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

ASSEMBLY APPROVES LEGISLATION ALLOWING LOCAL UNVOTED TAXES TO CONTINUE

A hotly contested measure allowing cities and counties to continue to levy taxes that were not voter approved as required by Proposition 62 was approved by the Assembly last Tuesday. In December of 1995, the California Supreme Court, in the Guardino case, upheld the validity of Proposition 62, which was passed in 1986 and requires all local taxes to be approved by a vote of the people.

Prior to the vote on AB 1362 (Mazzoni), majority Democrats tabled, without debate, amendments offered by Republicans authorizing cities to eschew refunds, if they would place the non-voter approved taxes on the ballot for a vote in order for them to continue. Under AB 1362, there will be no refunds and the non-voter approved taxes will be allowed to continue indefinitely. This bill was approved without a vote to spare, 41-37, with all Republicans voting no.

Assembly Member Kerry Mazzoni, in a rather "low ball" presentation of the bill, said all it does is make the Guardino decision prospective. She said local governments "acted in good faith" when they levied the taxes. She was supported by Assembly Member Michael Sweeney, who said the bill merely clarifies what cities and counties can and cannot do.

Speaking in opposition, Assembly Member Tom McClintock said the bill "rewards brazenly lawless behavior and allows 200 illegal taxes being levied to continue in perpetuity." He characterized the bill as the arrogance of officialdom. Assembly Member Nao Takasugi said the bill fails to respect the rights of taxpayers and said the Legislative Counsel has stated that it is unconstitutional for the Legislature to change the 1986 effective date of Proposition 62.

Other Assembly developments:

• Property Tax Allocation. On Monday, the Assembly unanimously approved AB 95 (Sweeney), giving local agencies other than schools the growth in property tax from increasing values and shifting to counties and cities, at a rate of 10 percent annually, the more than $3 billion in property taxes that have been transferred to schools in recent years. The bill, which now goes to the Senate, might have trouble on the governor's desk. In his May Budget Revise, Governor Pete Wilson proposed that only $100 million of the property tax shift be returned to local government.
• Bay Area Gas Tax. Legislation allowing San Francisco Bay Area voters to increase area gas taxes up to 10 cents per gallon (AB 595, Brown) was approved by the Assembly last Tuesday by a 42-32 vote. When queried if a two-thirds vote would be required, Assembly Member Valerie Brown said yes, because the bill provides that the tax increase must pass by the vote as determined by the Constitution. "Proposition 218 is part of the Constitution," she said.

Assembly Member Bernie Richter of Butte County said he supports the bill because the Bay Area representatives "want to tax their own constituents, not mine." He said he would encourage motorists to fill their tanks before driving into the Bay Area.

SENATE R&T REJECTS COUNTY EFFORT TO REDUCE PROPERTY TAX REFUND INTEREST

Efforts by counties to take away interest owed property taxpayers on refunds came up short in the Senate Revenue and Taxation Committee last Wednesday. Senator Quentin Kopp managed to secure only two of five votes needed for approval of SB 30. The bill would reduce the interest counties are required to pay on the portion of property tax refunds attributable to tax years prior to 1993 from 9 percent to 7 percent.

Taxpayers should not breathe easier now, as proponents will continue to seek approval of the measure. The bill was given a courtesy reconsideration and county lobbyists immediately began pressuring committee members who did not vote for the bill.

Speaking haltingly in support, Deputy Los Angeles County Counsel Albert Ramseyer said he believes current law is unclear. Representing San Mateo County, Mary McMillen said her county would save $10 million in interest payments if the bill passes.

Among those opposing the measure were Cal-Tax's David R. Doerr; Dick Fishman, representing the California Manufacturers Association; Gilbert Martinez of the California Cable T.V. Association; David Gangloff, a property tax consultant; and Robert Pool, a Los Angeles attorney who has already won a Superior Court judgment requiring the county to pay 9 percent.

Mr. Doerr pointed out Los Angeles County overtaxed taxpayers and is refusing to return the overpayment with the rate of interest on the books (9 percent) when the overpayment was made. He said most taxpayers would have to pay in excess of 9 percent interest to borrow the money to pay the tax they did not owe. Mr. Pool said the bill gives counties "a license to steal."

Other committee action:

• Business Expenses. Legislation repealing business expense deductions for club dues and executive wages over $1 million (SB 569, Lewis) was approved on a 5-2 vote. Senator John Lewis defended the proposal as conformity and as a way to make the bill revenue neutral.

Mr. Doerr said it was fundamental to the integrity of income and corporation taxes to allow expenses in earning income to be deducted in order to determine net income subject to tax. The bill also indexes the basis of residential property for capital gains purposes.

• Income Tax Reduction. The committee defeated a proposal by Senate Minority Leader Rob Hurtt that expressed intent that an income tax reduction should be considered by a tax conference committee (SB 1165).

Mr. Hurtt had offered amendments to strip the bill of provisions cutting the income tax. He said he left just an intent section in the bill, so the issue could be on the table during budget negotiations, as suggested earlier by Senate Leader Bill Lockyer. Democratic committee members, however, did not want to allow the issue to be even placed "on the table." (See related tax-cut story below.)

• MIC--Agricultural Equipment. The committee defeated SB 38 (Torlakson), extending the manufacturers' investment tax credit for purchase of agricultural equipment.
• Do-Nothing Bills. The committee passed out a number of bills that originally reduced taxes in one form or another, but were amended to do nothing but express intent that the original policy was a laudable goal.

Included were bills originally proposing a sales tax exemption for newspapers (SB 1300, Calderon); a tax credit for trucks switching from diesel fuel to clean-burning fuel (SB 1096, Brulte); a major employer tax credit for the cost of providing employee health insurance, and (SB 1216, Costa), a tax credit for biomass energy production.

• Other Defeated Bills. The committee also defeated SB 664 (Wright), providing a sales tax exemption for reproduction rights to artwork and drawings produced at social gatherings, and SB 1248 (Monteith), providing a tax credit for repairs of private levees.

During the discussion of SB 664, Lloyd Dangle, president of the Northern California Guild of Graphic Artists, said the current sales tax is unfair as products in which the artwork is used is taxed again. He also said that State Board of Equalization staffers told a seminar that asking for written advice (under the Taxpayers' Bill of Rights) may flag the requester for an audit.

MISTAKEN VOTE DIMS HOPES FOR WILSON CORPORATE TAX-CUT BILL

Two weeks ago, Governor Pete Wilson's corporate income tax rate bill unexpectedly cleared its first legislative hurdle, and the outlook appeared bright. This, and the fact that the Assembly Revenue and Taxation Committee passed billions of dollars in tax cuts, galvanized the education lobby into a frenzy of activity against this and other tax-cut proposals.

Now, the governor's 10 percent bank and corporation tax rate reduction bill (AB 479, Pringle) seems to be swimming against a strong tide of opposition at its scheduled hearing this Wednesday in the Assembly Appropriations Committee. One major factor: A first-term Democrat says he mistakenly supported the bill in the Revenue and Taxation Committee on May 12.

The bill was approved with one vote to spare by the Revenue and Taxation Committee when three Democrats joined all four Republicans on the 11-member panel. Governor Wilson publicly thanked the trio of Democrats by name -- Lou Papan, Mike Machado and Carl Washington.

However, Mr. Washington sent a letter two days later to his Assembly colleagues -- and a lobbyist for school employees -- apologizing for his vote. He said he had been at the dentist for a root canal and arrived at the committee as final votes were taken on various bills. He said his "aye" vote was meant for a different bill. "... be assured that I will not support this measure when it comes before the Assembly Appropriations Committee," Mr. Washington wrote. "AB 479 would have a tragic effect on funding for public schools and state programs vital for California's economy."

Since these three Democrats are on the 21-member Appropriations Committee, where Democrats outnumber Republicans 13 to 8, and Mr. Wilson needs three Democrats for an 11-vote majority, Mr. Washington's letter means the governor's bill will be one vote short in the committee unless another Democrat can be swayed, and all Republican members are present.

Meanwhile, prospects also dimmed for a personal income tax (PIT) relief measure, despite Governor Wilson's renewed interest. Last Wednesday, chief gubernatorial spokesman Sean Walsh said the governor is working on "a number of proposals" to provide "badly needed personal income tax relief to keep us competitive with other states."

On May 14, when the governor issued a revised budget plan that noted more than $2 billion in new revenue from unexpectedly high PIT returns, reporters pressed him with queries about PIT relief. He responded that while he had pushed for such relief in prior years, he had pragmatically abandoned the quest this year due to Democrat control of both the Assembly and Senate and strong opposition from the "education community."

Mr. Wilson said he would be "delighted" to approve a PIT cut. Senate President Pro Tem Bill Lockyer, currently considered the state's most powerful legislator, responded that a personal income tax cut proposal was worthy of discussion, and should be on the table.

Mr. Lockyer, whose remarks caught the education establishment off-guard and prompted the ringing of alarms, quickly amended his remarks to stress that while a personal income tax cut deserved discussion, he was in no way advocating approval.

The Senate leader said "arguments against a cut probably outweigh those arguments for it." He said it is a "close call" and worth discussion, but he reiterated that he is not a supporter of such a major tax cut. Kevin Gordon of the California School Boards Association remarked that he was "very surprised" by the Senate leader's comments. Either way, Mr. Gordon said, his association is strongly opposed.

Subsequently, Senate Democrats last Wednesday killed a proposal to put PIT cuts "on the table" (see Senate Revenue and Taxation Committee coverage of SB 1165 on pages 2 and 3).

Another signal of tough sledding for tax-cut bids last Wednesday: For the first time in the memory of Capitol observers, the powerful California Teachers Association, the teachers' lobby that contributes heavily to legislators' campaigns, mostly to Democrats, appeared in the Senate Revenue and Taxation Committee to oppose almost all tax-reduction measures. In the past, the union has used Lenny Goldberg, whose California Tax Reform Association it partly funds, to lead opposition to tax-cut legislation.

(While enthusiastically embracing the thought of a PIT rate reduction bill, the governor is not backing away from his corporate income tax rate reduction, phased in over two years, according to H.D. Palmer of the Department of Finance. He noted that the first-year, $85-million savings to taxpayers from a phased-in bank and corporation rate cut is built into the governor's proposed 1997-98 state budget, including the May 14 revision.)

ASSEMBLY COMMITTEE MOVES TO STOP RETROACTIVE INCOME TAXES

Following a new federal policy against retroactive tax application, the Assembly Revenue and Taxation Committee last Monday voted 10-0 to pass ACA 14 (Caldera), which would prohibit retroactive tax increases or decreases of personal income taxes enacted after January 1 of a calendar year. The measure, which would appear on the June 2, 1998 ballot, requires a majority vote.

Retroactivity of tax changes was a major issue last fall when Lenny Goldberg of the California Tax Reform Association attempted to reimpose 10 percent and 11 percent income tax brackets retroactively in Proposition 217.

The bill is sponsored by State Board of Equalization Chair Ernest Dronenburg, who is also a member of the Franchise Tax Board. It is supported by Cal-Tax and the FTB.

Other committee developments:

• Conformity. The committee, by a 6-4 vote, approved AB 1044 (Caldera) providing selective conformity to recent federal provisions. Controversial amendments restricting business deductions were added to the bill on May 15.
• Capital Gain Exclusion for Homes. The committee approved AB 454 (Morrissey), indexing the $125,000 exclusion of principal residences of homeowners for inflation. Cal-Tax's Vance Hansen spoke in support of the measure which was approved on a 6-4 vote.

  Mr. Goldberg opposed the measure on the premise that the $125,000 amount exceeds inflation to date.

• Water's-Edge Elections. The committee approved AB 1469 (Ducheny) which was amended to contain provisions of AB 1488 (Pringle) that would allow taxpayers to correct a water's-edge election for certain prior acts or omission of an affiliate. Assembly Member Denise Moreno Ducheny said there was insufficient notice for many companies to timely comply. A representative of Matsushita Electric Corporation, with operations in 140 countries, stated that unless this measure is passed, they would face costly compliance. Brian Maas of Pillsbury, Madison and Sutro also supported the measure on behalf of their clients. Opposition was announced by Mr. Goldberg, who stated that these big companies have the capability to comply with requirements. The FTB and Department of Finance recommended that the narrowly drafted bill be amended to provide a global solution. The bill passed 6-3.
• Refundable Tax Credit. The committee rejected AB 470 (Ducheny), providing a refundable earned income tax credit equal to 50 percent of the federal credit when used solely for health insurance premiums. Assembly Member Ducheny stated that about 215,000 families could use the credit at a cost of approximately $200 million. Terry Brennan, representing the Service Employees International Union, testified in support. Cal-Tax opposed the bill, citing opposition to refundable tax credit provisions and proposing that this flat-out expenditure program should be treated as such through the state's budget process. The bill failed on a vote of 1-4.

The committee has already approved a refundable earned income tax credit as a part of AB 83 (Villaraigosa).

• Newspapers Sales Tax Exemption. The committee unamiously approved AB 1608 (Pringle), exempting newspapers from sales tax.
• Automatic Teller Machines. The committee approved ACR 27 (Papan), requesting the BOE to rescind its earlier action classifying automated teller machines (ATMs) as personal property. It was stated by a BOE representative that the BOE had already scheduled reconsideration of this issue.
• Motor Vehicle Trade-ins. The committee approved AB 1340 (Prenter), exempting from sales tax the value of a trade-in on the purchase of a new vehicle. Assembly Member Robert Prenter said California is one of only five states which disallow a deduction for the trade-in value of a used vehicle. Opposition was voiced by Dan Wall of the County Supervisors Association of California based on state and local revenue losses of $162 million.
• Collection of Child Support. The committee, by a 7-4 vote, approved AB 1395 (Escutia), providing for FTB collection of child support delinquencies.
• Community Development. The committee approved AB 1510 (Vincent), with several amendments, offering a tax credit to partnerships for investment in Community Development Financial Institutions for loans in certain communities.
• Veterans' Exemption. The committee approved AB 551 and ACA 9 (Morrissey), increasing the veteran's exemption for real property only to 110 percent of the homeowner's exemption. Both measures passed 9-0.
• Business Expense Deductions. The committee approved, by a 7-4 vote, AB 1291 (Strom-Martin), denying deductions for business expenses for club dues and compensation in excess of $1 million for corporate executives.

SUBCHAPTER S BILL SENT TO SUSPENSE FILE

The Assembly Appropriations Committee on Wednesday placed Subchapter S conformity (AB 203, Takasugi) on the suspense file for final committee action this week. Cal-Tax's Vance Hansen and Chris Micheli of Carpenter Snodgrass and Associates testified in support. The bill conforms California law to federal law. The Department of Finance noted a revenue loss, but announced that Governor Wilson is in support of this bill.

The committee also moved AB 222 (Takasugi) to the suspense file. Cal-Tax supported this bill which would require the state to pay interest on refunds at the same rate interest is charged to taxpayers for taxes owed.

The committee also passed on a party-line vote AB 55 (Mazzoni) to the Assembly floor. The bill would reduce the approval requirement for local school bonds from two-thirds to 58 percent. Cal-Tax opposed the measure, citing a two-thirds vote for increases in special taxes is required by Propositions 13, 62 and 218.

The hearing on AB 1027 (Caldera), the anti-taxpayer omnibus tax bill sponsored by assessors, was postponed to this week.

SENATE APPROPRIATIONS APPROVES SEVERAL BILLS

Several tax measures were approved by the Senate Appropriations Committee last Monday and sent to the Senate floor.

Included among bills passed were SB 110 (Dills), requiring retailers doing business in California to remit use tax collections to the place of purchase when they sell a product from an out-of-state affiliate; SB 116 (Peace), reestablishing a solar energy tax credit; SB 1102 (Alpert), a technical bill on diesel fuel tax administration, and SB 1234 (Alpert), providing partial conformity with federal check-the-box regulations.

The committee sent to its suspense file SB 890 (O'Connell), reducing the corporate minimum tax for new corporations for their first two years.

L.A. COUNCIL APPROVES $4 BILLION BUDGET

A $4.1 billion city budget for 1997-98 was approved by the Los Angeles City Council last Monday. The budget expands spending for a host of city services, such as libraries, parks and fire suppression. The budget also adds $1.5 million to the office budgets of members of the City Council. City Budget Director Chris O'Donnell said, "It's one thing if they were adding money to expand city services, but just to add staff for themselves? It's entirely inconsistent with the mayor's (Richard Riordan) priorities."

To help pay for budget augmentations, the council adopted higher fees on the city's waste-water system and imposed a tax on utilities for cuts in public streets.

NEW WINE IN OLD BOTTLES

Business Deductions. SB 569 (Lewis) has been amended to incorporate, in addition to indexing the base for capital gains on a home, provisions repealing the business deductions for club dues and executive compensation in excess of $1 million.

Enterprise Zones. AB 797 (Takasugi) has been amended to require the FTB to make available annually the value of enterprise zone tax credits and related information.

Nexus. AB 258 (Floyd) has been amended to provide that sellers at trade shows for less than 15 days a year are not engaged in business in this state for sales tax purposes, except that sales tax must be collected on sales at the shows. The bill originally provided for a child-care tax credit.

Confidentiality of Taxpayer Information. AB 976 (Papan) authorizes taxpayer information to be disclosed in a judicial hearing where such information is material to an issue in a criminal proceeding where the taxpayer is defendant.

NEW LEGISLATION OF INTEREST

Proposition 13 Base-Year Values. ACA 22 (Pringle) permits owners of property that becomes inhabitable due to environmental problems to transfer the Proposition 13 base-year value of the uninhabitable property to a replacement property of equal or lesser value in the same county.

Throwback Sales. SCR 44 (Calderon) requests the Trade and Commerce Agency to investigate and report to the Legislature on why sales to the U.S. Government should be treated differently than other sales in the unitary apportionment formula. (Such sales are "thrown back" to California, enlarging the California sales factor.)

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Wilson Endorses Internet Anti-Tax Bill. Reuters news service reported last week that Governor Pete Wilson endorsed federal legislation that would ban state or local taxation of Internet transactions. Mr. Wilson's position has been known, at least to many Cal-Tax members, since last February. That's when he told the Cal-Tax Members' Meeting, in response to a question, that he opposed Internet taxation (see Caltaxletter of February 17.) The Cox-Wyden bill, scheduled for its first U.S. Senate hearing last Thursday, "will ensure that the Internet industry will have a chance to develop without the market distortions caused by a haphazard tax structure," Mr. Wilson told Reuters. He had told Cal-Tax: "By not taxing, we will stimulate more activity and produce more revenues than if we artificially constrain (emerging industries) by taxation. I do not see why every new form of economic activity must be subject to a new tax."

Goldsmith Eyes Treasurer Race. Assembly Member Jan Goldsmith has announced formation of a committee for state treasurer. Mr. Goldsmith, the first to declare for the Republican nomination in the June 1998 primary election, wants to succeed Matt Fong, who is running for U.S. Senate. Mr. Goldsmith has served in the Assembly since 1992 and cannot seek re-election next year because of term limits. The former mayor of Poway (San Diego County) says he has spent his career in business and in the Legislature "trying to make government more efficient." The only other Republican who has shown an interest in the office is state Senator Jim Brulte of Cucamonga, who announced on May 16 that he will stay in the Senate. One Democrat, former state party chair Phil Angelides of Sacramento, who lost to Mr. Fong in 1994, is expected to run again.

Lungren on Taxes. In his May 6 address to the Los Angeles Town Hall, described by the media as a significant address to frame his candidacy for governor, Attorney General Dan Lungren said this about taxes: "Government's answer to why it can't cut taxes is that it can't afford it. However, do they ever ask, when they increase spending, whether taxpayers can afford it? Taxes increase as government grows bigger and tries to do more, and the inevitable effect is that the creative energy of the individual is sapped and suppressed."

Parker Leaves Finance. Theresa Ann "Terri" Parker will no longer be representing the Department of Finance at Franchise Tax Board meetings. The former chief deputy director of the Department of Finance has been named by Governor Pete Wilson to the $111,648-per-year job as head of the California Housing Finance Agency.

COMING UP

May 26-29: FEDERATION OF TAX ADMINISTRATORS ANNUAL CONFERENCE
Location: Arizona Biltmore Hotel, Phoenix.

May 28: ASSEMBLY APPROPRIATIONS COMMITTEE HEARING
Location: Room 4202, State Capitol, at 8:30 a.m.
Subjects: Bills on file include AB 83 (Villaraigosa), reimposing 10 percent and 11 percent personal income tax brackets; AB 479 (Pringle), the governor's corporate tax rate reduction proposal, and AB 1027 (Caldera), the assessors' omnibus property tax bill.

May 28-29: STATE BOARD OF EQUALIZATION MEETING
Location: 450 N Street, Sacramento, at 9:30 a.m.
Subjects: (1) Executive director's report; (2) District office space and security issues; (3) 4-R Act equalization ratio; (4) Setting values for state-assessed property.