David R. Doerr, principal contributor
Ronald W. Roach, editor

LOCAL GOVERNMENT PANELS MOVE MAJOR TAXPAYER BILLS

The bill would declare that the state Supreme Court's decision in Santa Clara County Local Transportation Authority v. Guardino does not affect taxes imposed before December 14, 1995. That is when the court rendered the decision that found Proposition 62 (1986), which required votes on local taxes, was constitutional. Local governments had, in the early 1990s and late 1980s, levied hundreds of taxes without following Proposition 62's vote requirements.

Cal-Tax's Steve Kroes testified that proponents of the bill were misinterpreting court precedents. He also stated that local governments are, in effect, stating that retroactive application of court decisions is fine when it hurts taxpayers, but not when it impacts local governments. Wendy Nelson, from the Howard Jarvis Taxpayers Association, testified that AB 1362 is an unconstitutional attempt to amend the effective date of Proposition 62. A Legislative Counsel opinion, written for Senator Quentin Kopp in 1996, was presented by Assembly Member Steve Baldwin to strengthen that argument. The bill passed on a straight party-line vote of eight Democrats against five Republicans, with two abstentions.

Meanwhile, the Senate Local Government Committee, also meeting last Wednesday, passed SB 919 (Rainey), which contains measures to implement and clarify Proposition 218, the constitutional amendment passed last November to make certain that popular votes are required for local taxes.

The Senate panel also passed SB 566 (Thompson), sponsored by high-tech companies to allow counties to rebate property taxes on new capital facilities valued over $150 million. Senator Pat Johnston grilled proponents with questions about revenue losses, asking if the premise of the bill was that counties are "wasting property tax." One provision of the bill allows a county to levy a "community services fee" of one-quarter of the rebated property tax, and Senator Mike Thompson accepted an amendment to remove the recipient company's ability to have input on the services for which the fee would be earmarked. SB 566 passed by a 4-2 vote, with Senators Johnston and Kopp voting no.

MAJOR CONFORMITY BILL STILL AWAITS SENATE ACTION

Although the Senate Revenue and Taxation Committee approved 15 bills last Wednesday, the major news coming out of the hearing is what did not happen. Action on the session's major state-federal conformity bill (SB 455, Alpert) was postponed until a later date because legislative counsel failed to complete massive amendments to the measure.

Amendments being prepared conform to more than 60 federal provisions. To facilitate passage of the bill, major controversial provisions have been excluded. (A complete list of proposed provisions of SB 455 is available on Cal-Tax Online -- http://www.caltax.org -- in the Members-Legislative Section, which is open to online subscribers. Subscription information is on the website.)

Meanwhile, the committee turned down, on a party-line vote (Republicans for and Democrats and an independent against), legislation designed to encourage employers to offer health care insurance. The bill carries a $420 million revenue loss estimate. SB 1162 (Brulte) would have allowed employers to take a tax credit of $25 per month for each employee, or 25 percent of the actual cost of insurance, whichever is greater.

Allan Zaremberg of the California Chamber of Commerce said much of the problem of uninsured health care is at the small business level, and the credit would aid such firms in providing insurance. Speaking in opposition, Lenny Goldberg of the California Tax Reform Association said the bill rewards employers already providing health care.

Also, a proposal sponsored by the League of Cities that had the effect of turning over a portion of the state sales tax to cities and counties was not brought to a vote by sponsors after committee members made it clear the bill would have been rejected. SB 1310 (Johnson), when fully implemented in 2002-2003, was estimated to reduce state general fund revenue by more than $4 billion.

City officials voiced support, arguing cities need the money to provide essential services. Cal-Tax's David R. Doerr said the bill violates the accountability and responsibility theories of public finance and could lead to a big state tax increase. Rick Simpson of the California Teachers Association also opposed the bill, expressing concern about the impact on school finance.

Legislation approved by the committee:

• Consumer Use Tax Protection. SB 781 (Brulte) prohibits the State Board of Equalization from collecting a use tax from a consumer (with a receipt of payment) if a business folds and fails to remit the sales tax paid by the consumer to the state.
• Minimum Franchise Tax. SB 890 (O'Connell) decreases the minimum tax for brand new businesses from $600 to $300 for the first year of operation and from $800 to $300 for the prepayment for the second year (which has to be made four months after the first payment). Lt. Governor Gray Davis appeared in support of the bill saying, "Job creation is an important public policy. As businesses grow and prosper, so will California." Mr. Goldberg opposed the bill.
• Fairground Possessory Interests. SB 33 (Maddy) allows counties to exempt up to $50,000 of possessory interest value at fairs. Similar legislation for convention centers passed last year.
• Donation of Land. SB 87 (O'Connell) establishes a 55 percent tax credit for donating land to the state, provided the gift is approved by the Secretary of Resources and funds are in the budget. Agricultural and conservation groups supported the bill, and Mr. Goldberg opposed it.
• Disputes over Allocation of Local Sales Tax. SB 110 (Dills) establishes a "bill of rights" for cities and counties to contest allocation of local sales taxes by the BOE. The committee analysis pointed out that open board hearings on sales tax allocation disputes may inadvertently make public some confidential taxpayer information. The California Manufacturers Association, the League of Cities, and the firm providing sales tax consulting work for cities (Municipal Resources Consultants) all supported the bill. Cal-Tax opposed it.
• Enterprise Zones. SB 200 (Kelley) establishes an enterprise zone in the City of Brawley and SB 965 (Costa) corrects errors in last year's enterprise zone legislation.
• Collection of Child-care Support. SB 247 (Lockyer) requires all counties to participate in the Franchise Tax Board's child-care payment collection system.
• Sales Tax Exemptions. SB 591 (Johnson) exempts the background investigation fee charged firearm purchases from sales tax. SB 1267 (Peace) exempts feed for zoo animals from sales tax.
• Checkoff. SB 717 (Karnette) keeps the checkoff for contributions to political parties on the income tax form.
• Technical. SB 612 (Costa) makes permanent two temporary provisions relating to the collection of fuel taxes. SB 1105 (Senate Revenue and Taxation Committee) makes minor property tax changes suggested by the BOE. SB 1107 (Senate Revenue and Taxation Committee) makes minor property tax changes suggested by county tax collectors. SB 1233 (Alpert) is an FTB-sponsored bill to eliminate an obsolete tax reference.

TAXPAYER RIGHTS MEASURE CLEARS ASSEMBLY COMMITTEE

The Assembly Revenue and Taxation Committee last Monday unanimously approved legislation expanding the Taxpayers' Bill of Rights for Franchise Tax Board purposes (AB 713, Caldera) and referred it to the Judiciary Committee for further consideration. The bill conforms for FTB purposes to several provisions of federal law expanding taxpayer rights approved by Congress last year.

The bill is sponsored by the Franchise Tax Board. Cal-Tax's David R. Doerr, in support testimony, suggested several provisions should be made applicable to the Taxpayers' Bill of Rights law governing the State Board of Equalization. The only opposition expressed was by the Department of Finance.

Key provisions of the bill: (1) taxpayers may file a joint return even if separate liabilities are not paid; (2) notice of termination of an installment payment agreement by the FTB must be sent to a taxpayer; (3) interest attributable to unreasonable errors by the FTB may be abated; (4) FTB retroactive regulations are limited to 24 months after passage of a law, or federal regulation; (5) burden of proof is shifted to FTB to substantially justify its position when considering if taxpayer is to be awarded litigation costs; (6) if FTB staffers entice a taxpayer's representative to give taxpayer information, the taxpayer may seek damages from FTB; (7) when FTB uses information from a third-party information return against taxpayer, burden of proof of correctness is shifted to the FTB; and (8) FTB must make a reasonable attempt to notify taxpayers if unable to locate a taxpayer's account within 60 days of receipt of payment.

Other bills approved by the committee:

• MIC Carryforwards. The committee approved legislation extending indefinitely the period for carrying forward unused manufacturers' investment tax credits (AB 648, Kaloogian). Dick Fishman, tax policy analysis manager for Unocal and chair of the California Manufacturers Association's Tax Committee, said the bill removes an impediment for some taxpayers to invest in manufacturing equipment.

The Department of Finance and Lenny Goldberg, representing the California Tax Reform Association, opposed the bill.

• Hot Interest. Legislation was approved changing the computation of hot interest (which is an additional 2 percent interest imposed when the deficiency exceeds $100,000). If there are two deficiency notices in the same year, not interest on the second amount will be computed from the 30th day after the second notice, rather than being retroactively assessed back to 30 days after the first notice (AB 1179, Takasugi).

Carrie-Lee Coke, representing the CMA as sponsor of the bill, said it was unfair to retroactively assess interest on the second deficiency back to the date of the first. The Department of Finance opposed the bill.

• Partnership Tax Filing Requirements. Legislation allowing the FTB to relax partnership filing requirements (AB 601, Davis) was approved.

• MIC: Mergers and Acquisitions. There was another rumble over the committee's suspense file during the consideration of AB 706 (Ackerman). The bill clarifies that the manufacturers' investment tax credit is not recaptured because of a merger or acquisition. Supporters said a merger was not the same as a corporation selling off MIC property to an unrelated buyer. Vice-chair Nao Takasugi said he did not agree with Chairman Caldera that the bill should go on the suspense file, because the analysis of the bill stated that it is likely that relevant transactions would be infrequent. Mr. Caldera, who said he was favorably disposed to the bill, insisted the bill be placed on the suspense file.

Committee Republicans moved to suspend the rules to allow a vote on the bill. To everyone's astonishment, the motion had enough votes to pass. Mr. Caldera then gaveled the committee into an extended recess, with all members leaving the hearing room. Upon resumption of the hearing, one Democrat -- Assemblyman Carl Washington -- changed his vote and the motion to suspend the rules failed. The bill was placed on suspense.

• MIC for Agriculture. Legislation extending the manufacturers' income tax credit to purchase of qualified property related to specified agricultural activities (AB 138, Poochigian) was placed on the suspense file. Assemblyman Mike Machado joined Assemblyman Charles Poochigian in arguing for the bill. Lenny Goldberg and the Department of Finance spoke in opposition.
• Club Dues and Executive Compensation Deduction. Legislation to deny a business expense deduction for club dues and for executive compensation over $1 million (AB 1291, Strom-Martin) was sent to the suspense file. Lenny Goldberg supported the bill. He said executive compensation was really corporate profit and should be treated as such. Cal-Tax's Dave Doerr said expenses in earning income should be deductible. He said corporate executives were valuable in increasing a company's profitability and their legitimate compensation should be allowed as a deduction.
• Biomass Conversion. Legislation to institute a tax credit of $30 per ton of agricultural prunings delivered to a biomass conversion facility (AB 1513, Cardoza) was placed on the suspense file.
• MIC: Software Manufacturers. Legislation extending the manufacturers' investment tax credit to software manufacturers (AB 1063, Lempert) was placed on the suspense file. Teresa Casazza, speaking for the American Electronic Association, said software manufacturing was one of California's largest and most important industries, and incentives were necessary to compete with other states for such manufacturing. Also voicing support for the bill were Kaye Caldwell, representing the Silicon Valley Software Industry Coalition, and advocates for the California Manufacturers Association; the California Chamber of Commerce; Cal-Tax; the BOE, and others.

In opposition were the Department of Finance and Lenny Goldberg. Mr. Goldberg suggested that thousands of home computer owners create software and may try to get the credit.

FTB SUPPORTS COX-WYDEN

The Franchise Tax Board last Monday voted to support the Cox-Wyden bills in Congress (HR 1054, S 442), to place a moratorium on taxation of the Internet.

Controller Kathleen Connell noted that she and BOE Chair Ernest Dronenburg voted to support the bills when the State Board of Equalization took the same position in March, so there was little discussion. The surprise was that the Department of Finance was not represented at the meeting, so the vote was 2-0. Governor Pete Wilson, at Cal-Tax's annual meeting, stated he was opposed to taxation of the Internet. (See Caltaxletter of Feb. 17.)

The board also took positions on over 50 legislative measures. On the vast majority, the board followed staff recommendations. On several, the position was changed after discussion.

The board voted to support four bills expanding the manufacturers' income tax credit AB 138 (Poochigian), AB 648 (Kaloogian), AB 1063 (Lempert), and SB 519 (Alpert). Staff had recommended a neutral position on these measures.

On a nexus bill, staff suggested the board oppose AB 1271 (Papan), providing an out-of-state firm solely warehousing goods in California is not doing business here. Dr. Connell stated that if the bill was amended to limit the presence solely to storage, the board could be neutral.

The board changed staff position of support to "no position" on legislation designating specified FTB staffers as peace officers (SB 951, Johnston).

(A full list of positions on bills taken last Monday by the FTB is available to Cal-Tax Online -- http://www.caltax.org -- subscribers in the Members-Legislative Section. Subscription information is on the website.)

BOE PROPERTY TAX DEPARTMENT REORGANIZATION IN PROGRESS

The State Board of Equalization is reorganizing its Property Tax Department. Jim Speed, head of the department, said the reorganization is expected to be completed by July 1.

Divisions as newly realigned, with new responsibilities, are as follows:

• County Property Tax Division (William B. Jackson, chief). This division will administer the timber yield tax and conduct surveys of county assessment practices.

Charlie Knudsen will direct the Timber Tax Section and Tom McClaskey will lead the Assessment Practices Survey Section.

• Policy Planning and Standards Division (Richard C. Johnson, chief). This division prepares letters to assessors, develops changes in property tax rules and assessors' handbooks, processes exemption claims, conducts training classes, approves property tax forms, maintains the legal entity change of ownership program and prepares tax rate area maps.
• Valuation Division (Ramon J. Hirsig, chief). This division prepares value indicators and recommendations for consideration by the board in its annual assessment of privately owned public utilities and railroads.

Harold Hales is in charge of the Field Appraisal and Value Allocation Section and Octavio Lee is in charge of the Unitary Valuation and Auditing Section.

REVENUES STILL ABOVE PROJECTIONS

As the state awaits the tally from income tax returns filed through last Tuesday, revenues for the 1996-97 fiscal year continue to run above forecasts made three months earlier (in next year's proposed state budget). Through March, revenues were running $305 million above projections, according to the Department of Finance. Almost all of the windfall revenue is attributable to the personal income tax. Sales tax revenues are $39 million below estimates.

California's economy continues to expand, with non-farm employment up 42,000 in February over February 1996. The unemployment rate dropped 0.4 percent, the largest one-month decline in 10 years, to 6.5 percent.

SUB S CONFORMITY BILL PUT ON ASSEMBLY INACTIVE FILE

Legislation conforming California law with recent federal changes relating to Subchapter S corporations (AB 1039, Caldera) was placed on the Assembly inactive file by its author last Monday. The proposal has become controversial due to amendments raising the Subchapter S corporation tax rate from 1.5 percent to 1.6 percent.

Governor Pete Wilson and Assembly Republicans say the tax rate increase is not needed because the budget's revenue estimate already takes the bill's fiscal effect into account. Just last Monday, the Franchise Tax Board came out in opposition to the bill due to the tax rate increase provision.

Other Assembly floor action:

• Proposition 90. The Assembly last Monday voted 75-0 for legislation extending the provisions of Proposition 90, allowing elderly homeowners to transfer the Proposition 13 base-year values to specified dwellings in certain other counties (AB 240, Takasugi). Current law allowing such transfers is due to expire at the end of 1998. Ten counties, representing 64 percent of the state's population, accept such transfers.

EDITOR'S NOTE: CALTAXLETTER COVERAGE IS EXCLUSIVE

Cal-Tax reporting on state and local tax issues is exclusive for Caltaxletter subscribers and is no longer available via State Tax Notes.

For a number of years, State Tax Notes has been allowed to reprint articles written by Cal-Tax chief tax consultant David R. Doerr, who for nearly three decades was chief consultant to the Assembly Revenue and Taxation Committee, and other Cal-Tax staffers. However, this arrangement was terminated by the Arlington, Virginia-based publisher of State Tax Notes. Carol Douglas, editor of State Tax Notes, told Cal-Tax her publisher objected to Cal-Tax's account of the State Board of Equalization's decision to support the federal Cox-Wyden bill that seeks to ban state or local taxation of Internet transactions. (See March 24 and April 7 issues of Caltaxletter.)

Cal-Tax reported, based on a reliable BOE source, that the Multistate Tax Commission (MTC) wanted the board to oppose the Cox-Wyden effort. MTC chief Dan Bucks denied that the MTC had taken a position on the Cox-Wyden proposal. He said he had not asked the BOE to oppose it. Caltaxletter reported Mr. Buck's denial in a subsequent article, along with news of a March 11 letter from Mr. Bucks and Harley Duncan of the Federation of Tax Administrators that urged Congressman Cox and U.S. Senator Wyden not to introduce their bill.

Those who have followed California tax developments through reports of Mr. Doerr and Cal-Tax staff, as reprinted by State Tax Notes, should note that State Tax Notes has a new California correspondent. He is Lenny Goldberg, leader of the California Tax Reform Association. He is a lobbyist known for supporting or sponsoring tax-increase legislation or ballot initiatives and leading the opposition for tax relief, particularly for business taxpayers.

Mr. Goldberg was the primary author of two unsuccessful statewide ballot initiatives: Proposition 167 in 1992, which would have increased taxes by $5 billion a year, and last year's Proposition 217, which would have permanently reimposed 10 percent and 11 percent tax brackets. While lobbying at last Monday's hearing of the Assembly Revenue and Taxation Committee, Mr. Goldberg was asked by a committee member to name his group's primary supporters. He listed the California Teachers Association, the Service Employees International Union, and other public- and private-sector unions.

NEW WINE IN OLD BOTTLES

Assessors' Property Tax Bill. AB 1027 (Caldera), the county assessors' property tax bill, has been amended to remove several provisions that were opposed by Cal-Tax. Most provisions Cal-Tax found to be objectionable remain in the bill and new ones have been added.

Deleted from the bill are provisions relating to intangibles, trial de novo for state assesses, contingency fee appraisal contracts, Riverside County's Assessment Appeals Board Rule 10, limits on who may testify at appeals board hearings, and reduced and time limits for appealing appeals board decisions.

Added to the bill are provisions that (1) repeal provisions of SB 657 (Maddy) of 1995 that shifted the burden of proof on escape assessments from taxpayers to assessors and (2) establish a mechanism for collective county actions on property tax appeals.

In addition to the new items, remaining in the bill are provisions that (1) require 180 days notice for assessor handbook changes, (2) expand assessors' authority to revise and increase base-year values; (3) change the filing date for the business personal property statement to March 31; (4) allow assessors' to use a value-in-use valuation method; (5) extend assessor subpoena power; (6) give county assessors standing in the state assessee valuation process; (7) repeal the 2-year deadline for resolving assessment appeals; (8) impose additional penalties for failure to provide information; (9) allow assessors to seek added information during an assessment appeal; (10) allow appeals boards to establish certain rules of procedure; (11) relate to Williamson Act cancellations, intra county pipeline assessment, and filing dates for exemptions.

Cal-Tax continues to oppose the measure, which is scheduled for a hearing before the Assembly Revenue and Taxation Committee today.

Adult Entertainment Tax. SB 1013 (Calderon) has been amended to impose a 5 percent excise tax on gross receipts from sales of adult entertainment products and services.

Smog Check Certificate Fee: Underground Storage Tank Fee. AB 208 (Migden) has been amended to increase the fee for a smog check certificate of compliance by $1 and to increase the fee charged per gallon of petroleum deposited in underground storage tanks. The revenues generated are to be used to implement a program for the repair or replacement of high polluting vehicles.

COMING UP

April 21: ASSEMBLY REVENUE AND TAXATION COMMITTEE MEETING
Location: Room 126, State Capitol, at 1:30 p.m.
Subjects: Among bills on calendar are AB 1027 (Caldera), the assessor-sponsored anti-taxpayer bill; and AB 1319 (Alquist), limiting who may represent taxpayers at appeals hearings.

April 21: ASSEMBLY TRANSPORTATION COMMITTEE HEARING
Location: Room 4202, State Capitol, at 1:30.
Subject: Among bills on calendar is AB 653 (Papan), increasing gasoline tax rates each year by the increase in the CPI.

April 23: SENATE EDUCATION COMMITTEE HEARING
Location: Room 4203, State Capitol, at 9:00 a.m.
Subjects: Among bills on calendar is SCA 12 (O'Connell), reducing the vote requirement for schools to majority voter approval.

April 23: ASSEMBLY EDUCATION COMMITTEE HEARING.
Location: Room 4202, State Capitol, at 1:30 p.m.
Subject: Among bills on calendar is ACA 5 (Mazzoni), changing the vote requirement for school bond approval to 58 percent voter approval.

April 24-25: STATE BOARD OF EQUALIZATION MEETINGS
Location: 1350 Front St., San Diego, at 9:00 a.m.
Subjects: (1) Business tax appeals; (2) Non-appearance items relating to business, franchise and personal income tax, and (3) Executive Director's Report.