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Thursday, June 25, 2009

California Budget Proposals

The Floor Report 2009-10 Budget by the Assembly Budget Committee (6/19/09) notes the following as part of the package to address the $24 billion budget gap:

  • "Seeks Targeted Revenue: Includes tax increases, but focuses these increases at oil companies and cigarettes. Also includes some fee increases to support parks and protect Californians against fires, earthquakes, floods, and other natural disasters.
  • Eliminates Loopholes and Increases Compliance: Repeals recent changes to tax law, enacted in the September budget package, to allow the carry back of Net Operating Losses during the prior two years and another provision that allows corporations to assign a portion of unused tax credits to an affiliated corporation. Also includes various compliance measures to ensure payment of taxes owed to the state."

The plan is also to address the 2010-11 deficit. The plan also notes some spending cuts and the following:

  • "$5 billion in revenue accelerations and fees, including the Governor's proposals to accelerate Personal Income Tax withholdings and Corporate Estimated Payments. Also includes a 3 percent independent contractor withholding requirement that is expected to generate $2 billion one-time in FY 09-10 and ongoing compliance revenue of about $130 million per year.
  • $1.9 billion in new taxes. Of this amount $1 billion is from a new $1.50 per pack cigarette tax and nearly $830 million is achieved through a 9.9 percent oil severance tax.
  • $5 billion in other solutions, also detailed later in this report. This includes a $1.2 billion one-time savings by deferring the June 30th State employee paycheck to July 1st and $1 billion from the sale of a portion of the book of business for the State Compensation Insurance Fund."

An acceleration means that something that was supposed to be due in a later year is shifted to an earlier year. For example, since the state is on a June 30 year end and individual taxpayers are on a calendar year, if you require individuals to pay more of their annual tax liability (through estimated tax payments and wage withholding) in January through June, you'll help the state's budget more in the earlier year than in the subsequent year AND this is not a tax increase - just a budget gimmick. It will likely cause there to be a budget issue in the subsequent years although perhaps the legislature and governor think that the recession will end and greater revenues will be collected in the future year.

There are true tax increases in the budget - increasing the regressive cigarette excise tax and creating an oil severance tax - a tax that many states have had for years. The oil severance tax means that oil companies have increased costs and that gas will cost more. I think that is a good thing for gas to cost more - after all, California does have aggressive goals to reduce greenhouse gas emissions and if we think we don't need to reduce oil consumption, we're being foolish.

It appears that the oil severance tax will go to the General Fund which is a good thing. The California Faculty Association (CSU faculty) have been pushing for the tax to go to help fund higher education. That seems odd because you'd think the faculty would want to help preserve the CALIFORNIA State Universities as a wonderful and crucial state resource funded by the General Fund rather than convince legislators and the public that it requires special funding. Also, there is no connection between oil and education so certainly an oil tax should not be earmarked for higher education - it should go to the General Fund so the legislators and governor can do their jobs and create a state budget.

The legislative budget also proposes closing "loopholes" (they aren't loopholes, that term is just used as a way to help convince people they are somehow misused rules - I've commented on this before - here) - disallow a recent change that would let affiliated corporations assign a credit carryover to another member and to postpone usage of NOL carrybacks.

Also included in the budget is a copying of what New York did in April 2008 (the so-called "Amazon tax"), described as follows:

"Extends sales tax "nexus." Requires out-of-state sellers, such as Amazon, that pay commissions to California firms or residents for sales referrals (often through a website link) to collect use tax (equivalent to sales tax) on their sales to California residents. This provision improves compliance, but does not change tax liability. Existing law requires Californians to pay equivalent use tax on these purchases, but compliance is low. Provisions reflect AB 178 (Skinner). The estimated General Fund revenue gain is $48 million in 2009-10 and $110 million annually, with additional revenue increases in local sales tax revenues."

This is technically not a revenue raiser because it is getting remote vendors like Amazon to collect what should otherwise be paid by its California customers. But the state knows that Amazon can do a much better job collecting the tax than consumers are doing in paying it on their own.

The response in New York was that Amazon started collecting sales tax from its customers and cancelled its contracts with NY affiliates. At trial court in NY, the court found that Amazon's claim that the law was unconstitutional was not correct. The court found that it was reasonable for the state to assume that affiliates (those with links on their websites they hope people will use in buying from Amazon) would help promote sales and Amazon could have rebutted the presumption that the affiliates were soliciting sales in NY. (I've written on this before: 7/08 and 8/08 and 2/09 and 6/09) People and organizations that have vendor links on their websites that earn them commissions when someone orders by first clicking on that link, don't like this provision because they think vendors will do what Overstock did in NY - cancel the agreement resulting in less revenue for the person or organization (you can find these links on PTA website and many others).

You can find details of the budget at:

So, will any of this help move our tax system into the 21st century? Well, the intent is certainly to close a large budget gap rather than to modernize the system. Since an oil severance tax can help reduce oil consumption and we need to reduce CO2 emissions, there is some benefit there. But we could have also just increased the existing gasoline and fuel excise taxes. The "Amazon tax" proposal may reduce our $1 billion use tax gap, but doesn't help educate consumers that they need to be use tax compliant. The "Amazon tax" collects use tax from just a segment of e-commerce.

Perhaps the legislators are also just waiting for the report, due in July, from the CA Commission on the 21st Century Economy, for ideas on how to modernize our tax system.

Certainly more is needed but because true tax reform will require a 2/3 majority vote, it won't be pursued at this time (and it is not clear how strong the desire is to modernize California's tax system even though it should help the economy, individuals and businesses).

What do you think?

1 comment:

Anonymous said...

This weeks thousands of small businesses received their notice from BOE that they must register for the "use tax". Hmmm doctors, dentist, lawyers required to file a form each quarter with zeros. This is a fine use of our state budget!!!