David R. Doerr, principal contributor
Ronald W. Roach, editor
Legislative Analyst Elizabeth Hill, in her annual critique of the governor's budget, is estimating revenue growth in excess of budget projections. Projected 1996-97 (current budget year) general fund revenues are $48.482 billion, which is $77 million above the budget estimate. Projected 1997-98 revenues are $50.923 billion, or $266 million above the budget forecast.
According to the legislative analyst's report, personal income tax receipts have been "very strong" and bank and corporation tax revenues have been "extraordinarily" weak. Well-above-average growth in capital gains revenue is a major factor in the growth of personal income tax revenue. Corporate estimated tax payments in September and December of 1996 fell by 7 percent, but the factors responsible for the drop are unknown. Ms. Hill said it was possible that more business owners have chosen to meet tax obligations via the personal income tax.
Other highlights in the analyst's report:
If the Legislature freezes the shift, as proposed in AB 2797 (Aguiar) last year that was vetoed by the governor, the state cost of this proposal would exceed $1 billion in six years.
In commenting on the current state loan program to assist assessors in property tax administration, the analyst states, "In general, the loan program appears to be achieving its goals. However, the loan program may not be the most effective mechanism for ensuring the long-term viability of the property tax administration system. While the loan program does infuse additional resources into the system, it does not alter the underlying disincentives faced by the counties."
The Department of Corrections has estimated lesser growth in prison population through 2002. One reason is a declining crime rate.
Twenty-four percent of the teachers do not have a credential. Forty-two school districts, including the Modesto City Elementary District, elected not to participate in the program last year.
The program also strained the facilities available to house the added classes created by the reduction in class sizes. Fifty-six percent of CSR classrooms were additions of portables. Districts also had to convert libraries, computer labs, teacher prep rooms and child care facilities to classrooms to accommodate the increases in classes. The analyst observes that some programs and services to children have undoubtedly been curtailed due to the class-size reduction program.
Since 1992-93, the two agencies have expanded by 440 audit positions.
The governor's budget also proposed $1.9 million to be transferred from the Trade and Commerce Agency to the FTB to fund 27 positions to administer provisions of the California Tourism Marketing Act. The analyst suggests the Legislature delete the transfer as "collection and enforcement of businesses' self-assessed fees should not be the responsibility of the state Franchise Tax Board."
A new solar tax credit proposal was approved 5-2 last Wednesday by the Senate Revenue and Taxation Committee and referred to the Senate Energy Committee for further consideration. SB 116 (Peace) establishes a 25 percent tax credit (up to $1,000) for each eligible solar system purchased and installed.
Senator Steve Peace said California faces a coming energy crisis and will be dependent on out-of-state energy sources as a result of the electric energy restructuring bill passed last year. He argued that a tax incentive for solar energy will encourage home-generated electric power, which will lessen demand, protect reliability of service and "help the lights from going out on a Saturday night."
A variety of witnesses from the solar industry and the Sierra Club spoke in favor of the bill. Senator Betty Karnette, a supporter, said, "We need to think about the future; that's one thing we haven't been doing."
In response to a suggestion from Lenny Goldberg, representing the California Tax Reform Association, Mr. Peace amended the bill to reimburse the estimated $5 million loss in the general fund by a transfer from a $540 million account generated by a surcharge on electric bills adopted in the electrical restructuring bill.
Other committee highlights:
Proponents pointed out that two counties (San Joaquin and Stanislaus) already have the authority to impose such a tax and others should be allowed to do so, too. Senator Leroy Greene asked why the authority should be restricted to libraries. Senator Pete Knight questioned whether a maintenance-of-effort provision in the bill would stop counties from supplanting existing funds now spent for libraries.
The Department of Finance expressed concern about the proliferation of local sales tax rates at different fractions, saying it complicates sales tax administration.
The purpose of the bill is to create parity for pharmacists with eye doctors, who already pay sales tax on wholesale price of contact lenses.
Speaking for the business community, Fred Main of the California Chamber of Commerce said there was an exodus of business from California in the early 1990s, and this has been mitigated to some degree by passage of tax incentive legislation. He said additional changes in tax law are needed to keep California competitive, such as allowing businesses to file tax returns that include all affiliates (elective combination).
Cal-Tax's David R. Doerr pointed out that taxpayers in the aggregate had paid more in new taxes imposed since 1986 than they have received in revenue reductions from tax incentives that have been enacted during the period. He said state general fund revenues for 1996-97 are expected to be $2.5 billion higher than first projected in January of 1996. He told Ms. Ross and Mr. Goldberg they should not be complaining about the 5 percent corporate tax cut enacted last year because their "spending lobby" allies got 90 percent of the windfall revenues in additional spending while only 10 percent of the windfall was returned to taxpayers.
While Mr. Doerr said tax incentives needed to be examined on a case-by-case basis, he added that "50 percent of something is better than 100 percent of nothing."
Assessors are required to take economic obsolescence into account when valuing property, according to a key unpublished decision of the Second District Court of Appeal (Treasure Chest Advertising Company, Inc. v. County of Los Angeles).
At issue in the case, decided in early February, was the de novo review of whether an assessor is required to consider economic obsolescence under the cost approach to value.
Treasure Chest prints advertising supplements for newspapers. Unlike other segments of the printing industry, the insert industry used presses with a 21-inch "short cut-off." Treasure Chest had many such presses. There was no international market for presses with this cut-off, and when the insert industry declined, the United States market for 21-inch cut off presses "fell off tremendously," according to Treasure Chest.
Another factor affecting the value of Treasure Chest equipment was a change in printing press technology in regard to "web width," that is, the width of the roll of paper printed. When the insert printing industry started in the 1980s, webs were 36 inches wide. Advancing technology meant that webs were now 66 inches wide, meaning that more pages could be printed at a time. Thirty-six inch presses were technologically obsolete, a factor which significantly decreased their market value. Fifty-four inch presses had also suffered a depression in value, according to Treasure Chest.
In addition, manufacturers had begun to design presses intended for the intense use of the insert industry. Older equipment such as that owned by Treasure Chest was for that reason obsolete.
Michael Lacanilao, representing the Los Angeles County Assessor's Office, said that although the county assessor's handbook recommended a 15-year life for printing equipment, he used a 10-year life for Treasure Chest's equipment because of the equipment's low maintenance and physical abuse. Like its competitors, Treasure Chest ran its equipment 24 hours a day, but unlike its competitors, Treasure Chest did not have preventative maintenance programs. Rather, Treasure Chest ran its press lines until they broke, then fixed them with "bubblegum and baling wire." Treasure Chest also modified its equipment so that it would run in excess of recommended speeds, and made other modifications which increased productivity but "burned out" the equipment.
On the question of obsolescence, the court noted:
"Title 18, Section 6 of the California Code of Regulations establishes the procedure the assessor must use in determining value under the cost method. Subsection (e) of Section 6 provides that reproduction or replacement cost shall be reduced by the amount that such cost is estimated to exceed the current value of the reproducible property by reason of physical deterioration, misplacement, over-or under-improvement, and other forms of depreciation or obsolescence.
"Economic obsolescence has been defined as a loss in property value due to factors outside the property itself, such as political or social factors ... The regulation requires the assessor to consider all forms of depreciation and obsolescence, and ... the term `economic obsolescence' ... refers to obsolescence caused by technological advances, which might leave a functioning piece of equipment valueless in the marketplace."
In concluding that the "assessor neither considered, nor took into account economic obsolescence in its assessment of Treasure Chest's ... personal property," the court said that, while the county used a more rapid depreciation schedule due to the physical wear and tear on the equipment, the county admitted it did not take functional obsolescence into account.
The county argued that the evidence established that no such adjustment was called for. If wider webs were the current reality, Treasure Chest would have such equipment, but that instead, Treasure Chest ran the equipment it had.
Responding, the court said, "The argument is unavailing. First, the evidence was that Treasure Chest had equipment with a variety of web widths. Moreover, the fact that Treasure Chest continued to use the equipment, or even that the equipment produced an acceptable product for Treasure Chest, does not equate to a calculation of the market value of that equipment."
The court also said, "Where different items of equipment suffer different market disabilities, use of a uniform depreciation factor is improper."
This last statement is significant because the State Board of Equalization's assessment practices surveys have found many counties using a single depreciation factor for differing types of property, rather than differing factors for each as recommended by the board.
The Los Angeles City Council has voted to cut taxes for multimedia firms to improve the city's competitive position against smaller neighbor cities that want to compete for the offices -- and revenues -- produced by hundreds of companies.
The 12-0 vote last Tuesday created a new business tax category for the companies, reducing their tax liabilities by 80 percent.
Mayor Richard Riordan said, "From this point on Los Angeles will be the capital for multimedia into the 21st century. The fast-growing multimedia industry is vital to the economic future of Los Angeles. We have the creativity, the entrepreneurial spirit, and now the right business environment to help this important industry continue to flourish in our city."
The ordinance will be retroactive to last January 1, dropping the business license tax rate from $5.91 per $1,000 in gross receipts to $1.18. It is expected to save taxpayers $560,000. The city expects to get that revenue back -- and more -- as companies grow or move in because of lower taxes.
Multimedia firms produce films, disks, tapes, software, audio and visual recording devices through one two or more media, combining technologies that could include computer-generated graphics and regular video.
California motorists using the state's toll bridges are likely to find crossing the erections will be taking a bigger toll on their pocketbooks. In light of the need to strengthen several of the bridges for earthquake safety, the available state dollars cannot fully fund the task, and toll increases will be required.
Governor Pete Wilson and state transportation officials are recommending a brand-new eastern half (Oakland to Yerba Buena Island) of the venerable Oakland-San Francisco Bay Bridge to replace the existing structure, part of which collapsed in the 1989 world series earthquake.
The cost of a 10,000 foot "skyway" approach will exceed $1 billion, according to state number crunchers, which is almost as cheap and less intrusive than fixing up the existing span.
The state is also willing to build a "cable-stayed" bridge at the cost of 22 percent more, if local motorists are willing to pay the additional tab.
Side-effect: The League of California Cities, one of the principal opponents of Proposition 218 -- the Taxpayers' Right to Vote initiative -- is finding passage of the measure handy as a shield against unwanted legislation. In opposing SB 147 (Ayala), requiring voter approval for certain proposed local indebtedness, the league is arguing that Proposition 218 "already provides adequate taxpayer protection by requiring voter approval for any proposed new or increased taxes, assessments and fees related to property."
Bond measure delay: The Los Angeles City Council has decided to delay until 1998 a proposed $200-million bond measure for police facilities. The council on February 11 voted 9-3 to hold off on the bond election while paying a consultant $100,000 to examine the replacement of Parker Center. Council Members Richard Alatorre and Laura Chick, who sponsored the motion for delay, said there would not be time to build political support needed for approval of a bond measure this spring.
Wilson's top aide: The man who has been Governor Pete Wilson's top aide and closest advisor for three decades, Bob White, has decided to move on. Mr. White, 54, has been the governor's chief of staff for six years in Sacramento. Before that, he held the same post as Mr. Wilson served in the U.S. Senate and was mayor of San Diego. He had joined the governor during a state Assembly campaign in 1968. He said last week he will be a consultant in Sacramento while the governor completes his final term, and will continue as a private citizen advisor to the governor.
Taxpayer service: Two Taxpayer Service Centers -- designed to make government more efficient -- have opened in the district of State Board of Equalization Member Dean Andal. Mr. Andal, who says the BOE budget is the only state agency to have its proposed 1997-98 spending go down, announced the grand opening last Thursday of the Bakersfield Taxpayer Service Center at 1800 30th Street. One day earlier, the Ventura Taxpayer Service Center opened at 4820 McGrath Street. Each center is a "one-stop shop" for sales tax, payroll tax and state income tax administration by offering services from the BOE, the Employment Development Department Tax Division and the Franchise Tax Board. Mr. Andal says that over the last year he is responsible for closing more than 16 BOE offices with consolidations that he says will save taxpayers more than $40 million over a five-year period.
Lungren on taxes: Columnist George Skelton in the L.A. Times last week, based on an interview with the Republican gubernatorial frontrunner for 1998, wrote that Attorney General Dan Lungren "is a fiscal conservative, but not a fool. He won't lock himself into 'a commitment in blood (to) never under any circumstances, any place, any time ...' There'll be no reading of lips."
Letters to "C" Filers: The Franchise Tax Board says more than 80,000 letters were in the mail in early February asking taxpayers to review their Schedule C filling to determine if they used that business profit or loss form appropriately. The Internal Revenue Service and the FTB are working together to send the letters to taxpayers with low gross receipt Schedule Cs for 1992, 1993 and 1994. Guidelines are provided for who should file a Schedule C. In some cases, taxpayers try to claim deductions as a business expense instead of as an itemized deduction. This is done to avoid the 2 percent adjusted gross income limitation applied to miscellaneous itemized deductions. Taxpayers who have done it wrong are asked to file amended returns for past years. The IRS mailed about 22,000 similar letters in January 1996 and more than 30 percent of the taxpayers contacted stopped using a Schedule C on their subsequent return.
Capital Gains. AB 253 (Takasugi) indexes the basis of property for determining the capital gain on the sale for tax purposes. The purpose is to limit capital gains taxes on assets acquired in the future to be the real gain, not the inflationary gain.
Dependent Care Tax Credit. AB 258 (Floyd) reestablishes a dependent care tax credit for working parents with limited incomes.
AMT. AB 265 (Battin) excludes from the calculation of the alternative minimum tax any capital gain from the charitable donation of appreciated property.
Volunteer Services. AB 283 (Baca) establishes a tax credit, up to $250, for retired taxpayers aged 65 or older who volunteer their services to schools.
Motorcycle Registration Surcharge. AB 299 (Ducheny) continues indefinitely the $2 motorcycle registration surcharge used for motorcycle safety programs.
Tax Credit: Care for Welfare Recipients. AB 302 (Runner) provides a $2,000 tax credit for taxpayers providing care for an individual receiving public assistance that removes the individual from the welfare rolls.
Health Insurance. AB 305 (Wayne) increases the deduction for self-employed health insurance from 25 percent to 100 percent.
Fiscal Reports. AB 311 (Granlund) allows local officials two additional months to file their fiscal reports to the controller (resulting in a further delay in publishing the local fiscal transactions report for taxpayer use).
Tax Credit -- Teacher Furnished Supplies. AB 336 (Miller) authorizes a 100 percent tax credit for certain out-of-pocket expenses of teachers for school supplies. There is no ceiling on the amount that may be claimed. "For years teachers have been spending their own money on classroom supplies. This year California is going to say `Thank you.' Giving teachers a tax credit will help California's teachers, and it will improve education as a whole," Assemblyman Gary Miller said.
Local Sales Tax Allocation. AB 339 (Takasugi) revises the allocation formula for a one-half percent sales tax approved by voters in 1993 for public safety purposes. The bill repeals a percentage cap on the allocation factor for cities within a county.
VLF Subventions. SB 325 (Maddy) requires the state to withhold vehicle license fee (VLF) revenue subventions to cities or counties if they fail to remove graffiti promptly from Department of Transportation property in the jurisdiction.
Madera Sales Tax. SB 355 (Monteith) authorizes the City of Madera to impose a .25 percent sales tax with two-thirds voter approval.
Local Sales Taxes. SB 375 (Sher) makes two changes in local sales tax provisions: (1) the State Board of Equalization's administrative changes for collecting a countywide library tax in Stanislaus County is limited to the lesser of actual cost or 5 percent; (2) the authority of San Mateo County to levy a one-half percent county-wide sales tax for schools is broadened to include parks and libraries.
Official State Soil. SB 389 (Monteith) designates San Joaquin Valley soil as the official state soil.
Dividend Taxation. SB 400 (Peace) requires the FTB and Department of Finance to make recommendations on eliminating or ameliorating the effects of double taxation of corporate dividends.
February 25: STATE BOARD OF EQUALIZATION MEETING
Location: 5901 Green Valley Circle, Culver City at 9:00 a.m.
Subject: (1) Business tax appeals; (2) Executive director's report; (3) Non-appearance matters relative to business, franchise and income tax
appeals.
February 26: STATE BOARD OF EQUALIZATION MEETING
Location: 5901 Green Valley Circle, Culver City at 9:30 a.m.
Subject: (1) Business tax appeals; (2) Franchise and income tax appeals, and (3)
Taxpayers' Bill of Rights reimbursement claims hearings.
February 27: STATE BOARD OF EQUALIZATION MEETING
Location: 5901 Green Valley Circle, Culver City at 9:30 a.m.
Subject: Franchise and personal income tax appeals.
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