David R. Doerr, principal contributor
Ronald W. Roach, editor
As expected, welfare reform and education funding received star billing, and these issues will dominate budget debate over the next five and one-half months (longer if budget talks are not concluded by the June 30 end of the fiscal year).
Proposed general fund spending is $50.3 billion, compared to an estimated $48.4 billion in the current year. The state expects $50.7 billion in general fund revenues, up 4.6 percent from $48.4 billion this year. Including special funds ($14.3 billion), the total is $64.6 billion. (If selected bond funds [$1.99 billion] are included, total proposed state spending would be $66.6 billion.)
The projected year-end reserve is $553 million, or 1.1 percent of the general fund. Personal income taxes, expected to total $22.660 billion this year, are anticipated to produce $24.240 billion in 1997-98. Sales and use tax revenue is expected to grow from $16.485 billion to $17.325 billion, while the bank and corporation tax should produce $5.860 billion, an increase from $5.795 billion.
The Republican governor's budget is based on an economy that has been outpacing the nation. Personal income growth, 7.2 percent last year, was well above the nationwide gain of 5.5 percent. It is expected to be more than 6.5 percent in 1997 and 6 percent in 1998.
Nurturing an expanding economy that has improved state revenues by more than $2 billion above expectations of a year ago, the governor proposed to build upon last year's 5 percent reduction in the bank and corporation tax rate. He wants to reduce the current 8.84 percent rate to 8.4 percent on January 1, 1998, a 5 percent reduction. The plan calls for another 5 percent drop, to 7.96 percent, on January 1, 1999.
The budget also proposes conformity to federal law on Subchapter S corporations, increasing the number of allowable shareholders from 35 to 75. Both of these measures, when fully phased in, will result in tax relief totaling $647 million in the year 2000-01.
Legislative Analyst Elizabeth Hill, in her January 15 overview, described the budget as "balanced with a modest reserve" with some of the most significant issues centered on welfare reform (support for children, work incentives and employment-related services) and use of new education dollars (state-determined vs. locally determined purposes). She said the governor's budget forecast "is generally consistent with recent projections made by other economists, although its state personal income forecast is slightly above the consensus."
On the governor's corporate tax cut proposal, the analyst said issues to consider include "the relative tax position of California to other states, the effects of the tax cut on California's interstate competitiveness, its longer term fiscal effects, and the lack of parity between individual and corporate taxpayers inherent in the proposal."
In the governor's budget summary, the corporate income tax cut is described under the heading "Maintaining Momentum." It said California "needs to become more competitive in corporate taxation, especially as other states reduce their tax rates. Last year, 17 states made changes to their business taxes with several making broad-based business tax reductions."
California's current 8.84 percent corporate income tax rate ranks 14th highest among the states, according to the Federation of Tax Administrators. With a 10 percent cut, California would rank 20th among the 50 states.
The governor also proposed elimination of the renters' tax credit, which is worth about $520 million. This credit has been suspended in recent years but is due to be reinstated this year unless action is taken to do otherwise.
At the governor's budget news conference, questions touched on these tax-related issues:
Making it easier to approve local school bonds, the governor said, would be coupled with reductions or limits on developer fees. Statewide general obligation bond measures -- which are not directly linked to a tax -- may be approved by a majority of voters. Local general obligation bonds, though, result in commitments of property taxes and require two-thirds voter approval.
When a reporter suggested that majority-vote local school bonds proposal will be "politically difficult," the governor responded:
"The arguments from the standpoint of local voters, I think, are compelling. Why vote for a state bond and pass it with a majority vote when you have no assurance, particularly under the school construction process that now exists, that you are going to see the money in the lifetime of your children? Why not have the same vote requirement and be assured that in fact the money that you are voting for is going to be spent in your own district? And, also, I know there is unused bonding capacity at the local level. I don't know why the state should have to do it all."
"We are helping (local governments) in many ways, but if they are suggesting that we take $3 billion away from schools, I don't think that is a serious suggestion," Mr. Wilson said. "The law states what we must do on education. And we are not in any way insensitive to the needs of the counties."
The governor recited a list of local funding measures, including Proposition 172, which raised sales taxes to pump $1.5 billion into local public safety programs. He said there also has been relief from mandates as "we have sought to give them help in a variety of ways." He also noted that the current welfare reform plan of "relief from general assistance really is a management tool for them, to allow them to set their own priorities ..."
He said counties should have the opportunity to provide hiring subsidies if they can find the right kind of employer who is willing to participate. A potential problem is the employer who hires someone off welfare rolls, picks up the subsidy, fires the employee and picks up someone else. The governor said he expects to see counties experiment with different programs because counties are differently situated.
A reporter asked whether the governor had a detailed analysis tracking specific numbers of jobs to certain tax incentives.
"Better than that," the governor responded. "What we have had are testimonials of people who have no connection with the Department of Finance or state government; people like Jack Kyser (chief economist of the Los Angeles County Economic Development Corporation), who has said very clearly (that) they produce change. They have made California a more attractive environment, particularly for some of the emerging technologies, which was, of course, the hope and the purpose of making the tax cut (of) 5 percent in the bank and corporation tax, and some of the more specifically targeted cuts (such as the research and development tax credit increase). But you can see here," he added, pointing to a chart, "that we are doing pretty well in most areas ... spectacularly well in manufacturing. That is light manufacturing, not steel mills or tire plants. These (light manufacturing jobs) are not only high-salaried jobs, people in white smocks in clean rooms, but you create jobs for others. Look at construction. California is above the national average. The reason we are doing so well in commercial construction is we have created the jobs, in animation, in the film industry. The ripple effect is enormous."
Would many of those jobs have happened regardless? A reporter asked. Mr. Wilson replied: "No. I don't believe that for a moment."
Why not? The reporter asked.
"... The fact is we have had competition," the governor said, citing efforts by other states that have set up economic development bureaus in California. He said Arizona Governor Fife Symington "has agents here all the time" trying to lure businesses to his state.
Mr. Wilson concluded, "We have to be more competitive. You can't rest on your laurels ... there is an obvious relationship. If we are unable to produce the jobs, because we cease to be competitive, then we don't produce all the revenues that we have to increase investment in education and public safety."
Wages and salaries grew 6.9 percent last year, or more than 2.5 times the increase in employment, as a result of the relatively large share of employment growth occurring in high-technology, high-wage jobs, according to the governor's budget summary.
Budgets for the State Board of Equalization and the Franchise Tax Board contain a number of adjustments, including an increase in the staff-to-supervisor ratio at the BOE.
At the BOE, a budget reduction of nearly $1.4 million, reflecting 28 fewer positions, is proposed to reflect an increase in the BOE staff-to-supervisor ratio from 7.5:1 to 8.0:1 and a cutback in subscriptions. In all, the BOE budget calls for 65.5 fewer positions, for a total of 4,023.5, with salaries and wages totaling $172.2 million. That is only $460,000 more than the current year.
Augmentations of $108,000 in reimbursements and 0.7 positions are proposed to meet extended needs of refunding invalidly collected taxes for special taxing jurisdictions in San Diego and Monterey counties, and $112,000 in reimbursements and two positions to process claims for refund of the invalidly collected Fresno Metropolitan Projects Authority District tax.
The BOE also is proposed to receive an additional $772,000, mostly from special funds, and nine permanent positions, to provide continued enforcement of the state's tobacco tax law. According to the budget, this funding "will enhance the board's efforts to combat cigarette and tobacco tax fraud and is projected to increase revenue collections by $5.8 million in the coming fiscal year.
The BOE also is proposed to use a $940,000 augmentation from the Motor Vehicle Fuel Account to create a two-year pilot effort to combat "designer fuel" tax evasion schemes.
FTB budget adjustments proposed for the year starting July 1 include $2.9 million to continue redesigning the Bank and Corporation Tax System; $1.8 million to continue administration of the settlement program; more than $5.2 million (98 new positions) for tax return processing workload growth, and more than $2.6 million for the Collection Accounts Processing System (CAPS) Expansion which, when fully implemented, is expected to result in $34 million in revenues.
In all, the FTB would add 152 positions and more than $8.7 million to its salaries and wages budget, bringing the payroll to 5,459.5 positions, costing $206.3 million.
Neither agency's line-item budget in the governor's proposal mentions the Multistate Tax Commission. The BOE and FTB have paid MTC dues (more than $400,000 combined) in increments this year because the current state budget required the Washington, D.C.-based agency to adopt open meeting rules. "There may not be a specific item in the budget, but that does not mean the issue is done. It could come up again in hearings on the agencies' budgets," said one Capitol insider. It remains to be seen whether such MTC critics as BOE Member Dean Andal and Assemblyman Charles Poochigian, former chair of the Assembly Appropriations Committee, will continue to target California's participation in the MTC during 1997.
Emergency tax relief is available to business and property owners who suffered losses during the latest storms and severe flooding which affected a number of counties in northern and central California.
State Board of Equalization Chair Ernest J. Dronenburg Jr. has announced that special tax relief is available through three measures:
Relief from penalties and interest may be provided for those persons who are unable to file their returns and pay taxes due on time. Taxpayers should include with their returns a statement under penalty of perjury giving the causes for late filing.
The relief program applies to sales and use taxes, use fuel taxes, alcoholic beverage taxes, cigarette and tobacco taxes, gasoline taxes, energy resources and emergency telephone surcharges, insurance taxes, and hazardous substances taxes; as well as the integrated waste management, occupational lead poisoning, and underground storage tank fees, diesel fuel taxes, jet fuel taxes, childhood lead poisoning prevention fee, tire recycling, and International Fuel Tax Agreement returns.
Relief from penalties, but not interest, is available by including with returns a statement under penalty of perjury giving the causes for late filing with respect to the oil recycling and oil spill fees.
The property tax relief program provided for in Section 170 of the Revenue and Taxation Code allows county boards of supervisors to pass an ordinance authorizing county assessors to recognize a loss in value of property resulting from calamities. The loss in value must exceed $5,000. Once granted, the damaged property will retain its lower value, with reduced taxes, from the day of the disaster until it is restored, repaired, or reconstructed. The lowered value, however, may be annually adjusted by an inflation factor not to exceed two percent (Section 51, Revenue and Taxation Code).
Also, the owners of flood-damaged property may be eligible to delay payment of the April 10, 1997, property tax installment without penalty. If the county board of supervisors has adopted the ordinance mentioned above, and all of the conditions for property tax deferral are met, and a property tax deferral claim is timely filed, the payment will be due and delinquent 30 days after a corrected tax bill is issued.
Property owners who have suffered damage from the floods should file an application with their county assessor for reassessment to reflect the condition and value of the property after damage. State law normally requires that the claim and supporting information be filed within 60 days of the date of the disaster. Property owners are urged to contact their county assessor as soon as possible to file applications for flood damage reassessment and claims for deferral for the April 10, 1997 tax installment, or to obtain more information.
A refund of taxes paid or included in the price of alcoholic beverages or cigarettes may be obtained by distributors, wholesalers, and retailers if the products have been rendered unmarketable by reason of disaster. For alcoholic beverages, the loss must exceed $250; there is no minimum on cigarettes. Claims for alcoholic beverage tax refunds should be filed directly with Board of Equalization's Excise Taxes Division within six months from when the damage occurred, approximately July 1, 1997. Retailers' claims for cigarette tax refunds must be filed through their distributors.
For information regarding the alcohol beverage tax and the cigarette tax, please call the Excise Taxes Division at (916) 327-4208. For further information regarding property tax, please contact your local county assessor. For information on sales and use tax, the gasoline tax, the use fuel tax, and the other taxes listed above, please call the Board of Equalization's toll free number at 1-800-400-7115.
Business owners needing to obtain copies of Board of Equalization tax records lost during the floods will be able to receive replacement copies by calling their nearest BOE office. The board will send business owners free of charge copies of critically needed tax records on file with the board, including prior tax returns filed with the board, copies of audits, and permit application forms. Those requesting records should call the board's toll-free number at 1-800-400-7115.
Foes of Santa Clara County's $1.1-billion program to fund transportation projects have filed an eleventh-hour lawsuit against the sales tax hike, an action that may at least delay plans to expedite construction of highway and rail projects.
On November 5, Measure A was approved by 78 percent of the voters as an advisory proposition recommending that money raised from a half-cent sales tax increase be spent on transportation projects. The half-cent sales tax was authorized in Measure B on the same ballot, and voters were 52 percent in favor.
Proponents say Measure B, because it did not earmark revenues, is a general tax and therefore required approval by only a bare majority of voters. A special tax -- with the revenue designated for specific projects -- would require two-thirds voter approval under the state Constitution (Proposition 13's Article XIIIA).
The unusual two-measure approach was "a gimmick from start to finish," according to Charles Moore of San Jose, one of the plaintiffs. They are some of the same tax and transit opponents who successfully overturned a 1992 sales tax measure, including Shelley Williams, a Saratoga realtor.
Because the plaintiffs, who had no attorney, did not announce what they had done, county officials -- and the news media -- were unaware until early last week that the suit had been filed late in the day of January 6 -- the 60-day deadline for litigation.
County Attorney Steve Woodside said the complaint is "wholly without merit."
However, the suit is expected to cause some delay in moving ahead with construction projects. According to a report in the San Jose Mercury News, the suit stands in the way of plans to issue $100 million in bonds to accelerate completion of interchange and freeway widening projects. The sales tax is not scheduled to be collected until April 1.
The newspaper noted that foes of Measure B proceeded to sue despite the lack of a powerful ally
-- the Howard Jarvis Taxpayers Association. The association's Jonathan Coupal told the paper that he is busy with the implementation of Proposition 218, which requires voter approval of local government taxes. Mr. Coupal said Proposition 218 would have made Measure B an illegal special tax, but may not have been in effect since both were on the same ballot. "Therefore, it is an open issue," he said.
When was the last time a taxpayer asked to pay more taxes? It happened at the January 10 meeting of the State Board of Equalization (BOE).
The BOE turned down the effort by Contel of California, Inc. to increase the state-assessed value of its property from $420 million to $423 million. Reportedly, the company wanted its value to correspond to the figure that the "settlement agreement" formula would have produced.
BOE Member Dean Andal led the attack against changing the value. He said it would establish a horrible precedent for taxpayers. State-assessed values must be set annually by December 31. Only escape assessments can be made after that date.
In response to a question from Mr. Andal, BOE Property Tax Chief Jim Speed said both figures were within the acceptable range of value. Mr. Andal said an escape assessment, as proposed, could only be made if: (1) property was not known or (2) if a mistake was made.
Responding to arguments put forth by Property Tax Counsel Larry Augusta that the property was undervalued, Mr. Andal pointed out that the current assessment was in the acceptable range of value. Mr. Andal said a change in the value would be unprecedented because there was no mistake or no property missed. "The effect of changing a value would be to create uncertainty in all state-assessed values. They would never be firm," he added. This precedent, he argued, could lead to situations whereby if BOE staff was unhappy with a value, they could try to reopen the issue in the following year, particularly in a year after elections changed the board membership.
Mr. Andal's motion to reject the request for change was carried by a 3-1 vote with BOE Chair Ernest Dronenburg and John Chiang voting with Mr. Andal, and Johan Klehs voting against the motion.
In another board action, the BOE unanimously approved a contract with KPMG Peat Marwick for a performance audit on selective board functions.
Prior to approval, Mr. Klehs tried to add a clause to the contract that would require the firm to divest itself of representing clients before the board for the period of the audit and six months following. Mr. Klehs said the company would have an inherent conflict of interest. He said it could also solicit business on the basis that it was auditing the board.
BOE Executive Officer Les Sorensen said the adoption of the amendment would require starting the process all over again and soliciting new bids. Mr. Andal said the function to be audited would not create conflicts and noted the board approved the package that went out to bid. Mr. Klehs motion failed on a 2-3 vote (aye - Klehs, Dronenburg; no - Andal, Chiang and Rex Halverson, on behalf of Controller Kathleen Connell).
The board did agree to add to the contract a provision requiring protection of taxpayer confidentiality, which KPMG Peat Marwick accepted. With this amendment, all five members voted to approve the contract.
Sally Lee has been named the State Board of Equalization's deputy director for administration ... Jerry Becker is the new chief of the BOE's Technical Services Division.
Judy Smith, once a staffer at the state Department of Finance, has moved from the League of California Cities to the office of Assembly Speaker Cruz Bustamante ... Andy Meyers, professional adviser to BOE Member Johan Klehs while Mr. Klehs was chair of the agency, has departed to become consultant of the Assembly Consumer Protection, Governmental Efficiency and Economic Development Committee (yes, that's the longest name of any Assembly committee). Mr. Meyer's speciality is economic development.
With all the symposia put on by others, including this week's Internet tax policy conference in the Silicon Valley (see December 23 Caltaxletter), the FTB has decided against hosting a conference on electronic commerce this spring. FTB Executive Officer Gerald Goldberg had been considering such a conference in April or May at the Davis campus of the University of California. BOE Member Dean Andal is speaking at the Silicon Valley conference and also has been booked to participate at another electronic commerce conference at Harvard University on April 4.
Former Orange County Treasurer/Tax Collector Robert L. Citron, 71, has begun serving a one-year sentence after pleading guilty to six felony counts of falsifying documents and misappropriating public funds. He also was fined $100,000 for his role in the county's bankruptcy. Instead of going to jail, Mr. Citron reported last Monday for his Community Work Program assignment at the sheriff's commissary warehouse. He sorts inmates' requests for such items as deodorant and postage stamps. He was considered too frail and diminished mentally to handle jail or heavy manual labor, according to a Los Angeles Times report that said Mr. Citron appeared "slightly dazed and nervous" when he arrived in a late-model Chrysler. He works from 8 a.m. to 4:30 p.m. Monday through Friday, returning home each evening. He could be released as early as October 24 if he gets time off for good behavior.
Feb. 7 CAL-TAX ANNUAL MEMBERS' MEETING
Location: Sacramento Convention Center.
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