California Tax Reform Association http://caltaxreform.org Equity and social fairness Thu, 21 Jan 2010 01:15:44 +0000 http://wordpress.org/?v=2.7.1 en hourly 1 Finally, a real debate on the economics of taxation? http://caltaxreform.org/?p=226 http://caltaxreform.org/?p=226#comments Thu, 21 Jan 2010 01:13:43 +0000 site admin http://caltaxreform.org/?p=226 Capitol Weekly ]]> Since a discussion of tax politics begins and ends quickly in the Capitol, let’s try talking economics instead.

The Governor’s tax commission did the state the favor of opening the discussion of the economics of taxation, and Schwarzenegger called for “major, radical reform” in his State-of-the-State address. So perhaps an economics discussion will attract some real debate, instead of the “just say no” discussion which applies to all taxes, however rational they may be.

The Commission on the 21st Century Economy (COTCE) also did an inadvertent favor to the discussion through their proposal to tax the net receipts of all businesses, which the Governor called “great, great reform.”
One key point made by many analysts of this tax is that many businesses would be taxed heavily even if they incur significant losses, because major expenses — labor, interest on debt — would not be deductible from the tax. The result of the backlash to this proposal was, helpfully, to reinforce the concept that taxing profits through the corporation tax and the income tax makes economic sense, contrary to the misguided COTCE goal of eliminating the corporation tax and flattening the income tax for the wealthy.

The Governor provided another inadvertent favor in the tax discussion by proposing to delay the new secret corporate loopholes as part of his budget trigger mechanism. With this delay, he effectively acknowledges that these loopholes, part of the last year’s budget hostage-taking, have nothing to do with economic recovery, a.k.a “jobs jobs jobs.”

Allowing corporations to get refund checks for taxes they previously paid when they take a loss (“loss carry-back”) destabilizes the budget in a down year and, because the refunds are two years after the fact, provide zero incentive effects for job creation.

Allowing corporations to share unused tax credits with affiliates (“credit-sharing”) benefits only a handful of very large companies, and also gives out tax dollars for activity already engaged in — not any new activity. And allowing corporations to choose how they want their taxes to be apportioned to California (“elective single-sales factor”) provides huge tax cuts without requiring a dime of new investment or a single job to be created.

The result, if these take effect: Programs will be cut by hundreds of millions of dollars, with thousands of real jobs lost. So, thank you, Governor, for de-linking these loopholes from any notion of economic recovery.

But that may be as much appreciation as we can muster.

The Governor’s proposals for housing tax credits and job tax credits are, alas, giveaways that he apparently believes in.

Last year’s developer credit, which only applied to new houses not yet lived in, gave preference to developers with excess inventory over homeowners trying to sell in a collapsing market. The new $200 million credit takes taxpayer dollars and temporarily pumps up a housing market which eventually has to seek a real level. Doesn’t anyone believe in market forces anymore? And, this $200 million does not have to create a single new job, nor is it likely to, by artificially delaying the settling (in economists’ terms, equilibrium) in the housing market.

And, there’s a $3,000 job training credit for employers. Low-wage jobs may cost employers well over $20,000 per year; good jobs will cost, in total, $50,000 to $60,000 a year when other employment costs are figured in. In the real economy, employers hire when the new employee contributes to the bottom line, not just temporarily but permanently.

Dan Walters got it right in the Bee: if you want to enact a useless tax break, get rid of some other useless tax breaks, such as the $500 million enterprise zone program, which, through rigorous economic analysis, has been shown to create no new jobs. Better yet, use the revenue from eliminating useless tax breaks to stop real cuts in programs and jobs. Real economics, anyone?

Beyond that, of course, there are the weakest links in our tax system.
Economists recommend taxing “economic rents” — that is, windfalls earned as a result of the actions of others —because they do not affect new investment. A tax on oil production, proposed once by the Governor, is the most obvious of those. Heavy, expensive California oil costs about $20 per barrel to produce, yet the world market prices reflected in California are in the range of $70. A tax of about $7 per barrel, as opposed to our current 60 cents, would have no effect on gas prices or production, according to a Rand Corporation study. In terms of economic impact, this is a free $1 billion, most of it from four multinational oil companies.

The oil industry mobilized a large astroturf campaign against a bill by Assemblyman Alberto Torrico for an oil production tax to be used for higher education, but the only economic argument they could muster was that 10-barrel/day stripper wells would be shut in early—except, of course, these have been exempt from tax in every oil tax proposal in the last 50 years! So, big oil can mount a major lobbying effort but cannot muster a single economic argument.

What is better for the economy, useless tax breaks or slashing public programs? Withholding revenues from independent contractors (which are supposed to be paid anyway), as Sen. Darrell Steinberg has proposed, or eliminating school support employees? Allowing multi-nationals to use tax havens, or making it easier to students to go to college, as addressed in a bill by Assemblyman Marty Block?

We have presented a $20 billion list of low-hanging fruit in the tax system (www.caltaxreform.org ), and the economics of some of those could, admittedly, be debatable. So let’s debate them, and maybe only agree on $10 to $15 billion. But let’s take up the Governor’s challenge: a real economic debate over the impact of sensible taxation versus massive budget cuts.

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Low Hanging Fruit in the Tax System: 10 Policies for $20 Billion http://caltaxreform.org/?p=211 http://caltaxreform.org/?p=211#comments Tue, 01 Dec 2009 21:15:14 +0000 site admin http://caltaxreform.org/?p=211 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.]]>

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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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Statement on the Tax Commission (COTCE) final report http://caltaxreform.org/?p=171 http://caltaxreform.org/?p=171#comments Tue, 29 Sep 2009 21:24:52 +0000 site admin http://caltaxreform.org/?p=171 September 29, 2009



The California Tax Reform Association, which participated in many discussions of
the Commission on the Twenty-First Century Economy, criticized the report as “a
failure to provide a fair, long-term solution to California’s revenue and tax
problems.”  Executive Director Lenny Goldberg said, among its many failings, “it
does not even address the distinct issues of the 21st century economy”, which is
its supposed charge.

CTRA’s summary of opposition to the report is as follows:

*It provides disproportionate tax relief–$7.6 billion yearly– to the top 3%
of income tax payers—those least burdened by state taxes.  “The reason that the
tax system relies so heavily on the wealthy is because they have an historically
unprecedented share of the income”, said Goldberg.  A chart demonstrating
disproportionate relief is here:
http://www.cotce.ca.gov/documents/correspondence/public/documents/
GOLDBERG%20-%209%209%2009.pdf



*It relies entirely for its reforms on a completely unknown and untried tax,
the business net receipts tax (BNRT).  There are huge legal and economic
problems with this tax, including:  burdening companies disproportionately which
have  higher labor costs; burdening companies, including start-ups, with tax
which otherwise would have losses;  taxing rental housing, childcare, food and
other necessities of low income people; assuming the ability to tax interstate
commerce which is highly questionable; possibly disadvantaging California-based
companies;  encouraging the contracting out of labor services, rather than hiring
employees.


Many critiques of the BNRT have been put forward from virtually every
perspective.   Perhaps the clearest critique comes from Commissioner Richard
Pomp, at http://www.cotce.ca.gov/documents/correspondence/
staff_and_commissioners/documents/Why%20I%20Think%20We%20are
%20Heading%20in%20the%20Wrong%20Direction.pdf
Pomp notes in particular
that the only effort at a similar tax, in Michigan, is at a very low 1% level, and is
integrated with a corporation tax.  The proposed California tax would be 4%.
One unnoticed part of the BNRT is that it would fall heavily on rental housing, so
that, in a world where homeowners receive major tax benefits, renters would be
expected to pay.  “With homeowners doing so well in the tax system, it would be a
travesty of good tax policy to now burden renters, but that’s what this proposal
would do,” said Goldberg.  The whole distributional impact of the BNRT has not
been analyzed, with regard to the extent that it would burden California
consumers or fall on domestic businesses.


*Elimination of the corporation tax would disproportionately benefit out-of-
state shareholders and the federal government.  Corporations doing business in
California put demands on California services.  The profits generated from
business in California would be untaxed in this proposal, increasing the return to
shareholders, many or most of which may be out-of-state beneficiaries of the tax
break.  And, since these taxes are deductible from federal taxes at a 35% rate, the
outflow of revenue to the federal government from eliminating this tax will be
several billion dollars in addition.
As Commissioner Pomp has noted, the corporation tax exists in 47 states, and
has served California consistently for many years.  From our perspective, the issue
which needs addressing the corporation tax is the erosion of its base, particularly
from the new loopholes put in place in the recent budgets, not its elimination.


*The Commission failed to examine one of the dominant changes in the 21st
century economy:  the growth of internet usage, electronic commerce, digital
downloads, internet taxation, and interstate nexus issues which arise from
growing electronic commerce.  “It is a stunning failure of the Commission that it
barely examined the many new issues of the new economy which surround the
internet”, said Goldberg.


*The Commission failed to adequately examine alternatives, such as failures
in the commercial property tax, the lack of an oil severance tax, and the option for
a carbon tax.  CTRA presented twice with regard to the proposal for a split roll,
which we have called “the single largest hole in the tax system”, but the
Commission did no independent analysis, nor did it consider this seriously.
Similarly, it never really considered Commissioner Fred Keeley’s proposal for a
fuel tax or other approaches to taxing carbon, again a major issue of the 21st
century economy.  The split roll presentations are here:
http://www.cotce.ca.gov/meetings/testimony/documents/LENNY%20GOLDBERG
%20-%20COTCE%20-%20cotce%20property%20tax%20discussion%20-
%204%209%2009.pdf



“Ultimately, the report suggests that California take  a complete shot in the dark,
basing our tax system on something unknown and untried in order to provide
massive tax relief to the wealthy and large corporations,” said Goldberg.
CTRA also presented alternative approaches to the Commission, including
broadening the sales tax base, addressing commercial property, and addressing
tax expenditures, here:
http://www.cotce.ca.gov/documents/correspondence/public/documents/
GOLDBERG%20-%209.3.09%20-%2011%2018%20AM.pdf

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Comments of the California Tax Reform Association on COTCE Recommendations http://caltaxreform.org/?p=165 http://caltaxreform.org/?p=165#comments Wed, 22 Jul 2009 19:59:20 +0000 site admin http://caltaxreform.org/?p=165

With different proposals (1,2 and “blue”) on the table, we offer these comments on the issues raised in these proposals.


1.  The top personal income tax rate should not be lowered, since figures presented to the Commission demonstrate clearly that the volatility problem is a function of the distribution of income, not a steeply progressive tax.  In fact, the tax is relatively flat, assessing the same marginal rate on the upper-middle class (90k +) as the very rich, with a very quick ride through the brackets.  If anything, the bracket structure should reflect the federal structure, which has increasing brackets and rates at $137,000, $208,000, and $372,000.


As Phil Spilberg’s presentation on March 16 pointed out, the top 1% take an extraordinary share of income (25%), nearly doubling since the early 1990’s.  Their tax burden moves consistently with their share of income, so their disproportionate share of taxes is a function of their disproportionate share of income.  That fact alone is what leads to volatility, but lowering their tax burden only exacerbates the mal-distribution of income.  And any tax cuts share income with the federal government at a marginal rate of 35%, likely to become 39.6%, so are effectively a capital outflow.


Thus, we would urge rejection of both package 1 and 2 as providing significant relief to the wealthiest taxpayers, and further flattening an already relatively flat rate structure.


2.  Any capital gains relief would be not only regressive but would reward a net outflow to the California economy.  Part of capital gains volatility stems from the increased use of stock options in place of salaries, which would be rewarded further by any differential rate and is already incented by the federal tax structure.  Capital investments are world-wide, and therefore capital gains relief has nothing to do with California investment; it would reward investment outside and inside the state equally.  And the reduction provides major sharing with the federal government, at a 35% marginal rate, likely to become 39.6%.


Control of volatility should be an expenditure issue, not a tax issue (pt 9, below).   The problem can be resolved by budgeting, not by tax cuts, as suggested in the “blue” proposal.


3.  Net receipts for business is a concept worth examining, particularly as a substitute for the sales tax, by providing a very broad base for transactions.  But a new approach to sales taxation which picks up electricity, gas, food, rental housing, internet services, and all other services, needs full exploration with regard to impacts, potential exemptions, and estimated revenue generation. We appreciate seeing for the first time a more fully articulated proposal for such a tax, posted on July 14.  That proposal has a number of policy decisions within it which deserve close scrutiny with regard to potential impacts on both types of businesses and ordinary taxpayers.
We recommend that this concept be suggested for further study.  Otherwise, we would expect that substantial variations in impacts could very well lead to a system full of exemptions and special provisions for different businesses and/or consumption items.  The “blue” proposal suggests further study, and we concur.  That would also imply rejection of package 1, which relies heavily on this untried and unstudied concept.


4.  We support the “blue” proposal for reform of assessment of the non-residential property tax.  As we have presented to the Commission, the current system is bad economics, bad law, bad fiscal policy and bad land use.  Should the commission wish not to recommend constitutional changes, at minimum it should request the legislature to tighten change of ownership law for properties with complex holdings.


5.  The Commission has failed to examine tax expenditures at any level of detail.  It failed to explore the mis-placed tax breaks in the last budgets, particularly loss carry-backs, which are de-stabilizing for the tax system, and elective single sales factor, which allow for endless manipulation.  It also failed to explore an oil severance tax, a proposal supported by the Governor, as an appropriate tax on economic rents as well.


In addition, a highly reputable academic study noted that California’s enterprise zone fails to create new jobs; the Legislative Analyst recommended the elimination of like-kind exchanges for commercial property.   In short, there are easily billions in waste within the tax system which can pay for other tax improvements.


6.  Carbon taxes appropriately tax pollution, not production, and the highly regressive impacts can be mitigated in a variety of ways—using 15% of the revenue, according to one study.  In addition to fuels, carbon taxes on the electric sector can be recycled to ratepayers to pay for the costs of global warming and, with appropriately tiered rate structures which exist in California, need not fall regressively.  If there were any tax appropriate to the challenges of the 21st century, one of the most significant of which is global warming, it would be a carbon tax, appropriately structured.


7.  The corporation tax can and should be greatly improved.  The last round of tax breaks made the corporation tax subject to extensive manipulation. Elective single-sales factor and loss carry-backs should be eliminated, and, on a revenue-neutral basis, could be replaced by a sales tax exemption for depreciable manufacturing equipment.  Such a shift would reward new purchases and investment, rather than tax manipulation.


The corporation tax should be understood as a way that shareholders, many of them out-of-state, pay for the use of California resources.  Corporations earn profits, distributed worldwide, from their California investments, and should pay for the use of California resources which create the environment they operate in.


In short, California’s corporation tax has been one of the best in the country until now, and should not be repealed; it should be reformed. The “blue” proposal suggests lowering the rate while repealing some, though not all, of the new loopholes.  That would be an improvement, although that revenue, as suggested above, could be better used to eliminate the sales tax on depreciable manufacturing equipment.


8.  We suggest the expansion of the sales tax base to a range of intangible commodities, including entertainment, storage, digital downloads, cable and satellite tv, hotels—in short, a variety of activities which are taxed in many states which do not otherwise broadly tax services per se.


However, even with the expansion of the tax to labor services, we do not believe that there is any credible proposal to end the sales taxation of business inputs, as proposed in the “blue” proposal.  Many business inputs are end-use consumption items, and are just a cost of doing business which do not necessarily “pancake” into prices in a competitive market.  And a wholesale exemption for business inputs creates significant enforcement issues which have never, to our knowledge, been put into practice in any state.  Again, the exemption of sales tax on depreciable manufacturing equipment may be a relatively enforceable means of responding to this issue, paid for either as mentioned above or by expansion of the sales tax to intangible commodities.


9.  Volatility is a budget/expenditure issue, not a tax issue.  As noted above, the main reason for the volatility of the income tax is the concentration of income at the highest levels, where incomes are more volatility.  Rather than reducing the taxation of the very wealthy, it makes sense to adopt budget control mechanisms which identify the level of extraordinary revenues in an upturn which should either be set aside or used in a one-time only manner, e.g. to pay down debt.  We urge the commission to recommend budgetary controls as a means of living with the volatility which is inevitable when income is so mal-distributed.  The “blue” proposal makes this recommendation.


10.  On process:  as we read Commission correspondence, we believe it is unfortunate that the only two packages appearing for consideration represent a very limited perspective on the charge to the Commission.  Surely that is a function of the very short timeline that the Commission has had for major changes in the tax system.  Thus, we believe it is very helpful that the “blue” proposal has been placed on the table as a point of reference for the options not explored.  One possible recommendation of the Commission could be to establish a more systematic and in-depth process of examination of the tax system and recommendations for change.

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It’s time to close a big tax loophole for businesses http://caltaxreform.org/?p=154 http://caltaxreform.org/?p=154#comments Wed, 15 Jul 2009 21:06:33 +0000 site admin http://caltaxreform.org/?p=154 Originally posted by the LA Times]]>

It’s time to close a big tax loophole for businesses

California’s property tax burden has gradually shifted to homeowners because commercial and industrial property doesn’t change hands as often as homes and the sales can be easily disguised.
Michael Hiltzik
July 13, 2009

Of all the ways in which California residents have slit their fiscal throats over the last 30 years, surely the most inexplicable is the bestowal of a gaping tax loophole on commercial and industrial property owners.


The culprit, no surprise, is that 31-year-old wolf in sheep’s clothing, Proposition 13, which prohibits the reassessment of any property except at the time of a change in ownership.


A sale is a pretty straightforward transaction for a home. That’s not the case for commercial or industrial property, where a sale can be disguised in an almost infinite number of ways.


“The whole system is completely unenforceable,” says Lenny Goldberg, a Sacramento lobbyist who, as director of the California Tax Reform Assn., has been pressing for years to institute a “split roll” — that is, to tax commercial and industrial property differently from residential.


The idea is to reverse what has been a shift in California’s property tax burden onto homeowners from business owners under Proposition 13.


In Los Angeles County, for example, single-family residences accounted for 39.9% of the tax roll, by value, in 1975, before Proposition 13. This year their share is 55.8%. In the same period, commercial-industrial property has gone from 46.6% of the tax roll to 30.9%. These figures are from the county assessor’s annual report, but a similar pattern holds statewide.


What businesses dodge, of course, the homeowner pays. It’s fair to say that lots of well-off California businesses are making out like bandits at the homeowners’ expense.


Goldberg calculates that Disneyland, which hasn’t had a reportable change of ownership since, well, forever, is currently taxed at an average of about a nickel per square foot. For comparison, a median California home bought last year out of foreclosure, measuring 1,600 square feet and selling for about $330,000 (these are averages from the California Assn. of Realtors), would incur property tax of about $3,300 per year, or $2.06 per square foot.


On average, as the anti-tax California Taxpayers Assn. acknowledges, business property was assessed at only about 60% of its full market value as recently as 2006-07, down from a recent peak of more than 87% in 1994-95.


Bringing the percentage up to 100%, say by requiring regular reassessments of business property regardless of ownership changes, could bring the state $2 billion to $4 billion a year in new revenue, depending on who does the math.


Despite this, the split roll has been as unpopular with the voters as any other amendment of Proposition 13. The only time the proposal has made it to the ballot, as Proposition 167 in 1992, it was soundly defeated.


An effort by public employee unions to get a split-roll initiative on the ballot in 2006 didn’t even make it past the signature-gathering stage.


But those were different times.


Maybe, just maybe, the voters of this financially spavined state aren’t still so reluctant to close a big loophole.


Even under normal circumstances, commercial property doesn’t change hands as frequently as homes do. But certainly a major cause of the category’s shrinkage as a portion of the tax roll is business owners’ ability to avoid reassessments — with millions of dollars at stake, they have greater incentive to maneuver around the rules, and well-paid real estate pros to help them do so.


The cleverness of some of their maneuvers gives the lie to any claim that American business has lost its innovative edge. Over the years, critics have pointed to some truly baroque schemes.


Consider the 1997 acquisition of Mammoth Mountain ski resort by Vancouver, Canada-based Intrawest Corp. When the Mono County assessor attempted to reassess the resort, Intrawest argued that although it had acquired a majority of Mammoth’s shares, it had left voting control on numerous management issues in the hands of the sellers. Therefore, it claimed, no change in ownership had occurred. That cost the county what the assessor calculated was $20 million in taxes over an eight- or nine-year period.


The resort wasn’t reassessed until it was sold again — this time in a clean 2005 deal with Starwood Capital. The new assessment was $167 million more than the old.


My favorite is the elaborate dance choreographed around the San Francisco office complex One Market Plaza.


The property was initially the subject of a 1986 deal in which the Equitable Life Assurance Co. sold an 81% interest in the property to an IBM pension plan, while formally retaining legal title.


This sale-but-not-a-sale wasn’t discovered by the San Francisco assessors until 1993. Straightening out the transaction, an appeals court later remarked, required “an extensive investigation, review of thousands of pages of documents, a federal lawsuit,” plus a long assessment hearing and two lawsuits in Superior Court.


Was it worthwhile? The ultimate recovery of taxes and fraud penalties in these high jinks came to $64 million, the appeals court reported.


But if Gov. Arnold Schwarzenegger really wants to wipe out waste in this state, he ought to think about the millions of dollars squandered over 13 years in chasing down the facts.


In economic terms, rationalizing the assessments of commercial and industrial property may be the best way to broaden the state’s tax base. For one thing, it’s close to the “ideal of non-distorting taxes,” as UC Davis economist Steven M. Sheffrin recently told a state panel that was considering changes to the state’s tax structure.


By this he means that it doesn’t skew business decisions on whether to build or buy a structure.


That’s because most of the underassessment of business property derives from the valuation not of buildings but the land under them — any new or acquired structure will be assessed at market value, so a split roll won’t affect that aspect of the investment decision.


It would, however, help eliminate the same inconsistent taxation that afflicts the post-Proposition 13 residential market, where two neighboring properties can receive wildly divergent tax bills simply because of when they last changed hands.


San Francisco Assessor Phil Ting, a leading advocate of the split roll, reports that the Neiman-Marcus on Union Square has an assessed value of $761 per square foot, more than twice that of the Macy’s next door, simply because the Neiman’s property changed hands in 2006 and Macy’s in 1995.


The two stores may not address exactly the same clientele, but they’re not that different. Similar disparities exist all around the business district, Ting told me.


“Property taxes are supposed to be based on value, but these rates have nothing to do with that,” he says.


Anti-tax crusaders will muster a lot of threadbare arguments against the split roll.


They’ll say raising rates will burden small businesses that will see the increases in their rent bills. Goldberg proposes moderating that effect by eliminating property taxes on the first $1 million of a business’ “personal property,” which in practice means its equipment and machinery, tools and furniture, most of which is a pain in the neck to assess anyway.


They’ll say the higher tax will be passed on to California consumers, but that’s not so easy. The marketplace sets consumer prices — one Beverly Hills hotel can’t charge four times the room rate of another just because it pays four times the property tax per square foot, for example.


They’ll say, finally, that higher property taxes will drive businesses out of California. Leaving aside the question of whether Disneyland can be moved to, say, Arizona, the truth is that what’s really going to drive businesses and residents out of this state is a crumbling infrastructure and a tax system that doesn’t work for anybody. The split roll would be a good place to start getting it to work for everybody.


Michael Hiltzik’s column appears Mondays and Thursdays. Read previous columns at www.latimes.com/ hiltzik and follow @latimeshiltzik on Twitter.
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Presentation to the Commission on the 21st Century Economy http://caltaxreform.org/?p=144 http://caltaxreform.org/?p=144#comments Wed, 15 Jul 2009 17:09:23 +0000 site admin http://caltaxreform.org/?p=144 The Empire’s New Clothes: 
The Failure to Assess Commercial Property at Market Value: a Powerpoint presentation
Addressing Property Tax Issues: Rational Discussion in a Charged Environment in pdf ]]>
The Empire’s New Clothes: 
The Failure to Assess Commercial Property at Market Value: a Powerpoint presentation


Addressing Property Tax Issues: Rational Discussion in a Charged Environment in pdf

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Corporate Loophole Repeal Initiative http://caltaxreform.org/?p=139 http://caltaxreform.org/?p=139#comments Mon, 13 Jul 2009 20:50:28 +0000 site admin http://caltaxreform.org/?p=139

Summary:  this proposed initiative repeals only the three new corporate loopholes which were the secret part of the failed budget deals in September 2008 and February 2009.


None of them have yet taken effect, so the initiative will prevent over $2 billion yearly in future revenue losses. It has been filed with the Secretary of State, pending title and summary.


The three loopholes are:


Loss carry-backs:  allows corporations to get refunds for taxes already paid to the state when the business takes a loss 2 years later.  If the state’s economy declines and corporations take a loss, they will be able to get a refund for prior taxes just when the state is in worst shape.


Elective single sales factor:  allows multi-state and multi-national corporations to choose how much income they want to attribute to California. Companies can choose every year which formula they want to use—sales only, or sales, property and payroll—in order to determine the amount of profit they made in California.  So they can attribute more losses or less income, depending on their yearly position, to their advantage and the detriment of the state.


Credit-sharing:  allows a corporation which cannot use all the credits they have received to share those credits with parent or affiliated corporations in order to shelter the income of the affiliate.  Multinational pharmaceutical companies are likely to benefit most from this.


History:  These loopholes were never discussed and never made public until they were passed as part of the budget agreements in September 08 and February 09.  Taken together, they lose $2-2.5 billion in revenue.  They also open up opportunities for endless manipulation of tax liabilities by accountants and attorneys.


They also benefit mostly a handful of multinational corporations with revenues over $1 billion each.  The California Budget Project analyzed who the beneficiaries of each of these loopholes would be, and demonstrated the following:


*80% of the benefits from elective single sales would go to .01 percent of corporations with revenues over $1 billion. 9 corporations would receive 30% of the benefit, with tax cuts over $20 million for each company.


*14 corporations with credit sharing would receive over ½ the benefits, and 87% of benefits will go to .003% of corporations with revenues over $1 billion


*The benefits of loss carry-backs include large holding companies, real estate and financial institutions.


These loopholes would never have passed in an open policy discussion, and, because they allow for extensive tax manipulation, could lose ever more money in the future.

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Initiative: Eliminate the New Corporate Loopholes http://caltaxreform.org/?p=104 http://caltaxreform.org/?p=104#comments Tue, 07 Jul 2009 22:18:17 +0000 Lenny Goldberg http://caltaxreform.org/?p=104 Read the initiative in pdf;]]> This initiative, filed July 7, 2009, would repeal the new corporate loopholes passed in secret by the Legislature as part of the failed budget deals which have been rejected by the voters.  Read the initiative in pdf;

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Revenues for the Budget Crisis http://caltaxreform.org/?p=101 http://caltaxreform.org/?p=101#comments Wed, 03 Jun 2009 01:00:01 +0000 Lenny Goldberg http://caltaxreform.org/?p=101

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

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Internet Tax Avoidance: SF Chronicle op-ed http://caltaxreform.org/?p=97 http://caltaxreform.org/?p=97#comments Wed, 20 May 2009 00:15:13 +0000 Lenny Goldberg http://caltaxreform.org/?p=97 Read the original article in the SF Chron ]]>  

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/17/INKN17JUFD.DTL

Internet tax avoidance hurts jobs, public


Lenny Goldberg,Hut Landon


Sunday, May 17, 2009


The demise of Cody’s Books in Berkeley and Stacey’s in San Francisco is a symptom of one of the key changes of our new era: the shift to the massive use of Internet sales instead of community businesses.


We are in a difficult period of transition for retailing in general and booksellers in particular. But it’s particularly frustrating when the state’s tax policies conspire with out-of-state sellers to inflict major damage on local businesses.


State-sanctioned tax avoidance is in fact what has been happening as a result of the failure of the state Legislature and of the state’s sales tax agency, the Board of Equalization, to collect taxes on sales into California by companies with substantial presence in the state. Not only is Amazon.com abusing the law with regard to its massive sales into California, but a whole Web-based cottage industry has grown up based heavily on a business model of avoiding sales tax.


The issue has come to a head over a bill by Assemblywoman Nancy Skinner, D-Berkeley, whose legislation, AB178, is really about enforcing the sales tax law, which the Board of Equalization has failed to enforce. It says, simply, that Internet sellers with agents or representatives in the state have presence sufficient for them to be obligated to collect tax on sales to California and send it to the state.


The business model used by Amazon for years, and now by other businesses, is their “affiliate” program, by which thousands of California organizations and individuals solicit sales under a contractual relationship and receive a commission on the sales. Amazon’s long-standing approach has been to gain a competitive advantage over other businesses by avoiding the collection of tax.


Founder Jeff Bezos has said he originally wanted to locate in Alameda rather than Seattle but wanted to sell tax-free into the huge California market. And somehow the company has managed to avoid the law that says that if it has representatives in the state - its affiliates - it must collect the tax.


California is not on the cutting edge of this issue. New York passed legislation that serves as the basis for Skinner’s bill. Amazon did two things in response: It started collecting the tax from New York purchasers immediately, because it did not want to be liable for the money; and it filed suit. A New York court dismissed the suit, holding that Amazon had a presence in New York, and upheld the state. As a result, a number of states, California included, are attempting to follow the New York law.


However, in California, home to high-tech industries, legislators have been hammered by lobbying from the likes of Google and Yahoo, even though their click-through advertising businesses would not be affected. Worse, an “AstroTurf” campaign of small sellers with Web-based businesses affiliated with a national Web company also has pressured the Legislature. This group serves as a Web-based representative of out-of-state retailers, giving them entry into the California market without collecting any tax on sales. Skinner’s bill, they say, will do harm to their businesses, which cannot exist if tax avoidance is ended.


But let’s talk about the long-standing harm, caused by an unlevel playing field, to California’s existing Main Street retailers. Stacey’s and Cody’s alone employed about 200 people, generated revenue of $20 million and paid $2 million in sales tax each year. That’s $2 million more than Amazon has collected on its book sales. And these small businesses are at the heart of what makes our communities into livable neighborhoods. Yet the state provides what is effectively a 10 percent subsidy for these out-of-state sellers.


Obviously, given the state’s fiscal dilemma and the legitimate needs of California businesses, these practices are untenable. Whether traditional booksellers can survive the next wave of electronic book downloads is an open question. Similarly, music sellers have faced the difficulty of competing with digital downloads (which also, unfairly, are untaxed in California and most, though not all, states).


For a brief time in the 1990s, major national retailers of electronics, sporting equipment and books flirted with separating their companies into dot-com subsidiaries so they, too, could avoid tax. Not only was this self-defeating, but it quite possibly was illegal, so that retailers such as Target.com now collect tax on all Internet and store purchases.


But there are, in fact, billions in out-of-state sales into California that unfairly compete with all of our domestic retailers by avoiding taxes, a situation Congress ultimately will need to resolve.


Skinner’s bill is estimated to bring about $150 million to California and its cities and counties. It’s not going to solve our budget dilemma, but neither can the state afford to let tax revenue that is legally due go uncollected. Hopefully, legislators also will understand that subsidizing Amazon at the cost of our communities is bad economics in severe economic times.


Lenny Goldberg is executive director of the California Tax Reform Association and a public interest lobbyist in Sacramento. Hut Landon is the executive director of the Northern California Independent Booksellers Association.


http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/05/17/INKN17JUFD.DTL
This article appeared on page G - 3 of the San Francisco Chronicle
© 2009 Hearst Communications Inc.

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