Time to Re-Think the California Tax Structure?

TaxesIncome taxes are due today, which should give us pause to think about the state’s rickety tax structure built on a narrow foundation of a few high end taxpayers. ForgetAboutIt! Hardly anyone seems to care, not while the current tax system is raining dollars into the state treasury like manna from heaven.

The latest figures from State Controller Betty Yee’s office show nearly $62 billion has been collected in personal income tax through March with the biggest hit yet to be calculated through the month of April. The March figure was already 3.1% more than anticipated by Governor Brown’s budget, and the overall collection of personal income taxes is over $7 billion ahead of last year’s collection on the same date at the end of last week.

The personal income tax last year provided nearly 68% of all General Fund revenues, with the top 1% of the state’s taxpayers providing about 50% of those funds.

With the help of a tax increase on those high end taxpayers Gov. Brown helped drive through at the ballot, he has seen a 45% increase in the state budget since he took office with this year’s budget enjoying billions in reserves and surplus.

In such an intoxicating fiscal environment, who wants to try to rearrange the feathers on the Golden Goose?

But that is something that needs consideration. Relying on high-income taxpayers to anchor the state budget comes with both the potential for dramatic revenue growth that the state has witnessed in recent years, but also the volatility of depending on this group of big earners. In down economic times, the state budget takes a dive.

Controller Yee authorized a council of advisors to study the problem of reforming the tax system and they produced a document in June 2016 titled Comprehensive Tax Reform in California, A Contextual Framework. The first criticism of the current tax system Yee’s advisors highlighted was volatility brought on because the state relies so heavily on high-end personal income taxpayers who take a big hit during economic downturns.

As I have noted previously: Many interests are comfortable with what they’ve got with the current system and don’t want to change. Voters tend not to like tinkering with the tax system they know, fearing what they might face with a new tax structure. When times are relatively good, no one wants to make drastic changes. All this adds up to inertia on tax reform efforts while waiting for the next economic downturn that provides proof that the tax structure is not working well.

So we merrily roll along during these flush times. Gov. Brown has warned what will happen when the next recession hits California hard. While he has put money into rainy day reserves to counter the negative effects on the budget, a hard downturn would still likely put the state’s budget underwater.

Brown will say, “I told you so,” yet he didn’t spend any political capitol to try to re-do the tax system. No question, it will take a Herculean effort and may only be forced on a governor and legislature during a time of crisis, much as the current tax structure was created during the Great Depression.

In the meantime, the state officials and interest groups will fight about how to spend all that manna.

ditor and co-publisher of Fox and Hounds Daily

This article was originally published by Fox and Hounds Daily

Enemies of Prop. 13 Delay Attack on Iconic Initiative

property taxA reporter for the Bay Area News Group stopped by the government office in Santa Clara County and concluded that while people standing in line to pay their property taxes were upset with the heavy burden, they had scant knowledge of California’s iconic Proposition 13. What most were probably unaware of is that their taxes would be at least twice as high without Prop. 13.

Many people who live in California today were not here in 1978 when Proposition 13 was passed overwhelmingly by voters. Today’s younger homeowners have little idea how frightened and angry citizens were in the mid-1970s when their property taxes doubled or even tripled from the previous year.  Homeowners were literally being taxed out of their homes.

But despite having no personal memory of the pre-Prop. 13 era, most Californians have at least heard of Proposition 13 and, when prodded, recall it somehow helps to keep escalating property taxes in check.

In June, Proposition 13 will hit its 40th birthday. While long-time homeowners will surely celebrate, those in government with an insatiable appetite for taxpayer dollars are hoping that voters will be ready to weaken it.  But previous attacks on Proposition 13 have come up short. At most, Prop. 13 was weakened by court decisions involving fees and charges as well as attacks on the two-thirds vote requirements.  But those attacks were quickly countered by subsequent ballot initiatives such as Proposition 218 in 1996, the Right to Vote on Taxes Act, which reinforced Prop. 13’s original intent.

Knowing that a direct attack on Proposition 13’s protections for homeowners is a fool’s errand, the tax-and-spend interests have focused on raising property taxes on business property. This so-called “split roll” effort has gone on for about 30 years and has never really gained any serious traction. According to these interests, 2018 was going to be the year where they would finally be able to take a big chunk out of Prop. 13 by hitting commercial real estate with several billion dollars in higher taxes.

The optimism displayed by Proposition 13’s detractors has been based in large part on the expected “blue wave” of voters coming out in support of progressive candidates. Liberal Democrats believe, rightly or wrongly, that voter disgust with the Trump administration might at least allow them to regain control of the U.S. House of Representatives. The thinking, at least until recently, has been that November of 2018 would be the right moment to fracture the pro-Proposition 13 alliance because of an energized progressive base, low voter turnout and fading memories of 1978.

But a funny thing happened on the way to the ballot box. After beginning a serious effort to collect signatures for their “split roll” initiative, the proponents have taken their foot off the gas and announced that, instead, they will attempt to qualify the measure for the 2020 ballot. The ostensible reason for the delay is that it would give them more time to expand their coalition (of course, the same can be said for Prop. 13 defenders) and that the voter turnout model in 2020 would be better for them – a dubious claim indeed.

Split-roll proponents might be having second thoughts about what they thought was a weakening of support for Prop. 13 or the political strength of their own coalition. Perhaps they’ve seen polling – both private and public – revealing Proposition 13’s continued popularity. Whatever the reason, this November’s election will not present a direct threat to Proposition 13. …

Click here to read the full article from the Orange County Register

Local Tax Hikes Are Cleverly Packaged

TaxesOver the past few years, voters in hundreds of California cities and other local governments were asked to pass tax increases, and indications are that another big batch of local tax measures will be on this year’s ballots.

All but a handful of the previous tax hikes were approved, although one failed sales tax, in Coalinga, was unique. It lost by just 33 votes because of an overwhelming vote against it by residents of Coalinga State Hospital, an institution for the mentally ill, who apparently didn’t want prices to rise for their personal sundries.

One could conclude that the high passage rate for most cities reflects voters’ faith that those they elected to city councils and other governing bodies would spend the additional tax revenues wisely.

Perhaps so, but they also reflect some very clever, even propagandistic, packaging of the tax proposals by political consultants who boast of their ability to overcome resistance to such measures.

Local governments cannot, by law, directly finance campaigns to win voter approval of new taxes. However, local officials can – and quite often do – hire consulting firms to test voter sentiment in advance, design tax proposals to give them the best chance of winning approval, and design supposedly educational mailers and other materials that portray the taxes in positive terms.

How far they can go without running afoul of the law is uncertain. The California Taxpayers Association accused one city, Carson, of stretching the law last year by publishing a “full-color campaign-style mailer” to pass a special tax on the local oil industry.

One of the leading consulting firms, The Lew Edwards Group, claims to have helped enact tens of billions of dollars in local tax increases, saying in one presentation it would provide “accurate, on-point public opinion research that effectively assesses your constituents for their attitudes and practices” and “nationally recognized, award-winning public agency communications materials.”

Passing local tax measures has become big business, and California voters will face another barrage of proposals this year because cities are facing unprecedented fiscal crises, born mostly of rapidly increasing demands by the California Public Employees Retirement System (CalPERS) for more money to shore up its shaky finances.

However, based on how these local tax measures have been packaged by Lew Edwards and other consultants in past years, this year’s voters won’t be told that more of their money is needed for pensions, because that wouldn’t sell very well.

What does sell, according to the polling that Edwards and others conduct, is “public safety,” along with fixing local streets and roads. Therefore the demands for more pension funds are typically reconfigured in tax proposals as bolstering police and fire protection.

It’s a half-truth because the biggest drivers of pension spending are benefits for police officers and firefighters. Their pensions can approach, or even exceed, 100 percent of their salaries, and they are costing close to 50 cents for every dollar of salary now, and costs are still rising.

Typically, too, the “public safety” mantra is amplified by campaigns financed by public employee unions. Or, as one how-to article in a public agency management publication put it, “The city’s message needs to be supported by a political side that doesn’t have the same advocacy limitations a city does.”

As the local tax wave continues to build, it will eventually hit some limits, not only because voters’ appetites for paying more are finite, but because state law caps the combined sales taxes of all local agencies to two cents per $1 of purchases.

The wave could flatten, too, if the underlying pension costs that are driving tax proposals get more media and public exposure.

olumnist for CALmatters

Tax agency rejects 4-cent gas tax increase

Gov. Jerry Brown’s office has to find another $617 million for his next budget because a tax-collecting agency he gutted last year has used some of its waning authority to reject a 4-cent increase in fuel taxes.

Normally, the Board of Equalization’s annual requirement to set fuel tax rates is almost automatic. It has tweaked recommendations, but it has not rejected them.

This time, two Board of Equalization members said they did not want to hike fuel taxes so soon after the Legislature’s adoption of a separate 12-cent per gallon gas tax that took effect in November.

“I’ve never voted for a tax increase on gasoline for my constituents. It hurts them,” said board member Diane Harkey, a Republican who is running for Congress. …

Click here to read the full article from the Sacramento Bee

Seven initiatives to watch that threaten California prosperity

VotedVoters may face as many seven ballot measures damaging to California’s business and political climate in November. Any one of these measures should motivate millions in opposition spending by affected industries. More than a few are likely to qualify for the ballot.

Conventional wisdom teaches that gubernatorial elections deliver older and more conservative voters to the polls, which normally drives liberal and anti-business initiative entrepreneurs to aim their measures for presidential election years, like 2016 or 2020. But this formerly reliable rule has crumbled in the face of a low qualification threshold, interest group imperatives, and impatient wealthy donors. It’s open season on the deep pockets!

Increase taxes

In 2016, California voters extended top income tax rates (already the highest in the nation) through 2030, increased tobacco taxes by $2-a-pack, and imposed new taxes on marijuana use and production. Elsewhere, voters in hundreds of local jurisdictions raised sales, property and excise taxes for a variety of municipal or school services.

For certain unions and special interest groups, this isn’t enough. Two proposed ballot measures would impose multi-billion-dollar tax increases on businesses and upper income earners.

The United Healthcare Workers union has proposed a one-percent income tax surcharge on all income over $1 million, which would raise up to $2.5 billion annually for various health care programs. Wealthy taxpayers would pay a top rate of 14.3%, well above the highest income tax rate of any other state.

A coalition of liberal interest groups is circulating a split roll property tax proposal, requiring that nearly all commercial and industrial properties, except production agriculture, be assessed to full market value, and then reassessed every three years thereafter. Tax bills for business would increase by $10.5 billion a year.

Worsen housing crisis

California’s notorious housing shortage contributes to many social ills, including poverty, long commutes, air pollution, and flight of middle class jobs and job seekers. Tenant advocates, backed by the head of the Los Angeles AIDS Healthcare Foundation, are circulating a proposal that would exacerbate this shortage by repealing long-standing limitations on rent control.  Far from alleviating the housing shortage, this proposal would simply allow local politicians to benefit some existing renters at the expense of future renters and homeowners.

Regulate industries

A measure purporting to improve consumer control over personal internet privacy promises to be among the hardest fought and most expensive ballot battles. A San Francisco investor proposes requiring businesses to provide to consumers upon request a copy of any personal information it has accumulated and allows consumers to opt-out any or all collection of their personal information – even if not personally identifiable. This measure undermines widespread business models in the industry and likely reduce many services now available to internet users.

United Healthcare Workers is also soliciting signatures for a measure to establish price controls for privately-operated kidney dialysis treatment. Intended to create leverage on dialysis clinics to increase unionized staff, passage of the measure would increase overall costs by shifting dialysis treatments from clinics to more expensive venues like emergency rooms or hospitals.

Stall economic development

For more than two decades, excise taxes on California gasoline and diesel remained flat, contributing to the erosion of purchasing power of those tax revenues and creating a backlog of maintenance and operational improvements for roads and highways. In 2017, the Legislature and Governor agreed on a $5 billion annual boost in transportation revenues to repair roads and bridges and add capacity in some of the most congested corridors.

A San Diego politician has proposed repealing the excise tax increases and subject future increases to statewide voter approval, which would freeze in place hundreds of planned transportation improvements throughout California, without a plausible replacement revenue stream.

Disrupt state governance

A Silicon Valley millionaire is again attempting to qualify a measure to break apart California, this time into three separate states, centered on the Bay Area, Greater Los Angeles and San Diego/Orange County, with the rural area divided among the new states. The new states would obviously create new and unpredictable winners and losers – economically, socially and politically. Rather than working to knit the fabric of our state more tightly together, this proposal would tear it apart.

Initiative proponents will begin submitting petitions to counties in May for signature verification. It is not too soon to begin educating affected business and industry leaders about the consequences of these proposals.

resident of the California Foundation for Commerce and Education.

This article was originally published by Fox and Hounds Daily

Corporate Tax Increase Would Stifle Economic Progress in California

Shortly after Governor Jerry Brown proposed a state budget that includes record reserves, the state controller reported that revenue is beating projections by a healthy margin, and state officials announced that California’s unemployment rate is at its lowest level since the current record-keeping format was adopted 42 years ago.

In short, this is the best fiscal shape that California has been in for many years.

The revenue boom is particularly good news, as it provides funding to improve critical programs and services without increasing tax rates.

The state government’s total revenue for January was $2.37 billion (15.8 percent) more than estimated in the governor’s 2018-19 budget proposal. Personal income tax revenue in January was $2.25 billion (16.9 percent) higher than projected, and corporate income tax revenue was $211.3 million (62.1 percent) higher than projected.

Unfortunately, several state lawmakers have come forward with proposals that would throw a wet blanket on this progress by discouraging businesses from hiring and making investments in California.

taxesOne of the worst offenders is Assembly Constitutional Amendment 22, which proposes one of the largest tax increases in state history – a plan that would hit California employers with the highest effective corporate tax rate in the United States. The measure would impose a 10 percent tax on many employers, in addition to the existing state corporate tax rate of 8.84 percent, in effect imposing an 18.84 percent tax on employers. California already has the highest corporate tax rate among the Western states, but ACA 22 would give California the highest rate in the entire country, thereby increasing the incentive for our businesses to take their jobs and operations to other states.

Why would anyone consider a tax increase that would put the jobs of more Californians at risk? Why would anyone propose a tax increase when tax revenue already exceeds expectations?

Supporters of the tax hike say it’s no big deal because California businesses will benefit from federal tax reductions, so a tax increase would be “revenue-neutral.” This political spin fails under even the most cursory examination. If California negates the benefits of federal changes, and the other 49 states don’t, businesses will move to the states that aren’t trying to neutralize them.

Even without the tax hike, our tax structure places California at a significant disadvantage in the worldwide competition for jobs. Many businesses have left, and others are packing up the moving trucks.

For example, as the Golden State promotes the use of electric vehicles, a major manufacturer of lithium batteries is in the process of leaving Riverside and taking its work to the Appalachian region of Kentucky. The Associated Press reported in December: “EnerBlu Inc. announced it will invest $372 million and create 875 full-time jobs in eastern Kentucky with the production facility in Pikeville. The company also will move its headquarters from Riverside, California, bringing another $40 million investment and 110 administrative, research-and-development and executive jobs to Lexington, Kentucky’s second-largest city.” The plant will manufacture rechargeable batteries used in transit buses, trucks and other vehicles.

California workers losing green jobs to Kentucky? There couldn’t be a clearer sign that California needs to improve its business climate. At the very least, we should be wary of anything – like a massive tax increase targeted directly at California employers – that would jeopardize our recent economic improvements.

CalTax Legislative Advocate.

This article was originally published by Fox and Hounds Daily

Californians Looking For Florida Homes Due To New Tax Law

By now you probably know that the 2017 Tax Act significantly limited the deduction of state and local taxes against your federal income.  For most Americans — particularly ones in low-tax states or states with no income taxes — these new rules will have little effect on your life.  For high-income individuals in high-tax states, they will suffer dearly from this policy.  There has been speculation of how many will relocate.  How bad will the impact be to the states they are leaving?  That is another question.

We do not know how many people will leave states like New York, Connecticut or California.  We do know that the states they will potentially leave will be severely impacted because the high-earning taxpayers pay a significantly high percentage of the income taxes in these states.

This question hit me square on when I had a chance to interact with a hedge fund operator in a semi-business occasion.  He found out I was a CPA specializing in taxes and he immediately launched into a discussion about how the tax law was going to hit him. He is getting hit two ways because his federal income is going to be taxed at higher tax rates due to the new carried interest rules.  Also, the voluminous taxes he pays the state of California will no longer be deductible. He told me everyone he knew spent their Christmas break looking for houses in Florida – a no income tax state. …

Click here to read the full article from Townhall

California is collecting so much of your money it can’t save it all

California’s swelling budget reserves are approaching a point where the state by law can’t save any more money ‑ but don’t expect a tax rebate.

The state is quickly filling up its so-called rainy day fund, the budget stabilization account voters created in 2014 when they passed an initiative that forced lawmakers to save money in flush years. Gov. Jerry Brown’s budget proposal puts the state on pace to fill it with $13.5 billion by July 1, 2019, but the milestone could come even sooner.

By law, the fund can only hold 10 percent of the state’s projected general fund revenue as a hedge against the cuts that would come in a recession. Any additional revenue has to be spent on infrastructure.

If the revenue keeps pouring in, Legislative Analyst Mac Taylor told senators earlier this month they’ll have a lot of options. The money “will be there for you do whatever you want to do with it, build reserves, tax cut, whatever you want to do.”

But, in one of those only-in-California budget formulas, filling the rainy day fund presents a different kind of problem for legislators. …

Click here to read the full article from the Sacramento Bee

Public Radio Admits: Trump Tax Cut Good for Middle & Low Income in California

donald-trump-3A story by Southern California Public Radio station KPCC last week appeared to admit that President Donald Trump’s $1.5 billion tax reform is best for middle and lower income households.

During the months leading up to the tax cut, public radio and television railed away that Republican tax reform would be a massive giveaway to the wealthy, paid for by the middle and lower households. KPCC public radio reported polling that only one in three voters supported the bill.

Citing the supposedly non-partisan Congressional Budget Office (CBO), PBS News Hour gravely warned that all taxpayers with annual incomes under $75,000 would become tax losers over the decade long life of tax reform. Individuals with $1 million incomes were predicted to receive an immediate $59,615 a year tax cut windfall, while poor Americans making less than $20,000 per year would suffer losses that would grow from $48 in 2019 to $788 a year by 2027.

But CBO has had dismal track record estimating public spending and government deficits. CBO in 2010 infamously presented a 36-page financial justification to Speaker of the House Nancy Pelosi assuring that Obamacare would reduce federal deficits of $143 billion over the next decade. By 2012, the CBO was estimating that Obamacare’s spiking healthcare insurance premiums would increase the deficit by another $820 billion.

KPCC recently engaged Los Angeles-based H&R Block to break down what the Trump “tax changes have in store for a group of Southern Californians,” ranging from “low-income grad students to highly paid professionals.”

Based on 2016 tax returns, H&R Block found that the impact of tax reform resulted in:

  1. LOW INCOME = grad student Christine Vega, earning $23,446, would receive a refund increase of $400;
  2. MEDIAN INCOME = Megan and Marlee Malone-Franklin, who together made $69,192 by operating a small business called Hero Birth Services, received a tax cut of $1,497;
  3. UPPER INCOME = Rosa Castro earned $140,468 as a board administrator at the Metropolitan Water District and received a tax increase of $4,076; and
  4. TOP 1 PPERCENT EARNERS = Mary Ellen and Mark Glackins, making a mid-six figure income as corporate executives, received a tax cut of only $1,919.

The main reason that the upper and highest income households received very small tax cuts in comparison to the lower and median income households is the former’s legal gaming of the tax code by upper income earners, who could take huge amounts of deductions to lower the effective tax they paid drastically.

In 2016, Castro took $57,875 in itemized deductions, and the Glickins took $103,627 in itemized deductions. But deductions for state and local income, sales and property taxes is now capped at $10,000 under the new rules, plus deductions of unreimbursed job expenses were terminated. In 2018, Castro will lose about $22,584 of her federal deductions and the Glickins will lose $59,408 in deductions.

H&R Block’s Aaron Martinez said that although critics claimed that Trump’s tax reform would only benefit the rich: “The new rules don’t always give much back to highly paid workers in a state like California. They pay higher state income taxes than residents in other states, and now their ability to deduct those taxes will be capped.”

This article was originally published by Breitbart.com/California

IRS could easily block Democratic scheme to increase CA tax deductions

Tax formDemocratic state lawmakers’ interest in pursuing an unprecedented plan to minimize the hit that California’s high-income residents face because of the federal tax overhaul’s $10,000 cap on deductibility of state and local taxes may be losing momentum – undermined by strong warnings from Treasury Secretary Steven Mnuchin, who oversees the Internal Revenue Service, and by a new analysis that says the IRS could easily squelch the maneuver.

Senate President Pro Tem Kevin de Leon, D-Los Angeles introduced Senate Bill 227 early this month. It would allow the estimated 6 million Californians who itemize their federal income taxes to effectively continue to write off state and local tax deductions in excess of $10,000 by allowing them to pay their state taxes to a state charitable foundation, the California Excellence Fund.

Tax experts note that states have long allowed tax deductions for charitable donations and say de Leon’s ploy is protected by the fact that tax laws are traditionally subject to stricter interpretation than most federal laws because of concerns that a rogue IRS could target individuals or companies it didn’t like.

Democratic lawmakers embraced de Leon’s proposal, saying the move would allow the 6 million state taxpayers who itemize deductions to save an average of more than $8,000 a year.

Washington Post: California shows how to take on Trump

But after Washington Post coverage of the legislation asserted it could create a “national boilerplate for skirting Trump tax changes,” the Trump administration took notice of what California was up to.

Politico reported that Mnuchin called the proposal in California and similar proposals in other high-tax states “ridiculous.” Mnuchin emphasized that the IRS was allowed to decide what qualifies as an IRS-recognized charity.

“Let me just say again from a Treasury standpoint and IRS, I don’t want to speculate on what people will do, but I think it’s one of the more ridiculous comments to think you can take a real estate tax that you are required to make and dress that up as a charitable contribution,” Mnuchin told reporters at the White House. He described the ploy as an obvious attempt by states “to evade the law.”

Mnuchin’s comments were backed up in a report by the Washington, D.C.-based Tax Foundation.

“This proposal, while interesting, is fairly obviously in violation of existing law and jurisprudence,” wrote veteran tax analyst Jared Walczak. “Just because the IRS has not consistently cracked down on some minor efforts here and there does not mean it would turn a blind eye to a concerted effort to contravene the tax code by providing a contribution in lieu of taxes program.”

Walczak warned state lawmakers that when it comes to de Leon’s Senate Bill 227, the IRS could readily thwart it under precedents that allow it to block deductions for charitable donations if the agency concluded there was no “charitable intent” to the donations.

Given that de Leon and other backers of the bill have openly described it as being designed to reduce Californians’ payments to the U.S. Treasury, lawyers defending the bill if it became law and was rejected by the IRS would face a difficult task: making a plausible case that a “charitable donation” that was undertaken with the goal of reducing an individual’s or family’s tax obligations meets the requirements set by the IRS for allowable charitable deductions.

The latest IRS overview of which deductions are allowed – Publication 526, released in 2016 under the Obama administration – doesn’t seem to allow such self-serving deductions.

It says that for a donation to qualify for a deduction, it must be “made without getting, or expecting to get, anything of equal value. … Qualified organizations include nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.”

This article was originally published by CalWatchdog.com