Revenues for the Budget Crisis

Recommendations on Revenues for

the 2009-10 and 2010-11 Budgets

I. Double (or more) all revenue projections below. No revenue item is too small to consider, because of the loss of federal matching funds. For example, collecting $35 million from conformity to federal back-up withholding is worth at least $70 million in program, and, given 2-1 matches for some programs, may be worth $105 million.



II. Eliminate money for nothing. We would never tolerate the waste in spending which we tolerate in the tax system. Despite the economy, there are billions in lost revenues which will have no economic impact, because they provide “money for nothing” and make no difference in economic decision-making. They simply lose money for the state, leading to cuts in program while generating nothing of value. The LAO lists many of these. We cannot afford these giveaways.



III. Solutions must be considered on a two-year basis. The LAO projects $15 billion in structural deficit for 2010-11, and the Governor’s budget includes at least two years. Revenue which may not be receivable until 2010-11 must be done now, or we’ll always be a year behind.



IV. With the early expiration of the taxes on ordinary Californians, the new secret corporate tax breaks must not be allowed to take effect. They will cost $805 million in 2010-11 (part year) and then rise to a likely $2.5 billion when fully phased in. People are not against taxes, they are against unfair taxes,[1] especially corporate handouts.



1. Collections: No collection is too small, given federal matches. The numbers below are direct gains, excluding federal match.



Summary of Proposals to Improve Tax Collections

Proposal

2009-10

2010-11

2011-12

Correct Amazon Nexus Issue (AB 178, Skinner)

$100 mil.

$100 mil.

$100 mil.

Financial Institution Record Match (FIRM)

$33 mil.

$100 mil.

$100 mil.

Require reporting between book and tax income

*$50 mil.

*$50 mil.

*$50 mil.

Crack down on abusive tax shelters

$40-60 mil.

$40-60 mil.

$40-60 mil.

Improved business use tax collection

$310 mil.

$620 mil.

$620 mil.

Conformity to federal back-up withholding

$35 mil.

$35 mil.

$35 mil.

Withholding on independent contractors

$2 billion acceleration $200+ mil.

$200+ mil.

Suspend professional and occupational licenses for tax debtors (AB 484, Eng)

$13-25 mil.

$13-25 mil.

$13-25 mil.

Deny sales tax refunds to purchasers of worthless accounts

$42 mil.

$42. Mil.

$42 mil.

LAO recommendations for fee, interest and penalty modifications

$12.6 mil.

$12.6+ mil.

$12.6+ mil.

*Rough estimate



a. Amazon nexus issue (AB 178, Skinner, AB 3x 27, Calderon): $100 million state, $50 million local. The failure to collect sales tax on remote sales hurts California businesses. This revenue is due and payable as use tax. The only issue is the point of collection. Amazon will start collecting immediately, as they did in NY, and will sue (case dismissed at first level in NY). Even if they ultimately succeed in court, which is doubtful, the tax collected will not be at issue. If California does this along with NY, the Congress will be incented to provide nationwide collection, at potentially $1 billion for the state and improvement in the suffering local retail climate.[2]



b. Financial Institution Record Match (FIRM): $33 million, $100 million on-going (Contained in the Assembly budget, a conference item). The banks are no longer opposing, nor should they ever have. It is information-sharing which will collect from adjudicated tax debtors, a system which has already worked for child support.



c. Require reporting on difference between book and tax income: Unknown revenue guesstimate of $50 million. The FTB has attempted to impose a state reporting form—state equivalent of the federal M-3 form–for the difference between book and tax income, which was opposed, delayed and defeated by Chevron. This should be in place, even though we cannot know how much it will generate. Its purpose is to track complex corporate tax sheltering, particularly the use of offshore shelters and pass-throughs by the proliferation of controlled foreign corporations.



d. Crack down on abusive tax shelters: Unknown revenue increase, potentially $40-60 million or more. The Franchise Tax Board has a number of proposals for tightening abusive tax shelter laws. Every one of those should be explored and enacted. The abusive tax shelter loss in California is still in the range of $500 million to $1 billion yearly, according to the FTB.



e. Improved business use tax collection: $620 million full year, if implemented in budget year possible $310 million (Contained in AB 711, Calderon). All businesses, not just retailers and re-sellers, would be required to register with the Board of Equalization and would be required to report out-of-state purchases and pay use tax. The state is estimated to lose $775 million in unpaid business use tax, and BOE estimates recovery at 80% of that lost revenue.



f. Conformity to federal back-up withholding: $35 million a year. Significant income cannot be withheld because of lack of information or other reasons, and is therefore never taxed, particularly for out-of-state earners. The IRS provides for back-up withholding, and California must do the same. Language was contained in AB 1848 (Ma) of 2008.



g. Withholding on independent contractors: Revenue likely to be realized in 2010-11, $2 billion acceleration (per majority budget in December), $200 million or more on-going. This addresses a major part of the tax gap and has been sought for years as a means of tax enforcement. Although it probably cannot be implemented in the fiscal year, we can no longer afford to ignore this critical enforcement tool.



h. Suspend professional and occupational licenses for tax debtors: $13-25 million Contained in AB 484, Eng. Those who are licensed by the state get the benefits and must pay their taxes. This is a collection measure of last resort for adjudicated tax debtors which has been successful for child support collections.



i. Deny sales tax refunds to purchasers of worthless accounts: $42 million. This was originally estimated at $6 million when it passed, but has cost 7 times the original estimate. Contained in AB 1839 (Calderon) in 2008. The cost of this will rise as defaults rise. Retailers can get sales tax refunds when consumers default, but the financial institutions which purchase their debts should not get the sales tax refunds.



j. Enact LAO recommendations for fee, interest, and penalty modifications: $12.6 million, growing over time, particularly penalties for baseless overstatements for refunds. Contained in Assembly Sub 4 and Senate Sub 5 budget recommendations.



2. “Money for nothing”: Giveaways with no economic impact, a.k.a. waste, fraud and abuse in the tax system.


Summary of Proposals to Eliminate “Money for Nothing” Tax Giveaways

Proposal

2009-10

2010-11

2011-12

Eliminate the ability to shelter income in offshore tax havens

$40 mil.

$130-160 mil.

$130-160 mil.

Disallow new enterprise zones and phase out the program

$100 mil.

$100-$400 mil.

$100-$400 mil.

Eliminate capital gains break for exchanges of commercial property

$350 mil.

$350 mil.

$350 mil.

Enact an oil severance tax at 9.9% (Gov’s proposal)

$1 billion

$1 billion

$1 billion

Tighten statutory change of ownership rules

-

$1-2 bil.

$1-2 bil.

Eliminate “nowhere income” loophole

$65 mil.

$65 mil.

$65 mil.

Eliminate new loopholes in past two budget: single sales, loss carry backs, credit sharing

-

$805 mil.

$1.8 bil.

Increase Subchapter S rate to 2.5%

$600 mil.

$600 mil.

$600 mil.

Eliminate the deduction/exclusion for subsidized parking

$100 mil.

$100 mil.

$100 mil.

Continue corporate tax credit limitation to 50% of tax liability

$400 mil.

$400 mil.

$400 mil.

a. Eliminate the ability to shelter income in offshore tax havens: $40 million in 2009-10, $130-160 million on-going (Contained in AB 1178, Block). The ability to park revenue in offshore tax havens, with no economic activity other than tax avoidance, loses substantial revenue while gaining nothing for the California economy. Tax havens should be considered part of the water’s edge, as some other states do.


b. Cancel new enterprise zones and phase out the program: Per LAO recommendation, $100 million initially, growing over time. A definitive econometric study has demonstrated this program to be useless in creating jobs. Other reports have shown major fraud and abuse of an outdated statute which can be manipulated by taxpayers. Wal-Mart gets major benefits for its distribution centers without even providing health benefits, thereby costing state dollars. Repealing the entire program would raise $400 million.



c. Eliminate capital gains break for exchanges of commercial property: $350 million, per LAO recommendation. These exchanges are made for the federal tax benefits, not state benefits, and exchanges for out-of-state property—an incentive to launder capital gains out of state—causes $50 million in revenue losses every year. This is a tax dodge which has nothing to do with investment, in which brokers specialize in arranging tax-free transfers.



d. Enact oil severance tax at 9.9%, per Governor’s proposal: $1 billion a year. A definitive study of oil severance tax in California demonstrates no effect on either price or production. Every place in the world but “progressive” California taxes oil production. We have left billions on the table, and can no longer afford to.



e. Tighten statutory change of ownership rules: Over $1 billion, in 2010-11, increasing over time. Change of ownership rules for investment property are full of loopholes, so that many properties legally change ownership without reassessment and companies can manipulate a system to their benefit. Much of this revenue, pursuant to Proposition 1A, would go to local government as increased property tax. Estimates have varied widely on this, but estimates by the BOE from doing this in the 1990’s were at $1-2 billion back then, and the number should be larger now.



f. Eliminate “nowhere income” loophole: $65 million. Companies can treat asset sales and purchases differently for state and federal law, allowing avoidance of state tax. Requiring treatment to be the same, as we do for other tax law, would eliminate the failure to report this tax.



g. Eliminate the new loopholes placed secretly in the past two budgets: $805 million in 10-11 (DOF estimate), growing to as much as $2.5 billion annually. The combination of elective single sales, loss carry-backs and credit sharing threatens to swamp the corporate tax, and should be eliminated before it takes effect. It is a boon for tax manipulation to a degree which is embarrassing to the state of California, and has to be stopped before it takes effect. [3]



h. Increase Subchapter S tax rate to 2.5%: $600 million. With federal law changes, Subchapter S corporations are no longer small companies but large corporations which pay only 1.5% in corporation taxes. When California permitted S corporations to form, it required a 2.5% entity level rate, later lowered to 1.5%. There are no economic impacts of increasing the entity level tax, since the use of the S form is a matter of tax convenience.



i. Eliminate the deduction/exclusion of subsidized parking: $100 million, per LAO proposal. We have long argued that the employer deduction/employee exclusion is a subsidy for individual driving, counter to the state’s environmental policies. The deduction/exclusion is counterproductive, and its elimination would send the correct environmental signals.



j. Continue the corporate credit limitation to 50% of tax liability: $400 million. (Contained in AB 1452). California has the highest research and development credit in the country which leads to the zeroing out of tax liability for many profitable companies. Profitable companies should pay some level of taxes for their use of resources in California, and this temporary limitation should become permanent.



3. Taxes supported by the public



Summary of Tax Proposals Supported by the Public

Proposal

2009-10

2010-11

2011-12

Reinstate the top income tax bracket

$3-5 bil.

$3-5 bil.

$3-5 bil.

Increase alcohol fee (or tax)

$1.4 bil.

$1.4 bil.

$1.4 bil.

Broaden the sales tax base to intangible commodities

$2-4 bil. (perhaps less part year)

$2-4 bil.

$2-4 bil.


a. Raise top bracket on income tax: $3-5 billion, depending on rates and brackets. The reason that the wealthy bear a high percentage of the income tax is because the top 1% hold a disproportionate amount of the income, up from 14% in 1993 to 25% in 2006. There is no evidence of impact on economic activity from raising the top rates and establishing new brackets.


b. Increase Alcohol fee (or tax): 10 cents/drink would raise $1.4 billion. Contained in AB 1019, Beall. An estimated $8 billion in public costs have been identified with alcohol abuse, including law enforcement, health care, hospital and trauma care, court costs, child abuse, domestic violence and foster care. Arguably a fee could back out significant state and local costs, but a general fund tax would be more appropriate.


c. Broaden the sales tax base to include commodities identified as intangible: $2-4 billion. Governor’s proposals were similar but included some labor services. Entertainment, amusement parks, professional sports, golf, ski resorts, hotels—the rental of facilities—should be subject to sales tax. Such electronic purchases as digital downloads, cable TV and other electronic access should be subject to sales tax as well. Higher figure includes sales tax on telecommunications, proposed in the early 1990’s by Governor Wilson.


###


[1] David Binder Research Poll

[2] California fails to collect $1.6 billion in use tax, according to a recent estimate in State Tax Notes


[3] See LATimes op-ed piece, “California’s Cavernous Tax Loopholes” http://www.latimes.com/news/opinion/commentary/la-oe-goldberg30-2009apr30,0,249660.story

6 Responses to “Revenues for the Budget Crisis”

  1. [...] Bass and Skinner gave some clues as to specific actions they might pursue by pointing to a plan laid out by the California Tax Reform Association, including improved tax collection methods, closure of tax loopholes and — yes — some majority-vote revenue increases. [...]

  2. [...] Bass and Skinner gave some clues as to specific actions they might pursue by pointing to a plan laid out by the California Tax Reform Association, including improved tax collection methods, closure of tax loopholes and — yes — some majority-vote revenue increases. [...]

  3. [...] Proposition 13 is not the only problem with California’s tax system, and split roll is not the only needed fix. The California Tax Reform Association (CTRA) proposes dozens of ways (nearly all progressive ones) for California to tap $13-17 billion of new revenue annually http://caltaxreform.org/?p=101, or double that amount when federal matching grants are factored in. [...]

  4. [...] Download this article as a PDF With the state facing a current deficit and on-going yearly deficits $20 billion, the survival of basic services and a healthy public sector is at stake.  The following summarizes 10 measures which will have the least impact on economic growth and recovery—the “low-hanging fruit” in the tax system. (For a more complete listing of tax options go to  http://caltaxreform.org/?p=101. Governor Schwarzenegger stated that all the “low-hanging fruit” in the budget—that is, the easy cuts– had been removed.  But loopholes, untaxed windfalls, tax breaks with no benefits, taxes on the very rich and sin taxes, the taxes with little or no impact on economic recovery, have not been cut at all. For broader-based taxes, the state can maintain some part of the previous increases. Note:  the revenues are not the same in every year, since some do not come in until 11-12.  The LAO calls for a long-term workout, and these revenues would provide that. Summary Chart:  Low-Hanging Fruit in the State Tax System 1. Enact an Oil Severance Tax at 9.9% ($1.2 billion):  California is the only state, and the only place in the world, that does not tax oil production.  9.9% is the rate proposed by Governor Schwarzenegger.  Contrary to oil industry propaganda, California has the lowest tax on oil in the nation—about 60 cents/barrel—when it should be $6-$7 per barrel at current prices.  This tax will have no effect on the price of gasoline or on oil production. 2. Eliminate Secret Corporate Tax Loopholes ($1.7 billion):  As part of the September 2008 and February 2009 budget agreements, the Legislature passed new corporate loopholes in secret—loss carry-backs, credit sharing, and elective single-sales factor.  These take effect in 2011.  Contrary to the Governor’s rhetoric, it is not a “tax increase” to repeal these before they go into effect, and they are egregious new loopholes, benefitting mostly the largest corporations, that the state can ill afford. 3. Broaden Sales Tax Base to Include Untaxed Commodities ($2 billion or more): There is virtually unanimous agreement that our sales tax base is too narrow.   The Governor has supported broadening it, and the first steps should include entertainment, admissions, parking, golf and skiing, hotels (i.e. the temporary rental of space) and digital products—all of which are commodities easily subject to tax.  Beyond that, sales taxes on telecommunications, cable and satellite would generate $2 billion more. 4. Reinstate Top Income Tax Brackets  to 11% ($4 billion now, growing to $6 billion in out-years): The top 1% of earners earn an unprecedented 25% of income in California!  While that may go down a little due to the recession, the recovery of the stock market means capital gains for the wealthy are likely to recover, while ordinary incomes in a slow economy are not.  State income taxes have no impact on the location of the wealthy or investment in California, and this revenue will grow faster than economic recovery. 5. Close Corporate Property Tax Loopholes ($2 billion): Statutory definitions of change of ownership are thoroughly loophole-ridden. CTRA research has been identifying numerous cases where properties have not been reassessed at market value following a change in ownership.  We estimate that tightening corporate property tax loopholes would raise $2 billion. The legislature can act by statute to close this loophole, potentially by a majority vote in a two-step approach. 6. Maintain Vehicle License Fee (VLF) at 1% ($1.3 billion): The VLF is supposed to be an in-lieu property tax, but was cut from 2% to .6%.  A long-term resolution of this issue would put the VLF at the Prop. 13 rate, 1%, slightly below the current 1.15 temporary rate, beginning in 11-12. 7. Close Useless Corporate Tax Loopholes ($1 billion): Enterprise zones have been demonstrated to have no impact on jobs ($500 million).  Avoidance of capital gains on commercial property sales—so called like-kind exchanges—are driven by federal, not state considerations ($350 million).  Placing offshore tax havens in the water’s edge stops blatant tax manipulation ($150 million).  Impact on economic decisions: zero. 8. Increase Tobacco and Alcohol Taxes ($2.4 billion): Taxing products with negative impacts on society has positive effects.  Enacting a tax at 10 cents/drink generates $1.4 billion, and proposals for increased tobacco taxes have been keyed at generating $1 billion as well. 9. Improve Tax Collections ($2 billion initially, less on-going):  Governor Schwarzenegger vetoed majority vote legislation which would have provided an initial $2 billion in improvements in collections, including withholding on independent contractors, tightening nexus (Amazon issue), and proposing a bank records match.  That amount would fall as others, above, phase up. 10.  Lower current sales tax by ½ cent ($2.5 billion):   The temporary1-cent sales tax increase will expire July 2011.  Lowering the sales tax by ½ of that should grow to $3 billion, particularly with a broader base.  This could phase down by ¼ cent/year as the state’s fiscal condition recovers. Many of these tax changes have little or no negative economic impact.  To the extent there is any negative impact, it will be vastly overwhelmed by the negative impact of a state unable to finance infrastructure, that allows its higher education system and schools to deteriorate, that forces cutbacks in local government, and that shreds its safety net for its poorest citizens. [...]

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