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 sgreenhut@rstreet.org.

This article was originally published by CalWatchdog.com

Could high taxes and crime push California voters to a tipping point?

VotingDespite changing demographics and a sharp veer to the ideological left, is it possible that California could take a political trip back to the future as two staples resurface that drove the state’s politics in the more conservative 1980s and 1990s? Look around and you’ll see indications that even in this liberal bastion on the left coast, the issues of taxes and crime are stirring again.

From the time when cinema’s Doc Brown (Dr. Emmett L. Brown, ably played by Christopher Lloyd) was sending his flux-capacitor equipped DeLorean back in time to today’s California run by Jerry Brown — a past-and-future character if there ever was one — attitudes on the issues of taxes and crime seemed to have shifted dramatically.

Considering recent evidence, one might think that the tax issue has faded from the conscience of Californians, most of whom were not around when the state’s voters kicked off a national tax revolt that helped propel Ronald Reagan to the presidency by overwhelmingly passing property tax-cutting Proposition 13 in 1978.

In a Wall Street Journal piece from a year ago leading up to the 2016 election, I asked, “Nearly 40 years later, many Californians are wondering: Will the tax revolt mind-set die where it all began?”

After all a measure on the 2016 ballot (Proposition 55) extended the highest-in-the nation income tax that voters put in place just four years previously; a cigarette tax passed, as did many local taxes and bonds.

This year’s legislative session included a gas tax increase, the cap-and-trade extension, which many call a tax increase because it raises revenue for the government to spend, and a document tax to fund housing issues. This legislative session probably produced the most pro-tax successes since the 1935 legislature created both a state income tax and a vehicle license fee.

Yet all this tax activity may be driving voters to a tipping point to say enough!

The first indication is the California electorate’s sour reaction to the gas tax. In a University of California Berkeley Institute of Governmental Studies poll conducted after the gas tax increase became law, 58 percent opposed the gas tax, 39 percent solidly opposed. The twelve-cent a gallon tax will not even be collected until November. The negative reaction to the tax seen in the poll likely would increase once the tax adds to the price of gasoline at the pump.

The test of new California resistance to taxes could well occur in November 2018. Two measures to repeal the tax have been filed. A gas tax repeal measure could rally Republican voters to the polls during the general election, especially if no Republican makes the runoff for either of the state’s high-profile offices, governor and United States senator. Since the state’s Republican Party is said to be behind one of the repeal initiative proposals,  polling shows that this is a powerful issue among voters. In addition a Southern California state senator, Democrat Josh Newman, is facing a recall effort centered on his gas tax vote.

The heated debate over extending cap andtrade to reduce greenhouse gases centered on the additional costs that would be felt by California consumers. The word “tax” would have dominated were a word cloud image created over word use frequency during the cap-and-trade debate. Increased costs generated by cap-and-trade demands were labeled a hidden tax.

California citizens have yet to feel the additional costs that the cap-and-trade measure might add—anywhere from fifteen- to seventy-three-cents per gallon of gasoline over time, according to the state’s legislative analyst.

If the gas tax repeal makes the ballot, an interesting political dynamic will play out in defense of the tax. A campaign to preserve the tax would likely have the greatest financial support. The tax was supported by both labor and big business. They argued that California’s economy depends on improved transportation and updated roads and highways. Business also supported the cap-and-trade bill, fearing if it were defeated an unelected California Air Resources Board would put a tougher, command-and-control greenhouse gas restriction in place.

The individual voter who pays the freight of the gas tax increase, additional car fees, and increased costs linked to the cap-and-trade law, however, may want to use the gas tax repeal initiative to send a message.

A rejection of the gas tax increase would certainly be a marker that as liberal as Californians have become, there is still a conservative streak when it comes to taxes and a potent issue from the past could return.

Meanwhile there is the issue of crime—like taxes, also on the rise. A backlash is stirring to changes backed by criminal reform efforts in the legislature and on the ballot.

In response to a court order to reduce prison populations, Governor Jerry Brown championed AB 109 in 2011. Under so-called realignment, certain low-level offenders were moved to county jails from state prisons. In many instances, overwhelmed local jailers were forced to release prisoners from their jails to make room.

Along came two ballot measures, Proposition 47 in 2014 and Proposition 57 in 2016, that downgraded a number of felonies to misdemeanors and fast-tracked the parole process for felons convicted of nonviolent crimes.

Efforts to reform the justice system and reduce prison overcrowding prompted the law changes. Voters are sympathetic to efforts allowing prisoners to achieve rehabilitation. Voters passed both ballot initiatives despite major opposition from the public safety community.

The combination of laws, however, has the law enforcement community warning of a rise in crime with little ability to curb it. Property thefts, forgeries, frauds, illegal drug use, and more under $950 are labeled a consequence-free crime because few arrested for such crimes serve any time, and perpetrators are aware of the situation.

According to a release from the Association of Los Angeles Deputy Sheriffs, “Prop 47 has created a criminal culture where criminals know they face little, or far lesser, punishment for their crimes. Following the passage of AB 109, nearly 25 percent of jail space that could house criminals serving local sentences for property or violent crime is now occupied by those shifted from state prison to local jails to serve their time.”

Law enforcement officials reveal increases in crime as a result of the new laws, but it is the consequences on the street and in people’s lives that have changed the tone of the conversation. If you’re not convinced, take a look at neighborhood websites with constant chatter about break-ins and suspicious activity and how to set up alarm systems and security cameras.

In Sacramento a growing number of neighborhoods fed up with petty crime pooled money to hire private security for public streets. In the inland empire, vehicle thefts jumped from ninth in the nation to fifth in just one year. In the west San Fernando Valley, gang activity has increased 63 percent in two years. A number of California cities are joining in an effort called Taking Back Our Community, a coalition of local governments dedicated to public education and community advocacy surrounding the unintended adverse public safety impacts of recent changes to California’s criminal law.

This surge of activity recalls another time in California history when crime became a major policy and political issue. As noted California historian Kevin Starr wrote in his book, Coast of Dreams, California on the Edge, 1990–2003: “In 1980, California had fewer than 25,000 inmates in a dozen prisons. By January 1998 there were some 154,000 prisoners in 33 prisons.” Californians elected two governors in succession who were tough on crime. Republicans George Deukmejian and Pete Wilson occupied the corner office in the capitol for much of the 1980s and 1990s.

In his first inaugural address in 1983, Deukmejian said, “All the prosperity in the world will not make our society better if our people are threatened by crime. Therefore, it will be the highest priority during my administration to provide all the leadership I can to make California safe again.”

Wilson’s 1994 State of the State Address was one of many to pinpoint the crime issue. He called for get-tough measures against dangerous felons and repeat criminals. He also called for bills that would put three-repeat felons behind bars for good.

The legislature responded by passing a three-strikes law in March, but the people did them one better supporting a three-strikes ballot measure (Proposition 184) in November 1994 that received nearly 72 percent of the vote.

But the crime pendulum shifted with Propositions 47 and 57.

In a Sacramento Bee op-ed published a month before the November 2016 election in hopes of stopping Prop 57, which Wilson argued gutted the three-strikes law, he wrote, “The three-strikes initiative approved in 1994 and other sensible crime- control laws prevented millions of Californians from becoming crime victims. It would be gross dereliction of duty to discard laws that have provided us protection of such proven effectiveness.”

This time he was not as persuasive.

But now that the effects of the crime reform initiatives and state laws are being tallied, that pendulum may be moving back again. Will state politics follow?

Certainly California is in a different place today than three and four decades ago, but growing unease can be detected about the tax and crime issues that dominated politics in that era.

Let’s just say that Jerry Brown, rather than Doc Brown, would recognize the modern social-media terminology associated with the taxes and crime in California.

They’re trending.

ditor and Co-Publisher of Fox and Hounds Daily

Originally published in EUREKA, Stanford University’s Hoover Institution’s online magazine.

California’s High Pot Taxes – A Teachable Moment

Buds are removed from a container at the "Oregon's Finest" medical marijuana dispensary in Portland, Oregon April 8, 2014. Over 20 Oregon cities and counties are moving to temporarily ban medical marijuana dispensaries ahead of a May deadline, reflecting a divide between liberal Portland and more conservative rural areas wary about allowing medical weed. Portland, Oregon's largest city, already has a number of medical marijuana clinics and has not moved to ban them. Picture taken April 8, 2014. REUTERS/Steve Dipaola (UNITED STATES - Tags: DRUGS SOCIETY POLITICS HEALTH) - RTR3KMHE

Do higher tax rates affect human behavior?

As the nation considers tax reform, according to a report, taxes on pot in California could reach as high as 45% for the consumer. Combined with the slew of regulations on the way, suddenly the libertarian fervor of buying and selling pot doesn’t seem so, well, free.

The question is: Will those pushing for the sale of pot and those buying, finally get a lesson in basic economics?

In 2016, California voters legalized the sale of recreational pot.  Many voters felt they were striking a blow for personal freedom with their vote. Since that day, all levels of the California governments have been coming to grips with how to implement the voter’s choice.  Of course, that really means how to regulate the sales and how to tax those sales.

Keep in mind that, at the time of the vote, California already had the largest pot market in the country – although its size is disputed because most of the market is illegal sales. Some have said, that as of 2015, “California  . . . has the largest legal cannabis market in the U.S., at $1.3 billion.” On the other hand, others have reported that over $7 billion in illegal crop has been seized in California. Given the Feds think they seize only around 10% of the illegal crops, you can see how large the market could well be.

On the regulatory front, local governments are setting the bar for obtaining local licenses, while at the state level, something called the Bureau of Cannabis Control, claims it is “the lead agency in developing regulations for medical and adult-use cannabis in California. The Bureau is responsible for licensing retailers, distributors, testing labs and microbusinesses.”

Little wonder that Time reports that “Operators have complained about what they see as potential conflicts in various laws and rules, or seemingly contradictory plans.”

As for taxes, a Fitch Ratings report taxes on pot may reach as high as 45% in parts of the state.

“Consumers will pay a sales tax ranging from 22.25% to 24.25%, which includes the state excise tax of 15%, and additional state and local sales taxes ranging from 7.25% to 9.25%.” Beyond that, “Local businesses will have to pay a tax ranging from 1% to 20% of gross receipts, or $1 to $50 per square foot of marijuana plants, according to the Fitch report. In addition, farmers will be taxed $9.25 per ounce for flower, and $2.75 per ounce for leaves.”

Welcome to the freedom to smoke marijuana in California. It turns out that freedom isn’t free in route to the State’s desire to collect over $1 billion in taxes.

As this unfolds, the question remains whether California consumers, regulators and legislators will study the effects of the high taxes and costs of those regulations.

Let me help them. As Calvin Coolidge would say, high taxes are not paid – they are avoided.

The evidence of that is everywhere.  As my colleague at Forbes.com, Brian Domitrovic, recently wrote: “In the 1950s and early 1960s, IRS data was clear that the 91% marginal rate produced essentially no revenue, that about 80% of earners who should have been subject to it by ordinary definitions legally avoided it. Same thing for 70% in the 1970s and 50% in the early 1980s.”

Even the Democrats who oppose tax reform know that when they tell you that the current top corporate tax rate is meaningless because the “effective” corporate rate is lower.  Corporations that can avoid that high tax by taking legal deductions.*

But that is not the only way to avoid taxes.  There is also the black market.

According to that same Fitch Report, “California’s black markets for cannabis were well established long before its voters legalized cannabis in November 2016 and are expected to dominate post-legalization production.”

Will that black market continue?  Perhaps the 650 billion black market cigarettes sold around the world could be instructive. Here in the United States, according to the Tax Foundation:

“New York is the highest net importer of smuggled cigarettes, totaling 58.0 percent of the total cigarette market in the state (a slight increase since last year’s edition of the report). New York also has the highest state cigarette tax ($4.35 per pack), not counting the local New York City cigarette tax (an additional $1.50 per pack). Smuggling in New York has risen sharply since 2006 (+58 percent), as has the tax rate (+190 percent).”

Can you see through the smoke of it all?

High taxes are quite often avoided. The same will be true for the sale of marijuana in California. With such high taxes, the black market in pot in California will continue to thrive.

Please note two final points about irony in all of this. That Bureau of Cannabis Control that is regulating nearly every aspect of pot in California? Well, it is part of the California Department of Consumer Affairs. Apparently, it is quite the affair to raise the price of pot for consumers in California.

Finally, in 2016 when Californians legalized recreational marijuana, they also raised the taxes on cigarettes – all in an effort to reduce people from smoking. A sin tax they call it. I wonder if in 2018, there will be a ballot measure to raise more taxes to stop people from smoking pot.

Of course, the real sin is that people don’t understand that simple economic law: the more something costs, the less of it you get. That includes the legal sales of pot, jobs and income.

One has to wonder whether there will be a tax reform effort for pot sales once consumers in California learn their lesson – and whether they will support tax reductions on income when they finally do understand that lesson.

Originally published at Forbes.

ormer chairman of the California Republican Party and current candidate for U.S. Senate.

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

A Fairer Tax Code Is a More Efficient Tax Code

Tax formThe last time we saw comprehensive tax reform in this country was also the last time UCLA won a Rose Bowl (1986), so we are talking about a long, long time. We know there have been several tax cuts, and tax increases, since then, but as for some legislative attempt to drive a change in the overall system of tax policy in this country, it has not happened in over 30 years. It would be easy to argue that partisan polarization is the cause of this legislative difficulty, but that would be inaccurate. Partisanship did not keep welfare reform or comprehensive trade agreements from being done in the 1990s. Partisanship did not keep significant national-security endeavors from passing in the 2000s. And President Obama’s reelection in 2012 coincided with the sunsetting of the George W. Bush tax cuts, creating one of the more bipartisan agreements in recent history, when Vice President Biden and Senate majority leader McConnell negotiated a permanent extension of the tax cuts that resulted in more favorable treatment for investment tax and estate tax and left the individual rates at the lower levels of the Bush plan, besides at the top rate. Bottom line: Partisans have done plenty of bipartisan work over the last 30 years; they just haven’t done it when it comes to reforming something that is broken.

The term tax reform is pivotal here. Tax cuts scream for people who pay too much in taxes wanting to pay less (fair enough). Tax reform implies something is structurally unfair, and therefore needing reformation. We do not need to reform that which is already good and right. Sure, we may turn a knob here and there on levels, but reform is more comprehensive, and more reactive. The catalyst to reforming something is admitting something needs to be reformed.

The catalyst for 2017/18 tax reform is a broken tax code, and that brokenness is most evident in two places: A brutally non-competitive business tax code that hasn’t come close to dealing with the global realities of the last 30 years; and a glut of tax brackets and deductions that are too confusing, too easy to manipulate, and too divorced from simplicity and fairness. Yes, the rates are too high, both individually and corporately, but beyond that, the system is not right. The efforts of the Trump administration, led by Treasury Secretary Steve Mnuchin, National Economic Council director Gary Cohn, and the GOP leadership of the House and Senate, seek to use a new tax-reform bill to attack the fundamentals of what is broken in the tax code (a non-competitive corporate code) and clean up around the edges as well (alternative minimum tax (AMT), pass-through entities, etc.).

The math of passing tax reform is difficult because of Senate rules on reconciliation. To attach it to a budget bill and thereby enable 51-vote passage, the impact the tax plan can have on overall revenue (and therefore deficits) is limited. “Dynamic scoring” — the reality of supply-side math that pro-growth tax cuts move us in the right direction on Laffer’s Curve — allows for some more liberal use of this parliamentary reconciliation reality. But at the end of the day, the White House is limited in how much it can reform the tax code without “pay-fors” — offsets and such that will enable the plan to be scored within budget-reconciliation math.

After the inevitable death of the ghastly “border adjustment tax” idea, the best “pay-for” available is eliminating the deductibility of state and local taxes against federal tax liability. Should that tax deduction be eliminated, the comprehensive business tax reform needed (a 20 percent rate vs. a 35 percent rate, a territorial system, repatriation of foreign profits, and the elimination of nearly all special-interest deductions) can become reality. And yet the path to tax reform is being blocked by those who would hold on to the abysmal deductibility of state tax — a blockage being promoted by Republicans and Democrats alike (who says they never do anything on a bipartisan basis?).

Who would want to hold onto the deductibility of state taxation? Well, legislators in high-tax states, for one, who fear little consequence from the residents of low-tax states who end up footing the bill for their fiscal recklessness. In fact, the sole source of opposition to eliminating this deduction has come from blue state California, blue state New Jersey, blue state New York, and blue state Connecticut. Unfortunately, the fact that these states are all blue does not mean this is leftist partisanship, because the opposition is coming from Republican legislators and thought leaders in these states as well. That opposition underscores the fundamental need for reform — reform in our policy, but reform in our thinking as well.

There is never going to be reform that does not upset some people, somewhere in the tax food chain. If there could be such a thing, by definition, there would be no need for tax reform! The objective of a national tax-revenue system should be to fund the legitimate functions of government, and do so in a manner fair to the national self-interest, devoid of governmental favoritism or bias. The purpose of a tax system is not to implement social agendas, punish certain behaviors, reward certain behaviors, etc. The federal tax code is a funding matter, and it ought to be done in the least threatening way to growth and competitiveness possible. A 0 percent tax code is not a possibility, as competitive as it may be, as government has responsibilities, liabilities, and legitimate functions that require funding. But where funding can be achieved without compromising American economic growth, that must be the aim.

The business-investment tax code in our country is a disaster, and this is hardly denied by the other side of the aisle. The rate is too high, and the incentives for businesses to keep moneys offshore are gigantic. Additionally, the loopholes, deductions, and various ways in which certain privileged or selected companies benefit (while others do not) is a direct violation of the intent of the tax system. Simplification is the goal, and an even playing field that does not pick winners and losers is the aim. While I would prefer to get rid of the R&D credit (crony capitalism for pharma) and the low-income-housing credit (crony capitalism for real-estate developers), the proposed tax reform goes a long way towards equalizing the business code and creating a competitive scenario for our U.S. companies with large multinational presence.

So what is the hang-up? The aforementioned state-tax deductibility issue is being presented as a hang-up by Left and Right alike. Ironically, the concern the Left has always had with Republican tax maneuvering is that it unfairly assists those on the higher end of the wage spectrum. Here, the Democrats are supposedly upset about the loss of a tax deduction that, by definition, is used only by those on the higher end of the wage spectrum (those who itemize). But let’s look at the issue from the vantage point of Republican voters in high-tax blue states. Could it mean a higher overall net tax liability? That is very unlikely, since those most affected by this would be of such an income context that they have almost certainly been subject to the AMT anyways, a tax atrocity that was already disallowing the state-tax deduction. But for those who were not previously in AMT but are fearful of losing the state-tax deduction, two things must be said. First, no one knows whatsoever how their net picture would turn out in the new tax law, because the income levels receiving the new tax rates (12 percent, 25 percent, 35 percent) have not been announced. Any attempt to model tax liability in the new system will be rank speculation.

Second, if a very small number of people end up paying more, not less, in the new system, it should have no bearing on what we believe about tax reform. I do not believe that will happen, and if it does, I think the net impact will be so small and affect so few, it will not even register. But even if it did, the fundamental question is whether or not residents of South Dakota and Texas should be footing the bill for a federal loss of revenue just because their states choose to run their affairs with a high degree of fiscal sensibility and wisdom. Tax reform is meant to reform what is broken, and the use of a state-tax deduction is discriminatory, unfair, and, worst of all, enabling. It enables high-tax states to make foolish decisions, to overly rely on highly cyclical income streams, to spend without regard to consequences, and to not factor in competitive realities across our cherished 50-state union.

The need of the hour is beneficiaries of the broken tax system to maintain advocacy for reform. The generation-long resistance to reform is a by-product of special interests and a mentality that replaces common-sense tax policy with gaming of the system. We can do better, and for those who know how badly this economy and our national fiscal situation need growth, we must.

David L. Bahnsen is a trustee at the National Review Institute, the managing partner of a bicoastal wealth management firm, and the author of forthcoming book, “Crisis of Responsibility.”

This article was originally published by the National Review

Dems want to raise property taxes to fund government pensions

Pension moneyI guess I should use the old vaudeville line: Stop me if you’ve heard this one: the push to increase commercial property taxes is about government pension costs. Returning to this subject at this time (I wrote on the same subject for the Sacramento Bee last April) is prompted by the coming together of a couple of recent events.

There was the League of Women Voters and other groups hosting a meeting in Los Angeles this past weekend to “educate” people and advocate for a split roll property tax seeking to raise billions of tax dollars on the back of businesses. Also last week, Stanford University’s Institute for Policy Research issued a report by professor and former Democratic legislator Joe Nation describing the pension burden that is beginning to strangle state and local governments in California.

The services that are affected by both the split roll rally and the Stanford report are quite similar.

Supporters of the split roll say that raising taxes on commercial property will provide $9 billion a year needed for schools and services provided by local governments. Meanwhile, Joe Nation’s report says that because of pension contributions by employers (i.e. governments) increasing an average of 400% over the past 15 years, educational services, recreation, community services and others are squeezed for lack of money.

Many “core mission services,” as defined by the Stanford report, will be starved of money because of pension demands. The split roll advocates talk about the need for more money for local services. What they don’t tell you is that money for those services is being diverted to cover the pension requirements of state and local governments because these governments made generous promises to workers and accepted revenue projections to cover those promises that did not play out.

Instead of admitting that more money is needed to cover pension costs, split roll advocates create a false argument about business dodging its fair share of property taxes. They claim homeowners now pay a much larger share of the property tax burden than they did prior to Proposition 13. A Legislative Analyst’s Office report undercuts that false claim.

The report states in part, “Homeowners pay a slightly larger share of property taxes today than they did when Proposition 13 passed. Proposition 13 does not appear to have caused this increase. … In part, this may be due to faster growth in the number of residential properties than the number of commercial and industrial properties.”

The so-called grassroots activity seeking support for a split roll is backed by powerful public employee unions who support more revenues to cover the pension costs. Yet, you won’t hear anything from the split roll advocates about the pensions strangling local budgets or pushing some cities toward bankruptcies.

Meanwhile, the Stanford study makes it clear with numerous examples that pensions are absorbing greater and greater portions of local government budgets. The Stanford study states clearly there is “agreement on one fact: public pension costs are making it harder to provide services that have traditionally been considered part of government’s core mission.”

This piece was originally published by Fox and Hounds Daily

Will the Trump tax plan help California?

donald-trump-2As most people are now painfully aware, California’s progressive political majority has just hit middle-class taxpayers with billions of dollars in new taxes. As a direct result of these actions, the state will soon have the distinction of having the highest taxes in the nation in the following categories: Highest income tax rate; highest state sales tax rate; highest vehicle tax; and the highest gas tax (and that doesn’t even include the added costs of cap-and-trade regulation). For the wealthy, California can be a lovely place to live. For normal folks, life in the Golden State can be a struggle. According to a recent article in the Sacramento Bee, California lost more than 1 million people in net domestic outmigration between 2004 and 2013.

Other than leaving the state, perhaps the only relief available for California’s middle class is tax reform at the federal level. And while there’s a lot to love in the “Unified Framework for Fixing Our Broken Tax Code” embraced by both President Trump and the Congressional Republican leadership, there is also a very big caveat.

First, the good stuff. The plan calls for lowering the income tax rates for individuals and families. It would shrink the current seven tax brackets into three — 12 percent, 25 percent and 35 percent — with the potential for an additional top rate for the highest-income taxpayers.

Second, it would roughly double the standard deduction so that typical middle-class families will keep more of their paycheck. The plan also significantly increases the Child Tax Credit.

Third, while it eliminates some loopholes, it does preserve the cherished tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education and retirement security.

Fourth, it repeals the death tax and Alternative Minimum Tax which forces many Americans to calculate their taxes twice.

In addition to helping middle-class Californians, the reform package would also help the state’s small businesses by limiting the maximum tax rate for small and family-owned businesses to 25 percent — significantly lower than the top rate that these businesses pay today.

For larger businesses and corporations, the framework reduces the corporate tax rate to 20 percent — below the 22.5 percent average of the industrialized world. It also ends the perverse incentive to offshore jobs and keep foreign profits overseas.

Finally, in a commonsense proposal, the framework would allow “repatriation” of American dollars by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.

Now, here’s what will undoubtedly cause some Californians heartburn. The proposal calls for the elimination of the deduction for state and local taxes. Currently, Californians are able to deduct from their federal tax returns both property taxes paid to local governments and income taxes paid to the state. Because California is a high tax state, the loss of the deduction would be very significant. In fact, some estimates show that Californians, in total, currently deduct over $100 billion in taxes from their federal tax liability.

Losing this deduction will have less of an impact on working families and the middle class, particularly when balanced against the middle class tax relief under the framework. But as one moves up the economic ladder, California’s more wealthy taxpayers will take a bigger hit.

While some have suggested that the Republican Tax Reform Framework is revenge against high tax, mostly Democrat controlled, states, the reality is that there are legitimate policy reasons for reducing or eliminating the deduction. In essence, low tax states are currently subsidizing high tax states with funding the federal government.

Moreover, the loss of this deduction might spur high tax states like California to rethink their own tax policy and pursue lower taxes as part of tax reform efforts at the state level. In California, that is long overdue.

Finally, a bit of irony for high-tax California. Because property taxes are included as part of the federal deduction, if it were not for Proposition 13, Californians would be threatened with an even greater loss of deductibility. So as bad as getting rid of the deduction might be for some, it could be worse. And for that, we can thank Prop. 13 which, once again, rides to the rescue of California taxpayers.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

This article was originally published by the Orange County Register

How the Trump tax plan will make most people better off

TaxesWith Washington planning a broad overhaul, your tax bracket could be changing. But will that actually score you and your family a lower tax bill?

While the Republican-led tax reform plan is short on some details at this point, the head of a tax policy group called the plan “viable” in an interview with CNBC.

“I think it’s a real step in the right direction,” Scott Hodge, president of the non-partisan tax policy research Tax Foundation told CNBC’s On the Money recently. “Not only in just simplifying the tax system, but in creating a more dynamic tax system, one that is more conducive to economic growth.”

Founded in 1937, The Tax Foundation is an independent, non-partisan tax policy research organization.

The tax overhaul promises a simpler tax code. For individual taxpayers, the current seven income tax brackets would be reduced to just three: 35 percent, 25 percent and 12 percent.

However, another “bracket” is zero percent, which represents those who don’t pay any income tax at all. The standard deduction will double to $12,000 for single taxpayers and $24,000 for married couples filing jointly.

Hodge predicted those folks will come out ahead under the new plan. “At the bottom end, they’re going to make some big changes. They’re increasing the standard deduction, the ‘zero bracket’ if you will, so that a couple won’t pay any income taxes up to $24,000 a year. That’s great.”

But while establishing fewer income brackets, the plan is proposing the removal of nearly all itemized deductions, except those for mortgage interest and for charitable donation deductions.

“That’s the real balance here, is how far we can reduce tax rates to make up for some of the deductions that we’re going to lose,” Hodge said.

Another major provision of the GOP tax reform plan is the elimination of deductions for state and local taxes – a change that could hit middle and upper-income taxpayers. …

Visit CNBC for the rest of the story

Businesses Joined by Non-Profits in Leaving California for Friendlier States

Friends in economic development agencies and in the site selection consulting world have asked why I haven’t posted anything in quite awhile. My answer is simple: I’ve been exceptionally busy. It certainly isn’t because there aren’t things to write about.

Another question I’m usually asked is whether businesses are still leaving California.

They are, especially with the state legislature again failing to provide tax or regulatory relief to its home-state companies. Overall, taxes, fees and regulations have gotten worse. Such a difficult business environment, combined with grim treatment by local governments, have caused operating costs to grow faster in the San Francisco Bay Area and Los Angeles than in virtually every other metropolitan area in the nation.

NevadaSo large corporations and small business entities continue to look for ways to partially or fully exit the state. Today alone brought two examples, which by coincidence both involve Nevada.

The first is a loss for Los Angeles with Virtual Guard, Inc. leaving the city’s Sherman Oaks section. The company plans to relocate its headquarters and interactive command and control center to Clark County (Las Vegas area), citing an “unfriendly economic environment” in California. The move is likely to occur later this year.

There, Virtual Guard plans is expected to hire 80 new employees within its first two years of operations. The video monitoring company is also a developer and integrator of technology in the perimeter security sector and its solutions are being used throughout the United States and Canada.

California, which a long time ago was a haven for aerospace companies, will lose another one next year.

ERG Aerospace Corp. plans to relocate its Oakland operations to McCarran, Nevada and make the Silver State its headquarters. The company manufactures materials and components for the aerospace, national defense, semiconductor manufacturing, biotech and other high technology industries. The target date for the move is the second quarter 2018, with operations to commence in the same quarter.

Several months ago a non-profit organization said it would relocate out of state, too. Horizon University, a private, Christian school that started classes in 1993 in San Diego is heading to Indianapolis.

Horizon’s President Bill Goodrich calls the decision “a no-brainer.” He said Indiana offers a “climate” that was slipping away in California, and by that he wasn’t referring to San Diego’s sunny days. Goodrich said that the university helps people “grow academically” while integrating the “strong biblical teachings and we find in Indiana, there’s an openness to that.”

The move will allow the, accredited university to grow on a 97-acre spread – in a state with less “red tape” – and attract more students.

Thanks to high costs, a sizeable non-profit move is upcoming: Toastmasters International will shift its headquarters from its birthplace in Orange County to Colorado.

With about 180 employees, Toastmasters CEO Daniel Rex said costs in California were a concern. “When you look at the availability of workers, when you look at the cost of commerce and real estate, this is something that makes sense.” The organization is spending $19.5 million to buy a building in Englewood, south of Denver. Toastmasters is a legendary California institution, founded in 1924 in Santa Ana. Since 1990 it’s been based in Rancho Santa Margarita.

Business people who endure the decline in California’s business climate and pervasive cost increases can take some comfort knowing that some non-profit brethren are members of the same club.

I’ll write more about how California treats its commercial enterprises. But first I need to see how many business-helpful bills and business-damaging bills Gov. Jerry Brown will sign into law.

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.

This article was originally published by Fox and Hounds Daily