David R. Doerr, principal contributor
Ronald W. Roach, editor
A heated debate over the adoption of committee rules was the highlight of last Monday's Assembly Revenue and Taxation Committee meeting. Committee Chair Louis Caldera proposed committee rules that include a suspense file last used by Democratic chairs, but not used last year when Republican Nao Takasugi chaired the committee. Under the new rules, supported by six of seven Democrats on the 11-member panel, bills with $1 million or more fiscal effect are to be placed on a suspense file. Some bills will be eligible for removal at a future date for a vote, but for some bills there may never be a direct vote. The only vote would be to remove them from the suspense file (if the motion fails).
Cal-Tax sent the committee a letter in opposition to the use of a suspense file, arguing that it creates end-of-session logjams, and divorces testimony on bills from votes.
Assemblyman Takasugi sought to amend the rules to require a vote on each bill, but his motion was gaveled out of order by Chairman Caldera. Mr. Takasugi said, "Taxpayers have a right to require elected officials to vote on a measure."
Mr. Caldera admonished Mr. Takasugi, "You can run the committee the way you want when you are chair."
During the discussion, there was an exchange between Mr. Caldera and fellow Democrat Lou Papan, a long-time chair of the Assembly Rules Committee who has returned to the Legislature after a 10-year absence. Mr. Papan questioned Mr. Caldera on the need for a suspense file, to which Mr. Caldera said the file was important in managing the workload. Mr. Papan said it was "not a sufficient answer."
On the rules vote, Mr. Caldera, Dion Aroner, Elaine Alquist, Wally Knox, Mike Machado and Carl Washington voted yes, and four Republicans (Mr. Takasugi, Charles Poochigian, Howard Kaloogian, and Gary Miller), plus Mr. Papan, voted no.
Other committee developments:
Moira Traver, from the governor's Trade and Commerce Agency, told the committee that the governor's budget fully accounts for the fiscal effect of Subchapter S conformity without a tax increase. She said AB 203 was an important business climate issue. The Wilson administration expressed its opposition to the tax rate increase in AB 1039.
Testifying in support of both bills were Tom Hayes of Deloitte and Touche, Gina Rodriquez on behalf of Spidell Publishing, Cal-Tax's David R. Doerr, and Chris Micheli on behalf of the semiconductor industry. They stressed the need for quick action as taxpayers are making decisions based on federal law. Mr. Doerr suggested any proposed tax increase be limited to the new revenue loss, and noted the estimates on which the 1.6 percent tax rate was predicted included both losses from C corporations converting to S status and existing S corporations that would otherwise be disqualified.
Ruling in favor of taxpayers, a state appellate court says East Palo Alto's parcel tax, imposed without two-thirds voter approval, is an unconstitutional property tax.
The First District Court of Appeal in San Francisco on March 26 (Thomas v. City of East Palo Alto) upheld the trial court and denied the city's appeal. The court held that the city "unconstitutionally imposed and collected a property tax not apportioned according to value, as is required by Article XIII, Section 1, of the California Constitution."
The parcel tax ($1,000 for commercial properties; $60 per unit for apartments, and $175 for single-family dwellings, and even applied to vacant lots) was imposed as an excise tax on services, the city contended. The appellate court, in its unanimous ruling, said to overturn the trial court judge's summary judgment would give cities "an obvious incentive to attempt to relabel their property taxes as excise taxes to evade" constitutional restrictions on the impositions of property taxes, such as the two-thirds vote requirement.
"If the city were allowed to impose the tax in question here, a gaping hole would be created in the constitutional provisions which at present protect property owners from the imposition of local taxes which are not apportioned by value, or which are not approved by a two-thirds vote," the ruling said. "This may explain why a number of California cities have filed an amicus curiae brief in this appeal, urging that we overturn the proper order of the trial court. We will not do so."
The court said it was sympathetic to the fiscal woes of municipalities, but "public entities may not resolve their revenue shortfalls through the subterfuge of enacting taxes on real property which violate those constitutional restrictions by labeling such taxes something they are not. We are required to uphold such constitutional provisions and invalidate such efforts to evade them, regardless of the merit of the goals for which such tax revenue is sought."
The ruling also cited a 1988 appellate ruling (City of Oakland v. Digre) that a property tax that was not apportioned was unconstitutional. The court said neither the city's appeal nor the court's own research found a case holding that a tax imposed on owners of real property merely because they own real property is an excise tax, rather than a property tax. "We believe the reason such a case is difficult to find is because such a case does not exist," the court added.
The appellate court also upheld the trial court's judgment that those required to pay the tax may sue in a class action for refunds, which could force the city to repay about $7 million that the tax has raised since 1990.
Mayor R.B. Jones said the city was considering an appeal to the state Supreme Court because "this tax has been the glue that held the city's budget together over the past eight years." The city has no reserve from which to pay refunds and is considering putting four new taxes before voters later this year to make up for a projected $1 million shortfall in its $5 million annual budget, according to a report in the San Francisco Chronicle.
Tony Tanke, attorney representing more than 700 property owners in the suit, said the plaintiffs were "sick and tired of illegal taxation and incompetent government that doesn't deliver them any value for their money."
Jonathan Coupal, counsel for the Howard Jarvis Taxpayers Association, praised the ruling. He said a ruling upholding the tax probably would have opened a gigantic loophole in Proposition 13 and ensuing constitutional amendments, such as last November's Proposition 218.
The Senate Revenue and Taxation Committee last Wednesday approved three bills with major price tags which did not meet the committee's previously voiced "revenue neutral" criterion. The bills advanced with the understanding that the fiscal effects would be considered by the Appropriations Committee.
These bills are:
The committee also approved three bills extending sunsets or deleting minimum requirements for income tax form check-offs. They are SB 532 (Solis) for the California Firefighters' Memorial Fund; SB 602 (Alpert) for the California Breast Cancer Research Fund, and SB 1253 (Mountjoy) for the California Military Museum.
Other measures meeting committee approval included SB 140 (Thompson), suspending the indexing of the Senior Citizens exemption credit and allocating equivalent revenues to other senior programs, and extending the income tax check-off for the Senior Legislature through 2001. Cal-Tax opposed the bill on the basis that suspending indexing increases taxes. It passed 6-0.
The panel also approved, 6-0, a bill allowing certain parent-child property transfers to receive adjusted Proposition 13 values after the deadlines (SB 542, Alpert), and a Cal-Tax-supported bill authorizing the State Board of Equalization to create a "self-audit" program for small retailers (SB 1104, Committee on Revenue and Taxation).
Disputing a Caltaxletter report, Dan Bucks, executive director of the Multistate Tax Commission (MTC), says the MTC has taken no position on the "Internet Tax Freedom Act" that would place a national moratorium on state or local taxation of Internet transactions. He called Cal-Tax on March 24 to say his staff was still analyzing the measure, and the MTC had not requested the California Board of Equalization to take a position.
The March 24 issue of Caltaxletter reported that the MTC had requested the BOE to oppose the bill. This information was provided by a reliable BOE source.
The BOE voted unanimously on March 19 to support the Internet Tax Freedom bill and to ask the California representative on the MTC to convey California's position on the matter.
BOE members also had been provided a "draft" letter dated February 13 from Mr. Bucks and Harley T. Duncan, executive director of the Federation of Tax Administrators (FTA), to the bill's authors, U.S. Senator Ron Wyden of Oregon and Congressman Christopher Cox of California. The letter, written in response to an earlier draft of the Internet Tax Freedom bill, concluded that "congressional action at this time is unwarranted."
The final version of the Bucks-Duncan letter, containing the above quote and dated March 11, was delivered to the bill's authors. It urged the authors not to proceed with the legislation and to instead show support for cooperative efforts of states and industry to find fair and equitable tax solutions. The letter said, "Premature consideration by Congress of preemptive action in this area will only create a negative and adversarial environment that will reduce the ability of the participants to reach mutually acceptable solutions to this emerging commerce. The best action that you could take to support cooperative state-industry solution to these issues would be to refrain from introducing the legislation."
The bill was introduced on March 13 as HR 1054.
Speaking for background, a congressional source said the MTC has a "clunky process" for supporting or opposing legislation, but "I would certainly read (the March 11 letter) as opposition. It expressed grave concerns." However, this source added that, technically, he would not portray the letter as "outright opposition. The MTC has not publicly taken a stand."
Congressman Cox issued this statement praising the California BOE's position on the bill: "Like Ulysses tying himself to his ship's mast, California's tax board members have willingly endorsed federal legislation that would preclude them -- and the tax collectors in the other 49 states -- from heeding the siren song of new Internet taxes."
The congressman's March 20 press release cited recent opposition from the FTA. The press release noted that California BOE Chair Ernest Dronenburg, who voted to support the bill, is an influential member of the FTA and its former president. Mr. Cox's press release did not mention the MTC.
The MTC on January 17 adopted a Statement of Direction on Electronic Commerce Issues which urged cooperation and dialogue without undermining sound tax policy or the capacity of the states to perform historic functions.
The number of counties accepting transfer of Proposition 13 base-year values, as authorized by Proposition 90, is shrinking. Marin County dropped out of the program earlier this year, leaving only 10 counties accepting a transfer of base-year values.
Proposition 90 permits elderly homeowners to transfer the base-year value of their dwelling to a dwelling of equal value in another county, if the receiving county agrees.
The 10 counties still accepting transfers of base-year value are: Alameda, Kern, Los Angeles, Modoc, Monterey, Orange, San Diego, San Mateo, Santa Clara, and Ventura.
These 10 counties represent approximately 64 percent of the state's population.
Regulatory hearings on proposed revisions of change-of-ownership rules and "Rules of Practice" regulations have been scheduled to be heard on April 9 by the State Board of Equalization.
The change-of-ownership rules (462.020, 462.160, 462.220 and 462.240) are being revised to conform with recent legislation and court decisions. There has been no opposition to date to the changes.
The revisions in the Rules of Practices (Regulations 5010-5087) stem from a year's experience with the regulations. The revisions, among other things, allow evidence to be submitted at anytime prior to the hearing on the matter. The other party will be allowed to submit a response.
The hearings will be held in Room 121, 450 N Street, Sacramento, at 1:30 p.m.
A long-range transportation plan being drafted by the Southern California Association of Governments (SCAG) suggests a 2-cents-a-mile tax on motorists to raise about $1.5 billion a year for transportation projects in the greater Los Angeles area.
The six-county SCAG's discussion of funding options includes a tax starting in the year 2010, with motorists paying the levy based on an annual odometer check. For someone driving 15,000 miles a year, the tax liability would amount to $300.
Supporters say the charge-by-the-mile program would discourage unnecessary driving and perhaps relieve congestion on Southern California freeways. They also say that, as cars become more fuel-efficient, the traditional gasoline per-gallon tax brings in less revenue.
The mileage tax would require passage of a state law by a two-thirds vote.
SCAG-member counties are Los Angeles, Orange, Imperial, Riverside, San Bernardino and Ventura, but the plan excludes Imperial.
The Orange County Register condemned the proposal in an editorial on March 11 entitled "The Odometer Police." The Orange County Transportation Authority also voted against the proposal.
Assembly Speaker on Taxes. Cruz Bustamante, the Assembly's new speaker, said in an interview with Sacramento Bee reporters last month that he opposes any attempt to cut corporate income taxes across the board. Such tax relief has been proposed by Governor Pete Wilson, who wants a 10 percent reduction in the bank and corporation rate phased in over the next two years. Any tax cuts should be targeted at industries that are creating jobs because so many welfare recipients need to gain employment, the Assembly's leader added.
California "Sin" Taxes Dip. Collections of tobacco taxes decreased 1.4 percent, to $666.5 million, and collections of alcoholic beverage tax collections declined by 0.6 percent, totaling $267.3 million, in the 1995-96 fiscal year. These figures are in the State Board of Equalization annual report which was issued March 13. Other facts from the report included taxable sales for the year of $312.2 billion, up 6.5 percent over 1994-95. Total sales and use tax revenues were up 6.6 percent, to $24.95 billion. Motor vehicle fuel taxes rose 4.2 percent, totaling $2.83 billion. Statewide property tax levies totaled $19.5 billion. Property values for 1996-97 increased 1.3 percent, to $1.831 trillion, while the value of state-assessed properties, mainly privately owned public utilities and railroads, dropped 3 percent to $66.8 billion.
Newspaper Tax. The California Newspaper Publishers Association (CNPA) wants to repeal the sales tax on newspapers, according to Bill Ainsworth's "Capitol Notebook" in Legi-Tech's Capitol Alert. When Governor Pete Wilson spoke to newspaper executives in February, he offered to sign a repeal bill if the publishers could get it through the Legislature, Mr. Ainsworth reported. The tax was imposed in 1991 in response to the state's $14.5-billion budget deficit.
Teachers' Tax Break. Assemblyman Gary Miller says he finds absolutely mind-boggling the opposition to one of his bills by the California Teachers Association (CTA). In a press release, Mr. Miller hammered the CTA for opposing AB 336, which would give classroom teachers an income tax credit for every dollar they spend on basic classroom supplies. He says he introduced the bill at the request of teachers in his Orange County district who are spending hundreds of dollars of their own money on classroom supplies. He says the CTA is opposing the bill because a tax credit will decrease the amount of taxes collected by the state and would thereby decrease total education funds guaranteed by Proposition 98. Mr. Miller says teachers now pay taxes of which about half go toward education. His bill would provide 100 percent of the tax credit to fund education. "If the CTA does not want to admit that teachers spend money in their own classrooms, then they need to get in touch with their own membership," he said. "... It is ludicrous for the CTA not to support a measure that puts money in teachers' pockets and increases education funding."
Porn Tax? State Senator Charles Calderon has another candidate for so-called "sin taxes" in California. Noting that alcohol and tobacco are subject to special taxes in the state, he has introduced SB 1013 to apply a 5 percent sales tax on pornographic materials. The tax would apply to the sale or rental of sexually explicit materials or entertainment, with revenues earmarked for rape crisis centers and battered women's shelters. Assuming $1 billion in taxable revenue in California from X-rated enterprises, the senator believes the tax could generate nearly $50 million a year.
FTB Hearing. The staff of the Franchise Tax Board has scheduled a public hearing on April 29 on a proposed conflict-of-interest regulation. Government Code Section 87300 requires the FTB to adopt such a regulation. The hearing will be held at 9645 Butterfield Way, Sacramento, beginning at 10 a.m.
Sinclair Arguments. Oral arguments are scheduled on May 6 before the California Supreme Court in the case of Sinclair Paint Company v. Board of Equalization and Department of Health Services. This case involves what the state contends are fees to fund a program designed to protect children from lead poisoning. Lower courts have held that the fees are really taxes that are illegal because they were not approved by two-thirds votes of the state Senate and Assembly. The hearing is scheduled to begin at 1:30 p.m. in San Francisco.
Taxpayers' Bill of Rights. The State Board of Equalization has scheduled two Property Taxpayers' Bill of Rights hearings this year -- April 9 at 1:30 p.m. at 450 N Street in Sacramento and June 10 at 1:30 p.m. at the board's Culver City office. The hearings will be an opportunity to discuss the recently released 1996 Property Taxpayers' Advocate's Annual Report.
Commercial Fishing Vessels. SB 53 (Thompson) has been amended to reduce the registration fee for commercial fishing boats owned by non-residents to the same level as the fee for resident owners ($400 to $200).
Budget Implementation. AB 1592 (Assembly Budget Committee) is a spot bill for changes in tax statutes, if any, to implement the state budget.
Retroactive Income Tax. ACA 14 (Caldera) requires increases or decreases in personal income tax rates to be imposed on a prospective basis.
Majority Vote for School Bonds. SCA 12 (O'Connell) provides that local school bonds require only a majority vote of the electorate, rather than a two-thirds vote for passage.
April 7: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 126, State Capitol, at 1:30 p.m.
Subjects: Among bills scheduled to be heard are AB 1499 (Caldera), conforming
with 1996 changes with respect to the research and development credit;
AB 41 (Murray), conforming with federal law on small business expensing;
AB 258 (Floyd), conforming to the federal child-care credit, and AB 372
(Battin), a credit for donation of computers for school use.
April 8: BOE PROPERTY TAX COMMITTEE MEETING
Location: Room 121, 450 N Street, Sacramento at 9:00 a.m.
Subject: Revisions of possessory interest rates (creating proposed Rule 20).
April 8: BOE LEGISLATIVE COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento, at 1:30 p.m.
Subjects: Pending legislation.
April 8: BOE BUSINESS TAX COMMITTEE MEETING
Location: Room 122, 450 N Street, Sacramento, at 2:30 p.m.
Subjects: (1) Innocent Spouse Relief -- Regulation 1705.1; and (2) out-of-state
retailers who use web servers located in California -- Section 6203.
April 9: STATE BOARD OF EQUALIZATION MEETING
Location: Room 121, 450 N Street, Sacramento at 9:30 a.m.
Subjects: (1) Business Tax Appeals; (2) Property Taxpayers Bill of Rights Hearing;
(3) Change-of-ownership Rules (Rules 462.020, 462.160, 462.220, and
462.240), and (4) Rules of Practice Regulations (Regulations 5010-5087).
April 10: STATE BOARD OF EQUALIZATION MEETING
Location: Room 121, 450 N Street, Sacramento, at 9:30 a.m.
Subjects: (1) Executive Director's Report; (2) Request to place "Discussion of Issues
Relating to Compass Management Contract Option" on future agenda; (3)
Non-appearance business, income and franchise tax matters; (4) Property
tax matters; (5) Petition to amend Rules of Practice, and (5) Income and
franchise tax appeals.
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