David R. Doerr, principal contributor
Ronald W. Roach, editor
Governor Pete Wilson has declared opposition to taxation of electronic commerce on the Internet, questioning why all new economic activity must be taxed.
The governor, featured speaker at Cal-Tax's Annual Members' Meeting on February 7 in Sacramento, also urged support for his corporate tax cut.
In a question-and-answer session, Mr. Wilson was asked how he felt about talk of new taxes on the Internet and telecommunications of any kind.
"My basic reaction is I am not eager to see any new taxes of any kind, and I don't see exactly what the necessity is," he replied. "By not taxing, we will stimulate more activity and produce more revenues than if we artificially constrain (emerging industries) by taxation. I don't see why every new form of economic activity must be subject to a new tax."
In his speech, the governor thanked Cal-Tax for its past support of tax relief proposals and sought backing of his new proposal for a 10 percent bank and corporation tax rate reduction. Cal-Tax Chairman James Barnes said the association enthusiastically supports the governor's plan for a 5 percent cut in January 1998 and another 5 percent cut in January 1999.
"Thanks to your good work, we not only lowered the bank and corporation tax (by 5 percent effective last January 1), we provided the sort of targeted incentives to our high-tech industries that will keep our `California Comeback' rolling well into the new century," he said.
"Just as important, you were a watchdog ready to put the bite on any attempt to impose an unreasonable burden on California taxpayers. Let me assure you that you're not alone on that vigil -- as long as I occupy the governor's office, California will never return to the days of runaway tax and spending."
The governor also repeated his call for an end to the eight-hour workday requirement. He wants regulations that will allow employers and employees the flexibility to set work hours.
Mr. Wilson also credited Cal-Tax for advocating a strategy of matching grants, local donations and "no new taxes" to increase the availability of computers in California classrooms.
Noting that Ronald Reagan turned 86 on February 6, Mr. Wilson said, "With each passing year, more Americans share his belief -- Cal-Tax's belief -- that high taxation is the antithesis of high achievement and that the greatest threat to ingenuity is an intrusive government."
The governor also commented, in response to questions from Cal-Tax members, that "it is my expectation that we will" nominate a successor to Brad Sherman on the State Board of Equalization. Mr. Sherman was elected to Congress last November. Then, before his departure early last month, he named John Chiang to be his chief deputy. Mr. Chiang will serve as acting BOE member for the final two years of the four-year term unless a gubernatorial nominee is confirmed by the Senate and Assembly.
He also said he does not believe a "flood tax" will be necessary in California. "We will be, with the federal funding that will be available for such purposes, able to take care of the people. Although there has been extensive damage, I don't think we will have to go to even a temporary tax increase."
On the issue of conformity with federal tax laws, the governor said, "it does make sense except where it imposes an increase in taxes."
On the issue of California's membership in the Multistate Tax Commission (MTC), the governor said he was persuaded by his finance director, Craig Brown, "that perhaps it was better to leave it alone, basically on the theory that perhaps it is better to be inside the tent than outside; that we can probably effect interstate policy and congressional relations by being a member (of the MTC), though I understand there are powerful arguments in opposition."
The MTC issue also came up at the Cal-Tax Members' Meeting breakfast session with State Board of Equalization Member Dean Andal, Deputy Controller Rex Halverson (representing Controller Kathleen Connell on the board), and Acting Member John Chiang.
Mr. Andal and Ms. Connell have voted against continued payment of dues to the MTC (the BOE and Franchise Tax Board roughly split the state's $404,000 annual dues), but current BOE Chair Ernie Dronenburg and former chair Johan Klehs, along with Mr. Sherman, have supported continued funding and participation on the MTC.
Mr. Andal, who has lobbied the governor on this issue, said, "I do not believe that the MTC is in the interest of California, period." He went on to say that the MTC has a conflict of interest because it audits taxpayers on behalf of member states (generally the smaller states and not California, he said). These states' tax officials, to justify support of the MTC to their legislative bodies, point to a return on their investments through MTC staff audits. Thus, Mr. Andal said, the MTC almost always advocates policies that produce higher taxes when it promotes uniformity among the states.
Mr. Chiang, whose views on MTC funding were unknown, said, "There are significant concerns. We funded them last year. Give them an opportunity to respond to concerns. If they do not respond, then you determine whether you fund the agency or not."
Last year, the state budget bill contained control language making FTB and BOE dues to the MTC contingent upon adoption by the multistate group of open meeting rules similar to those that govern the FTB and BOE in California. The MTC acted in that regard and received California's dues.
On the issue of Internet sales and use taxes, Mr. Andal said the issue "needs congressional action, and I hope congressional action will prohibit taxation of the Internet." He said there is no evidence that existing revenues are deteriorating from lack of taxation of Internet sales.
Mr. Halverson said, "The controller would say she is not in favor of any new tax, period."
Mr. Chiang said he believes Internet service is not taxable, but the "nexus issue" is "an open question."
Although the ink is hardly dry on Governor Pete Wilson's proposed 1997-98 budget, released January 9, the revenues for January 1997 exceeded the projections in the document. According to the Department of Finance, general fund cash exceeded projections by $297 million for the month. Virtually all of the excess is attributable to fourth-quarter estimated income tax payments.
"Look for the spending lobby and their legislative allies to push for spending all of the surge of revenue, which keeps it in the spending base, creating artificial long-term obligations, instead of sharing any of it with taxpayers who produced it," Cal-Tax President Larry McCarthy said.
The Franchise Tax Board, at last week's meeting, agreed with a staff proposal to sponsor legislation conforming to 16 provisions of the new federal Taxpayers' Bill of Rights adopted by Congress last year.
During a discussion of taxpayer rights, Richard Harris, attorney with Orrick, Herrington and Sutcliffe, followed up on statements he made last fall that relate to fair taxpayer treatment. State Controller Kathleen Connell said she had been told by taxpayer groups that fairness of tax administration in California has generally improved.
According to FTB Executive Officer Gerald Goldberg, the FTB has adopted a new mission statement stating the agency will collect taxes efficiently, effectively and fairly.
The items in the federal taxpayer rights' bill to which the FTB proposes to conform are:
BOE Chair Ernie Dronenburg said the program is pro-taxpayer as there is currently no mechanism for resolving such disputes. Disputes could involve two states reaching differing conclusions on the components of a unitary group, although both states have the same law, and the fact pattern for the company is the same in both states.
Although SB 38 was signed into law on September 26, it was retroactive back to January 1, 1996. While Congress provided relief from the estimated tax penalty due to federal law changes, the Legislature did not.
FTB staff recommended that corrective legislation not be pursued due to excessive administrative costs. The board requested staff to see if the penalties can be waived administratively.
Responding to a Cal-Tax suggestion at last November's Taxpayers Bill of Rights hearing, the State Board of Equalization is establishing a procedure for notifying taxpayers when a court overturns a BOE decision. Cal-Tax's David R. Doerr said this is particularly a problem when an unpublished court opinion overturns a BOE opinion. In such situations, the BOE opinion is still on the books, and taxpayers do not know that it was reversed.
According to Jennifer Willis, BOE taxpayers' rights advocate, "Ms. Susan Wengel, Appeals Section assistant chief counsel, had her executive assistant, Cathy Stroh, discuss this request with the various publishers. Each publisher is willing to establish a procedure, although some requested a different procedure from others. Ms. Wengel directed her staff that, upon receipt of a court judgment, they are to immediately forward this judgment to all the publishers to whom the BOE currently mails and request they either "depublish" and remove the old document or make an indication that the prior decision has been vacated, reversed, etc.
State Treasurer Matt Fong is urging the Legislature to adopt a spending-cut trigger mechanism to keep the state budget in balance throughout the year. After meeting with bond-rating agencies in New York, Mr. Fong said they are still seeking stability in the state budget and added a trigger might help California's credit ratings to recover.
Mr. Fong said he is open to suggestions on how the trigger should be constructed. He noted the 1994-95 budget had such a trigger when banks demanded a guarantee that loans to the state would be repaid. It was never activated, however.
Senate Budget Committee Chair Mike Thompson questioned the need for a budget trigger at this time. He said the fact that the last trigger was not pulled was proof that the state could maintain fiscal discipline.
Mr. Thompson also said that ballot initiatives, which have an impact on California's finances, are a concern of bond agencies.
If the bond-rating houses upgrade the ratings for California bonds, there will be a savings to the state when it borrows money.
Although the Senate on February 7 approved a stop-gap court funding bill (SB 21, Lockyer) of $290.5 million to keep the doors open until July 1, the long-term outlook for financial stability is still muddled. A long-term court funding bill was killed by the Legislature last year when no agreement could be reached on certain collective bargaining rights for court employees.
Senate President Pro Tem Bill Lockyer said that the state should consider taking over the cost of general assistance payments to the poor (now a responsibility of counties) and allow counties to fund the courts. He issued this statement: "I do not believe the state can now afford to assume responsibility for both general assistance and trial courts as currently proposed. Perhaps the state should rightfully assume responsibility for the safety net for the poorest of our poor, and allow the counties to fund the courts."
Arguing in support of SB 21, Mr. Lockyer said, "By March, certainly there would be a genuine and general crisis in funding and money would not be available to ensure that the majority of our courts remain open." The bill passed by a vote of 29-0.
The California Teachers Association (CTA), its ranks growing by thousands of members as a result of class-size reduction in limited grades, is laying a public relations foundation for a campaign to raise taxes, according to The Sacramento Bee.
The newspaper reported in last Tuesday's editions that the CTA is spending $2 million on a three-week television, radio and newspaper advertising campaign that seeks to capitalize on the popular Wilson Administration program to cut class size to 20 pupils for each teacher. The ads tout smaller classes in all grades.
Efforts by the education community to push for a tax increase are not unexpected (see Caltaxletter of January 6 which said the CTA was beating the drums for a 1 percent sales tax increase). The Bee reported that the CTA's 650-member state council will discuss the tax issue in March and could decide whether to go ahead by May. Meantime, it has been busy conducting polls and focus groups to measure support among potential voters for a 1998 ballot initiative.
A penny-on-the-dollar increase in the sales tax statewide would raise about $3.5 billion a year, and the plan would earmark all of this increase for education.
K-12 schools and community colleges now receive as much as 60 percent of state general fund revenues, or about $17.5 billion, because of Proposition 98, which voters approved in 1988 to guarantee a certain share of tax dollars for education. In the current year, the state is paying 80 percent of the cost of reducing classes to a 20-to-1 ratio in first and second grades, and either kindergartens or third grades. The CTA wants the state to pay the entire costs, and then add more grades.
A tax increase could be proposed in the Legislature, but would face long odds against gaining the necessary two-thirds votes of approval in the Senate and Assembly. Also, Governor Pete Wilson's press secretary, Sean Walsh, said, "A tax increase would be viewed very poorly by the public."
Reducing class size has been a bonanza for the CTA. Union membership increased by 7,000 in the past year, more than double the typical annual growth.
Results of the third annual "Cost of Doing Business Survey" for the Los Angeles area are in, and competition among cities is holding down business and development taxes.
As usual, the City of Los Angeles is the most expensive place to do business in Los Angeles County, the survey found.
The survey was unveiled last Tuesday by Kosmont and Associates, a real estate consulting firm. Its president, Larry Kosmont, said the once-popular practice of increasing business and development fees to help pay for municipal services has all but ended as cities try to lure new businesses and keep the ones they have.
Mr. Kosmont said there has been "a picking apart and raiding of Los Angeles' industrial and commercial base" by cities that can offer a better business climate. Los Angeles needs to recast its tax structure, he added.
For example, building a 60,000-square-foot office building in Los Angeles would involve $54,000 to $731,000 in fees, compared to no building fees in nearby City of Commerce, Irwindale and Vernon, or in Portland and Seattle. A law firm in such a building, using 30,000 square feet, would pay annual business license, utility and property taxes of $116,650 in Los Angeles. They would pay nothing in unincorporated areas of Riverside County or in Santa Clarita; only $120 in Lancaster, and $510 in San Diego.
Mr. Kosmont said Los Angeles "got big, but it forgot to get efficient." He said Mayor Richard Riordan's efforts to improve the business climate have been "excellent but piecemeal."
Gary Mendoza, the mayor's deputy for economic development, said he was not surprised by the findings but added the city has made significant progress. Recommendations for a tax structure overhaul are expected by this summer, when a comprehensive city-commissioned study is completed. Preliminary results of a "tax equity interim study" are expected to be released soon.
Mr. Mendoza said the city cannot wait for a comprehensive overhaul, noting Mayor Riordan's recent request of the City Council to approve a tax-break package for five health maintenance organizations. These companies have threatened to move out of the city over a dispute involving millions of dollars in business license taxes (see Caltaxletter of February 10.)
Pollution Tax Credit. AB 208 (Migden) establishes a tax credit for low income taxpayers for the costs of repairs of vehicles that are gross polluters. The tax credit ranges from 100 percent for a married couple making $17,800 or less to zero for a couple making over $27,550.
Dependent Tax Credit. AB 215 (Baldwin) establishes a $500 tax credit for each dependent under age 13. If anyone in the family earns $200,000 or more, the credit is disallowed.
Sales Tax Interest. AB 222 (Takasugi) equalizes the interest rate applied to overpayments and underpayments of sales tax. Currently, the rate for underpayments is substantially higher than the rate for overpayments.
Self-Employed Medical Care Insurance. AB 230 (Runner) increases the tax deduction for the cost of medical insurance purchased by self-employed individuals to the level of the federal deduction (up to 80 percent in 2006 and thereafter).
Transfer of Base-Year Values. AB 240 (Takasugi) extends provisions of law allowing homeowners age 55 and older to transfer their Proposition 13 base-year value to a comparable residence in another county if the county agrees to accept such transfers. Current law sunsets on January 1, 1999.
Blind Worker Tax Credit. SB 246 (Hughes) establishes a 100 percent tax credit for wages paid for 24 months to a blind or visually impaired person. The size of the wage payment is limited.
Child Support Payment Collection. SB 247 (Lockyer) requires county district attorneys enforcing child support orders to refer all child support delinquencies to the FTB for collection. Under existing law, county participation in the FTB collection program is voluntary.
Fictitious Business Fee. SB 248 (Watson) allows counties to impose an additional fee of $10 for filing a fictitious business name. The fee would be used to protect consumers.
Property Tax Allocation. SB 275 (Kopp) limits the amount of property tax increment of redevelopment agencies that must be shifted to schools.
Eating Places Investment Tax Credit. SB 276 (McPherson) establishes a 6 percent tax credit (similar to the manufacturers tax credit) for the purchase of specified personal property by restaurants.
Salmon and Steelhead Trout Restoration. SB 301 (Sher) extends and expands the existing 10 percent tax credit for restoring salmon and Steelhead trout habitats. The credit is extended from January 1, 2000 to January 1, 2005. The credit is expanded by raising the limit on how much a taxpayer can claim from $50,000 to $100,000.
Farmworker Housing Tax Credit. SB 302 (Costa) expands the existing farmworker housing tax credit. The overall credit limit is raised from $500,000 to $5,000,000.
Property Tax Shift. SB 303 (Burton) modifies the shift of property tax to schools by limiting amounts shifted to county superintendents of schools for special education for fiscal years after 1997-98.
February 18: SENATE TRANSPORTATION COMMITTEE HEARING
Location: Room 112, State Capitol, at 1:30 p.m.
Subject: SB 60 (Kopp), revising provisions allowing the state gas tax to increase
when the federal tax increases.
February 19: SENATE REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 3191, State Capitol, at 1:30 p.m.
Subjects: SB 13 (Mountjoy), exempting from sales tax contact lens; SB 116 (Peace),
establishing a solar energy system tax credit; SB 76 (Kopp), requiring
assessors to compile a list of life insurance companies, and SB 154
(Thompson), authorizing a specified sales tax for county libraries.
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