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

ASSEMBLY DEFEATS AB 1027

After a short and controversial life, AB 1027 (Caldera), the assessors' omnibus anti-taxpayer bill, was defeated by the Assembly at 2:21 a.m. on June 6. The vote was 33-39, with 33 Democrats voting yes and 36 Republicans and 3 Democrats (Dennis Cardoza, Bob Hertzberg and Diane Martinez) voting no. Absent or not voting were Republican George House and Democrats Joe Baca, Tony Cardenas, Susan Davis, Dick Floyd, Mike Machado, Lou Papan and Rod Wright.

County advocates and taxpayer advocates fought an historic battle for the hearts and minds of legislators over issues in the bill. Santa Clara County Assessor Larry Stone, Dan Wall, representing the California State Association of Counties, and Bill Siverling, representing Los Angeles County, worked feverishly for passage of the bill. At one point, they brought lobbyists from a public employees' union into the fray.

A very broad coalition of taxpayers united to oppose the measure. Heavy lobbying efforts were made by a number of individuals, including Cal-Tax's Carol Evans; Eric Miethke, of the Sacramento law firm of Nielsen, Merksamer et. al, on behalf of a number of clients; Carrie-Lee Coke, representing the California Manufacturers Association; Sande George, on behalf of a number of clients; Anne Kelly, on behalf of taxpayer clients; Dennis Loper, on behalf of San Diego Gas and Electric; Roy Perez, on behalf of GTE; Bev Hansen, on behalf of the Air Transport Association, Fred Taugher, on behalf of L.A. Cellular, and a number of others.

In presenting the bill to the Assembly, Assembly Member Louis Caldera argued that the bill gives assessors "the tools they need in assessing property." He said the issue should not be a partisan one, because one-half of the county assessors are Democrats and one-half are Republicans, and all support the bill.

Speaking in support of the bill was Assembly Member Elaine Alquist. She said Mr. Stone, a proponent of the measure, "had enormous integrity," and that an opposition group that "had said the bill is horrible has not had the courtesy to meet with Mr. Stone."

Ms. Alquist defended her county's assessor after Assembly Member Howard Kaloogian said the bill's philosophy was that property owners are guilty until proven innocent. He noted that Mr. Stone has been Santa Clara County assessor for two and one-half years without being certified as an appraiser and has refused to take the state course.

Also speaking against the bill was Assembly Member Robert Prenter, who said the bill was a "job killer" by making it less attractive for businesses to invest in California.

Key issues in the bill were:

• Business Property Statement Due Date. Proponents argued that moving the due date for the business property statement from the last Friday in May to March 31 is a rational extension of the change in the lien date to January 1 from March 1.

Opponents argued that this would force taxpayers to hire additional staff because of a heavy workload in March, thus increasing compliance costs. They also said the earlier date would increase the possibility of errors.

• Demands for Taxpayer Information. AB 1027 required taxpayers to provide any data an assessor deems relevant at any time. Proponents argued that some taxpayers were not providing assessors with enough information. Opponents said the bill constitutes a significant expansion of the power of the assessor to use frivolous information requests to harass and intimidate taxpayers.
• Assessor Subpoena Power. AB 1027 expanded assessor subpoena power. Proponents argued that assessors had to obtain expanded subpoena power to gain access to information. Opponents argued that the provision gave assessors the power to force taxpayers to give up appeals by making it too expensive to comply with assessor demands.
• New Penalties. AB 1027 added a new 10 percent penalty for failure to provide "any information." Proponents argued that this penalty is similar to one already granted to the State Board of Equalization. Opponents argued that assessors now request information not relevant to the valuation of property. Further, they noted that the BOE does not have the same power as proposed to be given counties.
• Standing in BOE Valuation Proceedings. AB 1027 gave counties the same rights as the BOE, and taxpayers in state assessee valuation proceedings. Proponents argued that counties should be given standing as they have a financial stake in the outcome and because they have expertise in valuing public utilities. Opponents argued that giving counties standing is bad public policy as the issue of revenue need is irrelevant to correctly valuing property. They also said counties have less expertise (if any) than the BOE to determine such values.
• BOE Handbooks. AB 1027 proposed a 90-day notice requirement prior to issuing a new or revised BOE handbook. Proponents argued that they needed "more time" to review handbooks. Opponents argued that many handbooks are years out of date, and the "more time" argument was a device to delay needed revisions for proper guidance to assessors and taxpayers.
• Appeals Boards Rules. AB 1027 proposed to allow local assessment appeals boards to establish their own rules of procedure. Proponents argued that this was a matter for local autonomy. Opponents said local boards could adopt procedures unfair to taxpayers, and taxpayers with properties in multiple counties could face 58 different and confusing sets of rules.

Other legislative developments:

• Soak the Rich. The Assembly approved (42-37) an amended AB 83 (Villaraigosa), which previously had proposed to restore the 10 percent and 11 percent income tax brackets.

The Assembly had rejected the bill on June 3 with the tax increase in the bill. As a result, the bill was amended to make the tax increase inoperative. The only operative feature in the bill, as it was approved on June 5, was a refundable earned income tax credit.

During the debate on the bill, Majority Leader Antonio Villaraigosa charged that there is $1 billion being held hostage in this state, locked up in the safe deposit boxes of the rich.

• Bunker Fuel. The Legislature approved on June 5 a do-nothing intent bill on the bunker fuel sales tax exemption (AB 366, Havice). Democrats rejected Republican attempts to place the substantive provision extending the exemption back into the bill.
• Conformity. Two do-nothing bills stating legislative intent to consider conformity (AB 1044, Caldera and AB 478, Takasugi) were approved on June 5. The Senate also amended its conformity bill (SB 455, Alpert), into intent status. As a result, neither House has actually passed a substantive omnibus conformity measure.
• Nexus. The Assembly approved (79-0) legislation on June 5 providing that taxpayers do not have nexus in California solely because they store goods in warehouses in this state (AB 1271, Papan). Assemblyman Lou Papan said the purpose was to encourage the growth of the warehouse industry in California. He was supported by Debra Bowen, who said, "It is easy to locate inventory 100 miles away across the border."
• R&D Credit. The Assembly on June 5 approved an amended, do-nothing intent bill as a vehicle for changes (if any) in the research and development tax credit (AB 1356, Figueroa).
• Credit Unions. The Assembly on June 5 approved an amended, do-nothing intent only bill stating the Legislature would review the issue of tax relief for credit unions (AB 1413, Papan).
• Business Expenses Deduction. The Assembly approved (41-37) on June 5 an amended bill, denying a business expense deduction for executive compensation over $1 million and limiting the deduction for club dues to $500 (AB 1291, Strom-Martin). To make the bill revenue neutral, the bill provides a tax credit for salmon habitat restoration and reduces the minimum franchise tax for new businesses from $600 to $200.

There was a major confrontation between Republicans and Democrats over whether the bill required a two-thirds vote for approval. (Proposition 13 requires a two-thirds vote for any bill changing tax rates or base for the purpose of raising revenue.) Legislative Counsel Bion Gregory appeared on the floor to give his rationale for ruling that the bill requires only a majority vote for passage.

• Minimum Tax. The Legislature on June 5 passed three do-nothing bills, stating intent for the Legislature to reduce the minimum tax (AB 8, Leach, AB 27, Strom-Martin, and AB 1419, Campbell).
• Acupuncturists Sales Tax Exemption. The Assembly on June 5 approved AB 410 (Gallegos), providing a partial sales tax exemption for acupuncturists.

Republicans were unsuccessful in their attempt to amend into the bill a $1,000 tax credit for private agency adoption. They argued this would move children into homes at the same costs as the acupuncturist exemption.

• Manufacturers' Investment Tax Credit. The Assembly on June 5 approved AB 94 (Cardoza), expanding the manufacturers' investment tax credit to property used in the production of agricultural commodities and to independent crude oil producers.

Prior to passage of the measure, Democrats tabled four amendments by Republicans to include additional tax relief provisions. Amendment one, offered by Assemblyman Jim Cunneen, would have also included software manufacturers in the manufacturers' investment credit. Amendment two, offered by Mr. Kaloogian, would have allowed taxpayers to carry forward unused MIC credits indefinitely. Amendment three, offered by Assemblyman Rico Oller, would have tied the bill to a $150 child-care tax credit. Amendment four, also by Mr. Oller, would have established a child-care tax credit.

• Propane. Legislation that provided a refundable income tax credit for purchases of propane gas (AB 1019, Machado) was sent back to the Revenue and Taxation Committee on June 5. As it had originally passed the committee, it provided for a sales tax exemption for propane used in residential units.

LEGISLATIVE CONFEREES WORK ON BUDGET; BIG 5 MEET

In public view, a Senate-Assembly conference committee last week began hammering out details of the 1997-98 state budget bill, and another two-house panel continued work on a plan to implement federal welfare reform in California.

Behind closed doors, meanwhile, the Big Five -- Governor Pete Wilson, Senate President Pro Tem Bill Lockyer, Senate Minority Leader Rob Hurtt, Assembly Speaker Cruz Bustamante and Assembly Minority Leader Curt Pringle -- also began negotiations on the big-ticket items which include tax relief and key elements of welfare reform.

With yesterday's constitutional deadline for passage of a budget bill an unrealistic option, Capitol observers late last week were predicting that the negotiations and debate would occupy legislators and the governor until at least June 30, the final day of the fiscal year.

The governor's $68.2 billion budget proposal continues to include a 10 percent reduction in the bank and corporation tax rate and would not allow a renters' tax credit. Although the governor's B&C rate reduction plan was rejected by the Assembly Appropriations Committee, it could still be revived as part of the budget negotiations. There also was continued talk of personal income tax (PIT) relief. Sean Walsh, Mr. Wilson's chief spokesman, said a PIT option "is alive and well" in the governor's office, with various approaches being examined. The governor's office, however, stopped short of "negotiating in public" on this issue.

Senator Lockyer, who has not endorsed a PIT reduction, has criticized the governor's business income tax relief plan. He prefers targeted tax breaks for industries that produce jobs. He also said decisions on tax cuts should be secondary to decisions on constitutionally required or essential services. Then, he said, it would be known if there is enough left for tax relief.

One determining factor may be whether the state will be allowed to spread out payments as it provides $1.36 billion that is owed to the public employees' pension fund. The state Supreme Court has ruled that the state should not have delayed payments to the pension fund, a strategy for balancing the budget a few years ago. If the courts allow, the state could avoid making a lump sum payment in the coming fiscal year, which would leave no money for major tax relief.

Tax relief is expected to be negotiated by the Big Five and molded into one or more bills by a special two-house conference committee in July or August.

Revised economic forecasts in May show $2.26 billion in unanticipated revenue, mostly from personal income taxes, through June 30, 1998. While nearly all the additional revenue must be spent on education, as required by Proposition 98, there remained enough revenue in the governor's estimation for tax relief and additional funding for schools and welfare reform.

On the tax front, Assembly Republicans endorsed a proposal by colleague Tom McClintock to more than double the personal income tax standard deduction. Thus, he said, a married couple earning $25,000 a year would pay no state income tax, instead of a $156 liability now. He said this proposal would save taxpayers $1.2 billion.

In his pitch to the budget conferees, Mr. McClintock said, "This tax relief is specifically targeted to the low- and middle-income families that have borne the brunt of the 1991 tax increases." He said the "entire Republican caucus stands with me in saying that at a minimum we should leave this $1.2 billion with the taxpaying families of California."

Meanwhile, in the welfare reform conference committee, expanded eligibility for unemployment insurance has been advanced. This would stick employers with a multi-billion-dollar annual tax increase. The Democrat majority in the Legislature and the Republican governor were reported to be far from agreement on a number of major issues, including an earned income tax credit that would cost the state $500 million a year, which the governor has not proposed. Democrats, backed by labor unions, also would restrict welfare recipients to nonprofit or public agency jobs.

Among other developments, the Department of Finance, in its monthly bulletin, reported that preliminary general fund revenue for May was only $46 million below the 1997-98 May Revision forecast of $2.96 billion. The state's "strong economic expansion" continues, the bulletin said, with more than 15,000 additional jobs -- 5,400 in the manufacturing sector -- in April. In the February-April period, the state added more than 100,000 jobs.

HOTEL TAX FOR S.F. PARTY FUND?

San Francisco Mayor Willie Brown plans to take $1.5 million from hotel taxes to finance his Office of Protocol, which San Francisco Chronicle reporters Matier & Ross contend is merely a euphemism for Office of Party. According to the newspaper, starting next month the hotel tax will be used to finance an office of nine paid special assistants, with salaries ranging up to $70,000, for a total annual payroll of $453,550.

Chief of Protocol Charlotte Mailliard continues as an unpaid volunteer. The rest of the $1.5 million, according to the mayor's office, is to cover office "expenses," and the mayor promises a full accounting, wrote columnists Matier & Ross. They say reporters are still waiting for a detailed accounting of how the mayor spent $133,000 in private funds carried over from the prior administration's "Host Committee." Matier & Ross say the mayor "feels the longtime practice of financing civic dinners, parties and gifts with private contributions -- and mostly volunteer staffers -- just doesn't fit his style."

The plot thickens when the writers quote unnamed "insiders" who say Mr. Brown's $1.5 million "grab" was payback to the Convention and Visitors Bureau for not giving him the $200,000 he requested for the U.S. Conference of Mayors meeting later this month. The bureau came through with only $25,000.

While the San Francisco City and County Board of Supervisors has the final say, Matier & Ross say it is no hurdle, adding with a chuckle, "Maybe Willie will toss 'em a party."

BOE PROPERTY TAX COMMITTEE SCHEDULE

June 24: Approval of wording in the draft AH 501, Basic Appraisal Handbook.

July 30: Possessory Interest Rules 21 through 27.

August: No meeting scheduled.

September 9: Approval of wording in the draft AH 521, Assessment of Agriculture and Open Space Property.

October 7: Update to Property Tax Rules to include 6, 10, 124, and 192.

November 18: Discussion of issues in the revision of AH 502, Advanced Appraisal Handbook.

December 2: No meeting scheduled.

January 1998: Welfare and church exemption issues.

February 1998: 1) Assessment Appeals Boards' Rules of Practice

2) From AH 305 -- Application for charged assessment.

April 1998: Appeal Boards' handbook issues.

HEARING SET ON POSSESSORY INTEREST RULES

The revised possessory interest rules developed by the State Board of Equalization's Property Tax Committee in April (see Caltaxletter of April 14) have been scheduled for Administrative Procedures Act public hearings on June 25. The revisions, incorporated in proposed Rules 20 and 21, seek to more closely track recently amended statutes and court decisions.

There has been substantial taxpayer and assessor input in developing the rules so it is unknown if there will be further controversy at the board hearing. BOE staff has circulated further amendments to the rule that they plan to present at the hearing.

Other BOE rulemaking activity:

• Property Tax Appeals Decisions Deadline. On June 25, there will be a regulatory hearing on amendments to Property Tax Rule 309 to conform to a recent statutory change allowing for a 90-day extension, in some circumstances, of the two-year deadline for appeals board decisions. Generally, if a taxpayer's appeal is not decided within two years, the taxpayer's opinion of value is enrolled. The proposed rule change provides for a 90-day extension if the taxpayer, within 90-days of the deadline, requests disqualification of an assessment appeals board member or requests that a hearing officer's recommendation be heard by the board.
• Use Tax Collection by Retailers. The board on June 25 will also hear regulatory changes to Sales Tax Regulation 1684. The new provision clarifies that an out-of-state retailer, whose only contact with California is the use of a computer server on the Internet to create or maintain a worldwide web page or site, does not constitute "substantial nexus."
• Fuel Tax. A public hearing has been scheduled on June 25 on amendments to Motor Vehicle Fuel License Tax Regulation 1114, providing that in-tank transfers and physical exchanges are distributions of motor vehicle fuel, while book transfers and settlements are not.

NEW WINE IN OLD BOTTLES

Local Military Base Recovery Areas. AB 3 (Baca), relating to local military base recovery areas, has been amended to delete all tax provisions.

NEW LEGISLATION OF INTEREST

Internet Taxation. AB 1614 (Lempert), prohibits any tax, assessment, or fee on or in connection with the Internet or interactive computer services.

POTPOURRI: SYMPOSIA, SIGHTINGS, SALUTES & SNAFUS

Prop. 218 Test Case? San Diego business improvement district (BID) assessments could be a prime Proposition 218 legal battlefield. Jonathan Coupal, legal affairs director for the Howard Jarvis Taxpayers Association, told the San Diego City Council last week that he plans to sue against fees being charged within 16 BIDs. Scott Barnett, executive director of the San Diego County Taxpayers Association, also told the council, "This would be the first significant test of Proposition 218 in the state of California." (A fire protection district in Los Angeles County lost a court challenge that it was immune from vote requirements of the initiative that voters approved last November.) Undaunted by legal threat, the council voted 8-1 to set annual BID fees that total about $1 million. The city formed the Pacific Beach BID without a vote of affected businesses, They pay fees varying from $60 to $360 a year based on size and location, along with annual business license fees. City attorneys say the fees do not require voter approval because they are not property-related; Mr. Coupal says, "If it is not a property-based levy, but is a business-based levy, it is a tax."

Sacramento Voters to Get Utility Tax Decision? Sacramento City Manager Bill Edgar, seeking to avoid litigation, has suggested that the city go to the voters in November 1998 with a measure that would authorize a new utility tax. It would replace a fee system that the Howard Jarvis Taxpayers Association (HJTA) has in its sights for a lawsuit, contending violation of Proposition 218.

The city has been funneling 10 percent of utility fees out of separate funds into the city general fund, and Proposition 218, approved by statewide voters last November, says a city cannot charge in utility fees more than the actual cost to the city of providing utility services.

Mr. Edgar, according to The Sacramento Bee, recommends a ballot measure to both reduce utility rates and authorize a new tax to make up for the amount that is lost, so neither taxpayers nor the city would gain or lose. At issue is $9 million the city collects from utility bills for such services as sewer, water and trash collection. These fees are imposed in lieu of franchise fees that the city would charge a privately owned utility.

HJTA Legal Affairs Director Jonathan Coupal, lead author of Proposition 218, said Mr. Edgar's plan would seem to bring the city into compliance with the initiative.

Mr. Coupal said he wanted to make Sacramento's utility tax a test case when the July 1 deadline passes for implementation of Proposition 218. However, if the City Council accepts its city manager's recommendation, he said he would look elsewhere.

BOE Wins FTA Award. The State Board of Equalization last month received the Federation of Tax Administrators Training Award for its computer-based collections program. The award was presented at the FTA's Annual Meeting in Phoenix, Arizona. The BOE, with its vendor, devised training modules for more than 500 users throughout the state of its new automated collection program. As a result, worker productivity has increased, substantial increases in collections have been achieved, and the BOE plans to use similar training tools for other programs. All users completed training in five weeks to minimize transition to the automated system.

COMING UP

June 16: ASSEMBLY REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 126, State Capitol, at 1:30 p.m.
Subjects: Among bills on calendar are AB 258 (Floyd), providing selling at trade shows under certain conditions does not establish nexus, and SB 13 (Mountjoy), exempting replacement contact lenses from sales tax.

June 16: ASSEMBLY COMMITTEE ON ELECTIONS AND REAPPORTIONMENT HEARING
Location: Room 447, State Capitol, at 4:00 p.m.
Subjects: Among bills on calendar are AB 1506 (Ortiz), the League of Cities' version of Proposition 218 implementation; ACA 9 (Morrissey), increasing the veteran's exemption; ACA 14 (Caldera), prohibiting retroactive income taxes, and SB 919 (Rainey), the consensus Proposition 218 implementation bill.

June 18: SENATE LOCAL GOVERNMENT COMMITTEE HEARING
Location: Room 112, State Capitol, at 9:30 a.m.
Subjects: Among bills on calendar are AB 719 (Torlakson), extending state funding for county assessor operations, and AB 1042 (Caldera), the State Board of Equalization's omnibus property tax bill (mostly technical).

June 18: SENATE REVENUE AND TAXATION COMMITTEE HEARING
Location: Room 3191, State Capitol, at 1:30 p.m.
Subjects: Among bills on calendar are AB 713 (Caldera), conforming to recent federal changes in the taxpayers' bill of rights and SB 1013 (Calderon), placing an excise tax on adult entertainment.