing $12,500 of property placed in service in 1997 and $15,000 of property placed in service in 1998 and thereafter.
Los Angeles Revitalization Zone. AB 82 (Villaraigosa) extends the life of the Los Angeles Revitalization Zone from January 1, 1998 to January 1, 2003. Taxpayers in the zone may claim a variety of tax benefits, including hiring tax credits, sales and use tax credits and a 100 percent net operating loss carryforward.
Upon introduction of AB 82, Assembly Majority Leader Antonio Villaraigosa said, "Even though we have made tremendous headway, the L.A. area still has not completely recovered from the devastating effects of the 1992 civil unrest. In addition, the Northridge Earthquake exacerbated the economic problems of the area. AB 82 is necessary to give participants more time to take advantage of the zone's business development and job creation incentives."
Earned Income Tax Credit. AB 83 (Villaraigosa) creates an unspecified earned income tax credit for low-income taxpayers.
Tax Credit: Jury Service. SB 14 (Calderon) establishes an unspecified tax credit for amounts paid as compensation to an employee during the period the employee serves on a jury.
Tax Credit: Contributions of Land. SB 87 (O'Connell) establishes a new tax credit for qualified land contributed pursuant to the California Land and Water Conservation Act. The credit is a percentage of the fair market value of the land.
Jan. 15: WSPA/CIPA/PSAC CONFERENCE
Location: Doubletree Hotel, 2055 Harbor Blvd., Ventura.
Jan. 21-23: BAY AREA ASSESSOR'S ASSOCIATION ANNUAL MANAGEMENT
CONFERENCE
Location: Stockton Hilton, Stockton.
Subject: On January 21, BOE Member Dean Andal will speak.
Feb. 7: CAL-TAX ANNUAL MEETING OF MEMBERS
Location: Sacramento Convention Center.
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