New Tax Proposals Hurt the Middle-Class

TaxesNo one disputes that California has a big budget surplus. According to the Office of the Legislative Analyst, California has budget reserves in excess of $18 billion. Our budget reserves exceed the entire state budget of eighteen other states.

One would think that the funds available for discretionary spending would chill any appetite for higher taxes. But this is California.

Despite the highest income tax rate, the highest state sales tax rate and the second highest gas tax, both our newly elected governor and our extremely progressive legislature desire to impose yet even higher taxes.

The most surprising thing about two of the new tax proposals is that they hurt the very groups the majority party claims that it is trying to help.

During his tenure as governor, Jerry Brown succeeded in shepherding through several tax hikes. However, he was unsuccessful in pushing a new 911 surcharge and a precedent-setting tax on water.

But as is common in California, new tax proposals never really die and these two have been resurrected in Gov. Newsom’s proposed budget.

To read the entire column, please click here.

California Legislature Shouldn’t Tax Innovation

TaxesWhen it comes to innovation and job creation, let’s keep the gold in the Golden State.

The role of private equity in funding the growth of many bread-and-butter, consumer-based firms that call California home – companies such as Peet’s Coffee and El Pollo Loco – is in serious jeopardy due to the possible re-emergence of faulty legislation in 2019.

Last year in the Legislature there was a proposal (Assembly Bill 2731), borne of understandable but misguided frustration over federal tax policy, that would have pushed the private funds financial services industry to other states. Fortunately, that proposal did not advance. Lest California lawmakers think again about cutting off an economic engine in a self-destructive over-reaction, the idea should be permanently shelved.

California is the earth’s epicenter for innovation, attracting entrepreneurs and talent from across our state and around the globe.  It’s blessed with world-class universities, robust markets, and it’s been a pace-setter in emerging industries. All of this is made possible by one essential element – access to capital.

Data from 2016 shows that the Bay Area is the number one market in the nation for venture capital, generating an impressive $23 billion in investment; more than three times that of New York sitting at number two.

A proposal like AB 2731 would put a chokehold on venture capital in the state by creating a 17 percent add-on income tax on the private funds financial services industry. The tax would apply to so-called “carried interest income” earnings – but interestingly enough only in the financial services sector, not in other sectors such as real estate, oil and gas development in which such earnings are also common.

An economic impact analysis of the proposal conducted by a professor at USC’s Marshall School of Business understandably concluded that the tax would be “so impactful that the industry will likely move out of state.”

The consequences of such a flight from California would be devastating. The industry directly employs more than 100,000 workers and pays a combined $2 billion a year in state and local taxes.

The American Investment Council estimates that private equity companies invested $66 billion in 583 California companies in 2017 alone. Those companies combined provided more than 400,000 jobs. In addition, an estimated 5,200 California-based companies now with more than 250,000 workers relied on venture capital funding to get off the ground.

To push back against federal tax policy by even considering a large, state-only tax increase on an industry that fuels economic growth and job production is destructive folly. Jobs would be lost, economic growth would be diminished and there would be a net loss in state and local tax revenue as a result of industry flight from California.  This proposal failed last year, and should not be reconsidered this year.  There is never a good time for a bad idea.

resident & CEO, Silicon Valley Leadership Group

This column previously appeared in the Sacramento Bee

A Crackdown on Misuse of Taxpayer Money

TaxesAlthough state law specifically prohibits public officials from using taxpayers’ money for political campaigning, they have been doing exactly that throughout California.

Local governments hire “consultants” to poll voters on what tax and bond measures they would find acceptable, to draft those proposals accordingly and, finally, to run so-called “information” campaigns to persuade voters to approve them.

It’s so blatant that firms seeking lucrative contracts openly boast of their successful campaigns, eliminating any doubt that they are truly political operatives.

The practice has ballooned because local prosecutors and the state attorney general’s office ignore complaints about its illegality. Indeed, local district attorneys often benefit from the higher taxes.

Finally, however, we may be seeing some effort to sanitize this very stinky phenomenon which, if left unchecked, will only become more commonplace.

Last month, the state Fair Political Practices Commission took a potentially significant action against the Bay Area Rapid Transit District for doing what it and other local governments have been doing.

The FPPC voted unanimously to impose a $7,500 fine on BART for failing to report its spending on a bond issue as a campaign contribution. It also asked the attorney general and Bay Area district attorneys to prosecute the transit district for violating the law prohibiting the use of public funds for political campaigns.

“It’s not the total (amount) of what was used; it’s the concept of misusing public funds,” FPPC chairwoman Alice Germond said at the commission’s December meeting. “We want to send a warning and not create a precedent that it’s a minor, ‘slap on the wrist’ kind of thing.”

The action stems from a proposed $3.5 billion bond issue, Measure RR, that voters in the three-county district approved two years ago by a 70 percent margin. The “information campaign” for the bond included a video, featuring Golden State Warriors player Draymond Green, that the FPPC said was acceptable, while concluding that two other videos and text messages to voters were clearly advocacy.

BART paid a public relations firm, Clifford Moss LLC, $99,000 to craft its measure before the item was placed on the ballot, and the same firm then directed the supposedly independent campaign for the bond measure.

The FPPC acted on a complaint from Jason Bezis, a Lafayette attorney. It’s similar to complaints that have been filed about other local bond and tax measures, including those in Los Angeles County, by taxpayer advocacy groups.

After the FPPC acted, a BART spokeswoman, Alicia Trost, told the Bay Area News Group that the campaign errors were “accidental.”

“We have been and will continue to be committed to following the law,” Trost told BANG. “We accept their finding.”

While state law allows agencies to publish accurate information about their proposals, they are not allowed to advocate their passage, and that’s the line that BART and other agencies have obviously and arrogantly been crossing.

If they use public money for campaigns, they will, the FPPC implies, be treated like other financiers of political campaigns and be required to file reports. If they file such reports, however, they will be admitting, in effect, that they are violating the law prohibiting such spending.

That’s where the prosecutors should come into the picture. They should do their duty, enforce the law and seek personal fines from the officials involved. And the Legislature could, and should, invalidate any local measure that’s passed when those officials ignore the law.

olumnist for CALmatters. 

California Abandons Plan to Tax Text Messages

TaxesCalifornia regulators no longer plan to tax text messages.

The California Public Utilities Commission said a new FCC ruling prevented the state from levying a tax on text plans. The state hoped to add new monthly fees onto wireless customers’ bills to increase funds for programs that bring connectivity to underserved residents. Regulators were scheduled to vote on the measure on January 10, 2019.

The FCC put the text tax’s future in doubt when it issued a new rule on December 12 determining text messages constitute an “information service” — not a “telecommunications service.” CPUC commissioner Carla Peterman withdrew the text tax propsal “in light of the FCC’s action.”

Proponents of the FCC’s new rule say it will give carriers the ability to crack down on spam messages, and critics say it could lead to carriers censoring messages. The FCC did not immediately respond to a request for comment Sunday. …

Click here to read the full story from CNN

California Legislators Want to Tax Text Messages

Text messageA California regulator’s plan to tax texts in order to fund cellphones for the poor hit a snag Wednesday after a Federal Communications Commission ruled text messages aren’t subject to the utility agency’s authority.

The decision by the FCC, which categorized text messages as “information services” on par with emails and not “telecommunications services,” came in an effort to combat robo-texts and spam messages. The California Public Utilities Commission now faces an uphill battle ahead of a scheduled vote on the measure next month.

Those opposed to the planned tax hailed the FCC decision a victory.

“We hope that the CPUC recognizes that taxing text messages is bad for consumers,” Jamie Hastings, senior vice president of external and state affairs for CTIA, which represents the U.S. wireless communications industry, told The Mercury News. “Taxing this service would burden those who rely on and use this service each and every day.”

The CPUC has not yet commented on the FCC’s decision. The group is scheduled to meet next on Jan. 10 in San Francisco. …

Click here to read the full article from Fox News

Sacramento Tax Increase Proposal Represents Statewide Trend

TaxesThe Sacramento City Council vote to place a tax increase on the November ballot is representative of what we’ll see around the state in many localities: a call for more taxes to maintain basic services when in reality the money is needed to meet pension obligations.

In one sense the argument that the money is needed to maintain services is correct. Because greater pension costs will eat into the general funds of local governments, services provided by government will be cut because of reduced revenue. The problem is that officials promoting the tax won’t talk about pensions. 

What’s needed is transparency.

In Sacramento, the city council placed a 1-cent sales tax on the ballot to offset a ½-cent tax that is soon to expire. The new tax will be permanent. The tax is projected to raise $100 million, twice what the temporary tax now brings in. The new money is purportedly for specific projects but money is fungible and can be used where the city needs it—and the city needs to deal with rising pension costs.

(UPDATE: The current tax take from the 1/2-cent tax is actually $36 million. The $50 figure came about because of carryover money from previous year. A full penny is about $72 million. Thanks to Dan Walters at CALmatters for the correct information.)

The city budget speaks of the long-term difficulty Sacramento faces dealing with pension obligations. “The pension cost (normal cost and unfunded liability combined) in the General Fund alone is projected to be $134 million in FY2024/25 when the rate change is completely phased in. This reflects an increase of more than $66.9 million over the eight years which is a 99.6% cost increase from FY2017/18 to FY2024/25.”

Sacramento’s General Fund has increased about 25% from the 2009/10 budget to now from $385.9 million to $484.4 million. Even that steady increase cannot match what is needed to keep pace with the expected pension demands.

A tax increase is a way to meet the obligation but you won’t hear much about that when a campaign is mounted for the tax increase. At the council meeting approving the tax there was talk of maintaining basic services and supporting a plan that would confront multiple problems including homelessness, neighborhood investments, and job issues.

This formula is not exclusive to Sacramento. Many local governments must face pension costs that are burdening their General Funds and are turning to taxpayers for relief. By paying more in taxes the taxpayers have less to contribute to their own retirement costs.

The debate over these taxes should be truthful about the pension monster that is devouring local budgets. Once that happens more attention will be focused on how to deal with the problem.

ditor and Co-Publisher of Fox and Hounds Daily

This article was originally published by Fox and Hounds Daily

Taxing California: Highest in the nation and unstable, too

California’s major revenue sources have shifted over time. Until 1995, the biggest was property taxes. Today, it’s personal income taxes.

And California ranks fairly high in overall taxation: 10th highest both per capita and as a percentage of personal income, based on the latest available data from the U.S. Census.

In 2015, state and local governments collected $228.7 billion in taxes, including property, sales, personal and corporate income levies and a few others, according to the census. That’s in a state with more than 39 million residents and personal income worth nearly $2 trillion that year.

California’s taxes have risen in ranking partly because of voter-approved increases. In November 2012, the state passed a temporary hike in sales taxes of 0.25 percent and raised personal income taxes on the rich. Four years later, voters extended the income tax increase for 12 more years.

State tax

Gov. Brown and lawmakers also approved a 12-cent gas-tax hike in 2017 to help raise $5 billion a year for aging infrastructure. The measure includes increasing the annual vehicle fee between $25 and $175, depending on the vehicle’s value. …

Click here to read the full article from the Los Angeles Daily News

Nepotism scandal embroils recently gutted state tax board

Tax formSACRAMENTO – The California Board of Equalization was stripped of most of its powers over the summer, after a series of audits and news reports exposed myriad spending, accounting and management problems. But the renamed, and greatly diminished, tax agency continues to be the source of state audits and troubling scandal.

The latest comes in a special investigation report published last week by the State Personnel Board, an agency charged with enforcing California’s civil-service-related statutes. The report, prompted by anonymous complaints about the BOE’s hiring practices, found that the agency “has a large number of employees who have personal relationships with other BOE employees and work in the same department or division.”

The findings could lead to the dismissal of three state employees. It also poses deep challenges for the agency and its successors. Approximately 90 percent of the BOE’s 4,767 employees will continue doing their existing jobs under the auspices of a new Department of Tax and Fee Administration, which handles tax collections, and a new Office of Administrative Hearings, which will adjudicate tax disputes between businesses and the state.

The State Personnel Board’s survey found that 835 of these employees – comprising 17.5 percent of the former BOE’s work force – have “personal relationships” with other staff members. The board defined such relationships as “associations with individuals by blood, adoption, marriage, registered domestic partnerships or cohabitation.” The survey, the personnel board cautioned, did not capture the entire workforce, so that percentage could be higher or lower.

The numbers don’t tell the entire story, however. The report detailed several specific examples that were investigated as part of the audit, and which provide details about how such questionable hiring takes place.

In one investigated case, auditors looked at allegations that a tax consultant expert in BOE member George Runner’s office “used his position of influence to encourage the hiring of his son.” The son later voluntarily resigned the position. The report argued that “employees acted in bad faith by not intending to observe the spirit and intent of civil service laws” because the hire apparently “was the result of preselection.”

In another investigated case, the personnel audit found that the daughter of an assemblyman was allowed to submit an application for a public-information officer position even though her application was submitted after the deadline had passed. It stated that Board of Equalization Member Jerome Horton and his chief of staff had pushed for the daughter’s hiring even though “she received the lowest rating for the interview by both interview panel members.”

The Sacramento Bee identified the assemblyman as Jim Cooper, D-Elk Grove. The audit argued that the appointment was not made in good faith and called for “corrective action.” Horton told the newspaper that he was simply trying to assure that the assemblyman’s daughter was treated fairly – and didn’t learn of the hire until after the fact.

In a third case, the audit argued that the “voluntary demotion of an employee” from an information-officer position in the Sacramento office to an office technician in the New York office was improper. The report states that “the evidence overwhelmingly supports a finding” that the person’s transfer “violated civil service merit principles and the law.” That case involved BOE Member Diane Harkey and her office. The report called for the employee’s dismissal.

In yet another instance, the report found that a job applicant, whose spouse also worked for BOE, was hired for a position even though he had “not waited the requisite six months between exams.” The audit called for his appointment to be voided.

The report pointed to the significance of these specific incidents. Officials “observed that the culture of BOE was one in which board members and their staff and executives were perceived as having significant influence and power over civil service personal matters” and that “favoritism or perceived favoritism toward employees having personal relationships with other employees had a dispiriting and stressful impact on overall employee morale.”

The State Personnel Board report also found that the BOE engaged in a hiring rush right before the governor’s pension-reform law went into effect, as the Bee explained. The “findings identified deficiencies in 23 of the 27 recruitment packages reviewed” and deemed those 23 appointments to be “unlawful” for a variety of reasons, according to the report.

The new California Department of Tax and Fee Administration prohibits nepotism, which it describes as “favoritism by those with power or influence to appoint, employ, promote, advance or advocate for relatives or persons with whom they have personal relationship.” It states that this situation “is antithetical to merit-based personnel system.”

The rules are clear. And the report offers several specific correctives. The big question now is how the state will handle the broader matter – that such a large number of employees in its tax bureaus have “personal relationships” with other employees.

In his November 13 letter to the State Personnel Board, the tax agency’s director Nick Maduros largely concurred with the report’s findings, but said the agency is working on developing a “more complete and accurate picture of the extent of employee personal relationships moving forward.” He will work with the state human resources agency, CalHR, “to develop a corrective action plan” for relationships that run afoul of the new anti-nepotism policy.

In the meantime, the personnel board’s executive officer, Suzanne Ambrose, told the Bee that she expects more anonymous tips from other state agencies. This could be just the tip of a broad state-governmental scandal that goes much deeper than the dealings of a now-gutted tax agency.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected]

This article was originally published by CalWatchdog.com

Is California’s Tax Burden “Fair”?

TaxesA recent report by the highly regarded Calmatters.com found that the State of California has been on a “taxing binge” over the past few years, having enacted a whole slew of recent tax increases such as the “gas tax,” the “cap and tax” energy taxation scheme.

The Calmatters.com analysis found that the recent state tax increases “plus a slew of new local government levies and hikes in personal income and taxable retail sales, will raise total tax collections to just under $300 billion, or $50 billion more than they were just two years ago,” according to the report.

“Nearly $200 billion will go to the state and more than $100 billion to schools and local governments,” states the report, which concludes that California likely has the “highest” tax burden in the nation.   (Note:  As good as the original Calmatters.com revenue analysis is, there appears to be several major revenue sources excluded such as “fee” revenue, county revenue sources, and “special district” revenue to name a few.  Based on my rough estimations the total state and local burden is likely closer to $400 billion, possibly more, if “all” revenue sources are included) 

That puts the state’s total estimated tax burden at an estimated $300 billion, which is roughly 11.5% of the state’s economy, based 2016 California Dept. of Finance figures that peg the state’s total economic activity at about $2.6 trillion.

To put this into perspective, the federal budget recently approved by the Senate proposes about $4 trillion in spending, which is about 21% of the nation’s $19 trillion in estimated gross domestic product (GDP), according to figures produced by the Trump Administration.

It must also be noted that these figures fail to adequately account for significant “deficit spending” and “mounting debt” at all levels of government, which have the effect of pushing an increasing tax burden into the future.

Thus, while the federal government is considering a dramatic reduction in tax rates, California government continues on a “taxing binge.”

A new updated report by the California Taxpayers’ Association (Cal-Tax) found that the Democrat-run California Legislature has proposed “more taxes and fees in the first half of the 2017-18 legislative session than in all of 2015 or 2016,” states the report.

The Cal-Tax report found that California Democrat lawmakers have collectively introduced 89 proposals that “cumulatively would cost taxpayers more than $373 billion annually in higher taxes and fees,” states the report.

This “taxing binge” at the state level, has been copied at the local level of government in California in recent years with a record amount of tax and bond measures being proposed in the June and November 2016 elections.

According to a report by CaliforniaCityFinance.com, there was an “unprecedented” 452 tax increases and 184 separate bond measures placed on the November 2016 ballot by California local governments and school districts.  More than 80% of the local tax increases passed and more than 97% of the bond measures passed.

But these overall figures, don’t tell the whole story. The key policy questions that emerge are what are the factors driving this “acceleration” in the California tax burden? And how are California state and local governments spending all this additional tax revenue?

A third question that I believe must be asked yet often is not, is who is paying all these additional state and taxes?

As an expert in state and local finance, I have extensively studied the facts and evidence on all of these questions and drawn some overarching conclusions.

First, the key factor driving the recent “acceleration” in the state’s tax burden is “unchecked” and “unsustainable” increases in the “cost of government” in California at both the state and local levels.

The state’s “public employee pension crisis” is the biggest single driver of the “cost of government,” combined with significant baseline expenditure increases in current and retired public employee health care costs.

Given that labor costs typically compose more than 80% of public sector budgets, and more than 90% of the cost increases, the “cost of government” cannot be addressed without significant mitigation of public employee compensation cost increases.

Second, how are state and local governments spending this additional tax revenue?  This issue is connected to the first question and touches on perhaps one of the most disturbing trends in California public finance—this money is primarily being squandered on “unsustainable” increases in the cost of government, not on improving government services and infrastructure.

Unfortunately, the complex nature of public budgets makes it very easy to hide the nature and extent of cost increases.  But my overall conclusion is simple, the “driving forces” behind both the underlying “need” for the tax increase as well as the actual expenditures themselves are caused primarily by “unsustainable” increases in public employee compensation costs.

In short, baseline public employee compensation costs are rising at rates that far exceed average revenue growth for public agencies.  Based on my review of local and state budgets, during economic expansions stand and local revenue growth averages about 4-7% per year, compared to increases in public employee compensation costs that average between 10-25% of total agency costs.

Thirdly, who pays this increasing state and local tax burden?  This is also a complex question, but there is no question that the heaviest tax burden falls on average Californians and small businesses, particularly the poor.

A 2015 report by the California budget project, found that California’s lowest-income families pay the largest share of their income in state and local taxes, with the bottom 1/5 of all taxpayers paying 10.5% of their income in taxes.

Incidentally, these same low-income and poor families are paying nearly 70% of their income in housing costs, according to the California Legislative Analyst.

That is why the recent tax increases approved by the California Democrat Legislature are so “offensive” because they take a bad problem and make it even worse.

The $5-6 billion increase in the “gas tax” and vehicle fees is highly regressive, and so is the “cap and tax” scheme which creates a new energy tax burden that will be the heaviest on poorer individuals and families, along with small businesses.

As for the whole slew of local taxes, those also tend to fall disproportionately on “average” taxpayers, small businesses, and homeowners, as opposed to special interests who can afford to mount major opposition campaigns, thereby preventing such proposals in the first place.

Ironically, there continues to be calls for “tax reform” in California, but if you look behind these “tax and spend” efforts such as the “Make it Fair Campaign,” they all propose billions in additional taxes, particularly on individuals and small businesses.

But to truly make the state’s tax system “more fair,” that would require limiting future tax increases and lowering taxes on “average” Californians, homeowners, and small businesses.

Unfortunately, there are very few “well heeled” interest groups in Sacramento who are willing to champion that cause.

David Kersten is the president of the Kersten Institute for Governance and Public Policy—a Bay Area-based public policy think tank and consulting organization. Kersten is also an adjunct professor of public budgeting at the University of San Francisco. 

This article was originally published by Fox and Hounds Daily

GOP Tax Reform Boosts Wages According to Boston University Researchers

TAX REFORM UPDATE!!

Researchers at Boston University Agree!

In a study published this morning analyzing the economic and revenue impacts of the Republican “Unified Framework” Tax Plan, researchers found:

  • The new Republican tax plan raises GDP by between 3 and 5 percent and real wages by between 4 and 7 percent.
  • This translates into roughly $3,500 annually, on average, per working American household.
  • The source of the increase in U.S. output and real wages is the UF plan’s reduction in the U.S. marginal effective corporate tax rate from 34.6 percent to 18.6 percent.
  • According to their model, the U.S. corporate income tax represents a hidden tax on U.S. workers.

Click here to go directly to the study

Corporate Tax Reform and Wages: Theory and Evidence

New analysis from the Council of Economic Advisers proves:

  • Reducing the statutory federal corporate tax rate from 35 to 20 percent would increase the average household income in the United States by, very conservatively, $4,000 annually.
  • The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000 à The most optimistic estimates from literature show wages could boost more than $9,000 for the average household.
    • A 15 percent corporate rate cut could increase average household incomes from $83,143 in 2016 to between $87,520 and $92,222.
    • Median household income — meaning earnings for more of a typical household — would rise from $59,039 to between $62,147 and $65,486.
  • Literature finds countries with low corporate tax rates have seen higher wage gains than countries with high corporate tax rates.

Click here to link to study in its entirety