State Revenue Falling Behind Estimates Thanks to Excessive Taxation

Betty YeeState Controller Betty Yee’s just-released July Cash Report shows state personal income tax revenue falling behind estimates by 6.9 percent, or $323 million lower than projections. While some will argue that one month does not make a trend, these figures are significant because they represent revenue in the first month of the new state budget, a budget that is based on much higher income estimates.

Should these below projection income tax revenues really be a surprise to anyone with even a minimal understanding of basic economics? Economists tell us that if you want less of something, tax it more, and California has the highest marginal income tax rates in all 50 states.

When upper income individuals were slammed with tax rates on steroids as a result of Proposition 30, approved by voters in 2012, they had little immediate choice but to pay, and the tax revenue poured in. (It should be noted that the tax, approved in November, was retroactive for the entirety of 2012 so there was an almost instantaneous infusion of cash into state coffers.) Still, many compelled to pay these higher taxes took some comfort in knowing the exorbitant tax rates were scheduled to end in 2018.

However, lawmakers viewed this extra revenue as the new normal and they partied on in Sacramento with ever higher state budgets — they have increased spending by 42 percent in the last five years and there is no end to the spending spree in sight.

While the Sacramento politicians are loath to give up this additional cash next year as scheduled, the report from the Controller’s Office shows that the negative consequences of higher taxes, like proverbial chickens, are coming home to roost.

Most high income individuals are savvy and, given time, those penalized with a confiscatory level of taxation will respond by using legal methods that allow them to keep more of their own money. I personally know a veterinarian who cut his salary while retaining the unpaid wages in the business, a small animal hospital, he owns.

Sadly, over time, other successful individuals have packed up and left the state. This helps to explain the exodus of businesses, and the jobs they create, to other areas of the country with a more attractive tax climate.

A recently released study by Spectrum Locations Solutions estimates that over the last seven years, 9,000 business have either divested in California, or, while maintaining their headquarters here, have chosen to expand elsewhere.

“Gov. Jerry Brown’s office routinely denies that business departures is a serious issue,” says Joseph Vranich, a site selection consultant, who prepared the report. Brown’s denials are consistent with State Senate and Assembly leaders who see no down side to ever higher taxes.

Of course those businesses leaving the state are not just fleeing higher income taxes, high taxes in almost every other category are a factor, as are the costs of suffocating regulations.

But for those paying the ultra-high income tax rates, no relief is in sight. California government employee unions, who represent the highest paid public workers in all 50 states, are fielding a ballot measure – Proposition 55 – that will extend the Proposition 30 tax increases for another 13 years.

There is little doubt that just the threat of extending these hyper income taxes, will spur more high earners, to depart. If Proposition 55 passes this November, there will be consequences for the California taxpayers who remain. When Sacramento runs out of higher income individuals to tax, they are certain to shift their attention to those of more modest means.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This piece was originally published by HJTA.org

Controller Dead Wrong on Property Taxes

Betty YeeCalifornia’s State Controller, Betty Yee, normally displays a measured, albeit liberal, view of California fiscal affairs. While viewed as reasonably competent and not given to hyperbole, her recent statement in a local government blog was one she must have known to be flat wrong.

The blog, called County Voice, is disseminated by the California State Association of Counties. In it, Controller Yee pushed her vision of California tax reform – something about which she has written frequently. Yee, like most policy leaders both liberal and conservative, has recognized that California’s tax structure is broken. In fact, Yee is correct when she writes “our system leaves the state budget prey to boom-and-bust cycles, in turn disrupting funding of essential public services.” While the real cause of California’s fiscal distress is that political leadership lacks the will to save money during the boom times, most agree that revenue volatility is a real problem that needs to be addressed.

However, after her observations about California’s volatile and highly progressive tax structure, Yee said this about property taxes: “Meanwhile, in the nearly four decades since the passage of Proposition 13, revenues from the property tax — as well as the sales tax and corporation tax — have diminished.”

What?

All available data – to which Controller Yee has ready access – conclusively shows that property taxes in California have exploded in the last several years. Indeed, since it was adopted by the voters in 1978, property tax revenues have outstripped population and inflation by a significant margin. Even more surprising is the fact that, because of California’s robust real estate market, per capita property tax collections, adjusted for inflation, are beginning to approach pre-Proposition 13 levels.

The real irony, however, with Yee’s erroneous statement, is the context in which it was made. The whole point of the piece was to bemoan California’s volatile revenue structure. That volatility is a direct result of an income tax structure that leaves the state vulnerable to the financial fortunes of just a fraction of California’s population – high wealth individuals.

But California’s property tax system, thanks to Proposition 13, is the model of stability. Indeed, even during the worst of the real estate market meltdown, when other states saw massive declines in property tax revenue, California barely saw any year over year reductions at all. This is even more amazing given that market values in California fell further than most other states.

We can thank Prop 13’s prohibition against taxing runaway paper gains in the market value of property for the stability it brings to property tax revenues upon which local governments rely.

In short, if revenue volatility is the problem in California, the last thing you would want to alter would be the property tax system as created by Proposition 13.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This piece was originally published by HJTA.org

New eClaim System Makes It Easier to Reclaim Your Property From CA Government

California’s chief fiscal officer is making it easier to reclaim private property held by the state.

State Controller Betty T. Yee announced earlier this month an expansion of the eClaim feature for the state’s unclaimed property program. Property owners will now be eligible to submit their claims for property valued up to $5,000 using the controller’s streamlined paperless electronic claim process.

“The eClaim process is simple, efficient, and can be completed in a couple of minutes,” Yee said in a press release. “An increased threshold of $5,000 will allow many more Californians to claim lost or forgotten property online and quickly receive a check in the mail.”

Unclaimed Property: Your Money Held by the State

Under state law, when there’s been no activity on an account for three years, financial institutions are obliged to report this unclaimed property to the California Controller’s Office. In turn, the controller holds the funds until it is claimed by the owner. The most common types of unclaimed properties are bank accounts, stocks, bonds, uncashed checks, wages, life insurance benefits and safe deposit box contents.

Among the biggest problems facing the state’s unclaimed property program: a lack of public awareness about where people can find their old property. Most people don’t realize they’re owed money from a forgotten insurance settlement or an abandoned stock dividend.

However, for those owners aware of the program, obtaining the necessary paperwork to prove ownership can be costly and time-consuming. Many find the hassle of paperwork not worth a small dollar amount.

Unclaimed Property: eClaim created by Chiang

To address the paperwork hassle problem, in January 2014, then-Controller John Chiang created the eClaim feature to expedite the return process for properties valued at less than $500. Later that year, Chaing increased the value to $1,000. In total, more than 315,000 properties have been returned through the Controller’s eClaim feature.

Screen Shot 2015-11-20 at 10.35.42 AMThe state currently holds more than $8 billion in unclaimed property that rightfully belongs to more than 32 million people and businesses. More than three-quarters of unclaimed properties are estimated to be eligible for the new expanded eClaim feature. Yee says that by increasing the threshold to $5,000, she’ll be able to return another $9.4 million per year.

Among those who could benefit from the eClaim feature is billionaire hedge fund manager turned environmental activist Tom Steyer. The former hedge fund manager has three unclaimed properties, each valued at less than $50, dating back to his time as founder of the San Francisco-basedFarallon Capital Management.

LAO Report: State Can Do More

For decades, the state has made it difficult for owners to obtain their property. From 1990-2007, state law prohibited the Controller’s office from contacting approximately 80 percent of owners.

Earlier this year, the state Legislative Analyst’s Office released a report critical of the state’s unclaimed property system. The state could do a better job of finding owners, the report concluded, instead of passively waiting for the cash to be claimed.

It also argued that the state has a conflict of interest in managing the program.

“In particular, because property not reunited with owners becomes state General Fund revenue, the unclaimed property law creates an incentive for the state to reunite less property with owners,” the report found. “Now generating over $400 million in annual revenue, unclaimed property is the state General Fund’s fifth-largest revenue source. This has created tension between two opposing program identities — unclaimed property as a consumer protection program and as a source of General Fund revenue.”

Unclaimed Property: How to Search for Unclaimed Property

To find out if you have unclaimed property held by the state, go to www.claimit.ca.gov.

Originally published by CalWatchdog.com

CA Tax Board Owes Millions to Overcharged Taxpayers

TaxesThe California Franchise Tax Board potentially owes millions of dollars to 27,000 taxpayers who were overcharged interest after applying overpayments from one year to estimated tax payments in the following year. Due to FTB interest miscalculations going back nearly two decades, many more taxpayers may have been overcharged. But they’ll never be reimbursed due to the expiration of the statute of limitations.

How Much is Owed?

The FTB is trying to figure out exactly how much money is owed to about 24,000 individual tax filers and 3,000 businesses still eligible for refunds, and what it will cost the agency to process those claims, FTB Filing Division Chief Anne Miller told the board at its July 21 meeting:

These two interest calculations may impact a limited number of individuals and business entities that meet a set of specific and rare criteria. The criteria are centered primarily around overpayments being transferred or refunded from one particular tax year followed by an additional tax assessment on that same tax year. As a result, our systems may have overcharged interest.

Due to the complexity of the calculations, it’s been quite a challenge for us to determine the fiscal impacts. We estimate that if work was to be done manually on each of these individual accounts, it could take three hours per account. We have enlisted the help of our experts in the Economics and Statistical Research Bureau to help us with these calculations because they are so complex.

About 1,000 of the individual taxpayers are owed for more than one year, placing the total adjustments around 28,000. That equates to 40 FTB staffers working for a year to do the calculations, based on three hours per adjustment if an automated solution isn’t found.

“[W]e believe the adjustments could range from a very minor amount (a few dollars) to thousands of dollars for each account,” said the FTB in its Aug. 3 Tax News. The total amount owed could be in the millions of dollars, according to the California Taxpayers Association, which brought the problem to the attention of FTB management in March.

“CalTax is aware of millions of dollars in miscalculated interest based on what a limited number of taxpayers have told us,” said Gina Rodriquez, CalTax vice president for state tax policy. She continued:

In one case, the FTB overcharged interest by $1 million, and in another case $2 million.

In some of the cases that were reported to us, taxpayers asked the FTB to adjust the interest before their cases went final, i.e., before the taxpayer’s protest, appeal or settlement went final. Taxpayers who had already paid and subsequently discovered the error had to file refund claims to get the interest back if they already paid their assessments. In all cases reported to us, the FTB made the adjustment for the interest miscalculation without any argument, as they knew their calculations were wrong.

When I met with FTB management in the spring to discuss this issue, the FTB acknowledged that their computer system cannot properly calculate interest for taxpayers that fall into the two affected categories.

Origins of Miscalculation

The main category of miscalculation, potentially affecting 26,000 taxpayers, dates back to a lawsuit that May Department Stores Company won in 1996 against the United States for miscalculation of interest on the company’s tax underpayments a decade earlier. The IRS issued a notice in 1997 acquiescing to the court decision.

The complexity of the situation is evident on an FTB web page, which explains that you may be owed a refund under the May Department Stores ruling if:

  • You filed an amended return for additional tax or received a deficiency assessment after the original return was filed for the same tax year, and
  • On the original return, you elected an overpayment transfer to the subsequent year’s estimate tax, and
  • On the subsequent year, the required first quarter estimate payment was less than the requested overpayment transfer amount. The maximum amount of the adjustment is one year of interest on the additional tax or deficiency amount.

The other miscalculation category, known as “corporation interest netting,” may affect about 1,000 businesses that have made a previous refund or payment transfer, then filed a subsequent deficiency or amended return for additional tax with interest for the same tax year.

Thus far fewer of those overcharged are aware that they are owed money. “We’ve received three written requests for interest adjustments as well as a few visits to our website,” Miller told the board. “But our contact center has not reported any phone calls on this issue.”

Time Running Out

The clock is ticking on taxpayers who want to receive refunds. The statute of limitations runs out four years from the date the return was filed if it was filed within the extension period, or one year from the date a payment was made.

FTB plans to avoid this situation in the future. “In order to better serve taxpayers who may qualify for the interest computation adjustments, we have trained our staff to proactively identify cases that meet this criteria as well as put procedures in place to ensure that cases that do meet the criteria proactively receive proper treatment,” said Miller.

Betty YeeFTB Chairwoman Betty Yee, who is also the state controller, was appreciative of Miller’s work. “Thank you for really responding with such a strong focus on just initially identifying the universe [of affected taxpayers], which I know was quite complex,” said Yee. “And now to try to put a fiscal impact around what’s been identified. We look forward to getting that information in September.”

In her capacity as state controller, Yee directed the FTB on April 8 to review the interest miscalculations. “These rulings deal with complex interest calculations that affect very few taxpayers. However, these taxpayers are entitled to receive refunds of allowed overpaid interest,” Yee said. “As chair of the FTB, I work to ensure the rights of taxpayers are protected.”

FTB Board Member Jerome Horton said, “I want to thank the department for being proactive on this and engaging. It’s very important. As always we have stepped up and done so.”

Miller is scheduled to provide an update at the board’s next meeting on Sept. 22.

Originally published by CalWatchdog.com

CA Finishes Last in Government Transparency Study

California ranked at the bottom for the second consecutive year on the annual report on state government transparency compiled by the Public Interest Research Group, an investigative and advocacy organization based in Boston. And the state’s beleaguered Department of Technology, or CalTech, can be assigned part of the blame for the last-place showing.

The rankings on PIRG’s sixth annual report are based on an assessment of each state’s open data and the ease with which users – the public, media and policymakers – can navigate the information and draw conclusions about how the money is being spent.

“There used to be a designated transparency portal for California,” said Phineas Baxandall, a PIRG senior policy analyst. “At some point during the Schwarzenegger administration, they pulled the plug on it and ended the program. There was going to be a major IT overhaul integrating the whole state government that would bring in data from the controller’s office, the governor’s office, every state office.” Arnold Schwarzenegger was governor from Nov. 2003 to Jan. 2011.

The report presents costs associated with making and maintaining a transparency-friendly website, which California has not responded to since 2012.

In the 2012 PIRG report, the state estimated a set-up price tag of $200,000, with a $169,400 annual operating cost for the now defunct www.transparency.ca.gov. In 2011, his first year back in office, Gov. Jerry Brown shut down the website because the information was available elsewhere. “But open government advocates have objected to the move, saying it will make it more difficult for citizens to track spending,” the Sacramento Bee reported at the time.

A state’s coffers don’t have a lot to do with the ability or willingness of that state to provide the taxpayers the information they deserve. “California has the largest revenue and expenditure of any state, yet received 34 points, the lowest score” of a possible 100, the report said. That translated to an “F” grade.

The top ranking states were Ohio at 100, Indiana at 97, Wisconsin and Oregon at 96.5 and Louisiana at 96; all were “A” grades. The following map shows the transparency of all 50 states, with the darker shades most open to scrutiny.

2015 rankings for public data transparency

Fragmentation

PIRG also noted California…

“is weighed down primarily by bureaucratic fragmentation of its information. While the state has made some interesting and useful data sets available to the public — including, for example, one documenting spending at the county level — California does not succeed in creating a ‘one-stop’ transparency portal. For example, the state produces tax expenditure reports and publishes data on the Film and Television Production Incentive,but these are not available via a central transparency website, making this valuableinformation difficult to find for citizens and others who may not already know where to look. It would be relatively easy for California to substantially improve its score by providing clear links to sources of data from a central website.”

Public data is being increasingly placed online by states and there has been a push in California to put more of the state’s spending as well as tax revenues and compilations of information from state agencies in a form that can be easily understood.

But even the state’s attempt to create a decent portal for open data delivery was criticized by PIRG. The primary place for the public to sift through information is listed in the study as the Department of General Services site. PIRG found “the state does maintain a central data hub at http://data.ca.gov/ that can be more readily considered a ‘transparency portal,’ but it was not evaluated for purposes of this report because it fails to score better than the website we evaluated.”

Failures

CalTech, which had 121 employees with salaries over $100,000 last year, has been lampooned for its failures over the years. In 2013, a $371 million plan to upgrade the state’s payroll system was suspended after $254 million was spent.

A week later, a $208 million project to modernize the state’s Department of Motor Vehicles was canned after seven years and an outlay of $135 million.

The state Task Force on Reengineering IT Procurement for Success came out with a study of the department’s follies in procurement that included posting status updates of projects that are in progress, “helping to increase vendor accountability.”

Audit

An audit of CalTech released last week by state Auditor Elaine M. Howle included criticism of the agency’s ability to calculate the status of current projects. It made no mention of publicly posting that information.

The audit is a 50-page lambasting of the department and opens by noting “the state has a history of failed IT projects — between 1994 and 2013, for example, the state terminated or suspended seven IT projects after spending almost $1 billion.”

Regarding the department’s work on posting information that can be dissected by taxpayers, the study noted, “CalTech needs to revisit its guidance to sponsoring agencies for creating their status reports and its procedures for reviewing and approving status reports to ensure that projects present meaningful information to the public.”

In the agency’s response to the audit, CalTech Director Carlos Ramos agreed with all nine recommendations for improvements.

Legislation introduced in February by state Sen. Richard Pan, D-Sacramento, would create a chief data officer to be appointed by the governor. The officer would work with CalTech in creating a way to provide public information online and at the ready.

“Maybe one of these days, the state will unveil this great it system and it will be so impressive and their rating will improve,” said Baxandall, the policy analyst at PIRG. “But until then, we’re in the dark.”

Originally published by CalWatchdog.com