Responsible Governance - Tax break bills vetoed!

Source: https://www.gov.ca.gov/m_about.php

Why are our tax systems so complex?  One key reason is that lawmakers keep adding to them and rarely delete anything.  Also, items added for temporary purposes are often renewed (rather than dropped or made permanent). Also, we often have numerous rules serving similar purposes (such as for higher education spending or savings).

Well, on October 10, 2015, California Governor Brown, said "NO" to nine tax bills presented to him.

His reason was that they might bust the budget given other budget issues.  Each of the nine would have either added or expanded an existing or expired provision or added something new.

One additional benefit beyond curtailing complexity is that perhaps his action will remind lawmakers and taxpayers that another type of tax legislation are bills that reduce or eliminate tax deductions, exclusions, or credits and lower tax rates.  Such proposals also help a tax system to be more equitable, simple, efficient and neutral!

What happened - On 10/10/15, Governor Brown vetoed nine bills that either created or expanded a tax credit or exclusion or exemption. He stated that the budget is only “precariously balanced” and that “without the extension of the managed care organization tax” that he “called for in special session, next year’s budget faces the prospect of over $1 billion in cuts.” Thus, he vetoed the nine bills which he noted would make it more difficult to balance the budget. Per Governor Brown: “Tax credits, like new spending on programs, need to be considered comprehensively as part of the budget deliberations.” [That's also something we don't hear lawmakers say often enough!]

The nine bills:

1)      AB 35 – low-income housing credit expansion

2)      AB 88 – sales tax exemption for energy or water efficient home appliances

3)      AB 99 – CODI exclusion for 2014 for principal residence debt

4)      AB 428 –  30% credit for certain seismic retrofit work

5)      AB 437 – research credit for qualified small businesses

6)      AB 515 – expand credit for certain food donations

7)      AB 931 – modify new employment credit to include certain Veterans

8)      SB 251 – credit for eligible access expenditures

9)      SB 377 – allow sale of certain housing credits

How Often Do California Governors Say No? The California Senate Office of Research updated an earlier report summarizing how often in the past California governors have vetoed legislation. Per this report dated 10/12/15, as of that date, Governor Brown has vetoed 14.13% of bills. This doesn’t surpass his 2011 record of 14.37% though. In the past five years, the governor has vetoed almost 13% of the 4,777 bills presented to him. The record of vetoes is held by Governor Deukmejian who vetoed 2,298 bills during his eight years in office. The report has data back to 1967.

What do you think?

Governor Brown's Tax Modernization Proposal - Is It Enough?

Governor Brown's "May Revision" budget includes a "job creation and economic development proposal." Here is the text of that proposal (page 68):

"The May Revision proposes to modernize the state’s job creation and economic development incentives. Created over 25 years ago, the Enterprise Zone program should be reshaped to meet the needs of the current economy. In its current form, it fails to encourage the creation of new jobs an instead rewards moving jobs from one place to another within the state. Additionally, the New Jobs Hiring Credit created in 2009 has not been effective at stimulating job growth. The May Revision aims to strengthen both of these programs to bolster California’s business environment and reintegrate people into the workforce.

The hiring credit will be refocused to specific areas with high unemployment and  poverty rates. This credit will be available for the hiring of long‑term unemployed workers, unemployed veterans, and people receiving public assistance. The Enterprise Zone sales tax program will be expanded to a statewide, upfront sales tax exemption for manufacturing or biotech research and development equipment purchases. Finally, the California Competes Recruitment and Retention Fund will be created, to be administered by the Governor’s Office of Business and Economic Development (GO‑Biz). GO‑Biz will negotiat agreements to provide businesses tax credits in exchange for investments and employment expansion in California.

The proposal is revenue neutral and focuses on improving the performance of those dollars already spent. It will allow California to be more effective at stimulating economic growth an creating new jobs. The program will be designed to ensure that small businesses are able to easily obtain the manufacturing sales tax exemption, and will dedicate a portion of the hiring credit and the incentive fund solely to small businesses"

It is good to look at modernization of any provision that has been around for even 10 years, let along 25. Governor Brown doesn't mention what the "needs of the current economy" are. Is it to address varying unemployment rates among California communities?  Is it to be sure the California economy can attract and support jobs in the knowledge and green economies?  Is it to be sure the state's tax system is at least in sync with others?

If it means any of the above, more is needed than reforming a jobs credit and enterprise zone incentives. Why not reform the entire sales tax system to cover more types of personal consumption - modern consumption such as personal services and digital downloads?  Why not phase in exemptions for equipment of all types of businesses? A broader sales tax base would help local governments such that equipment exemptions could cover both the state and local portions of the sales tax. Ideally, the broader sales tax base for consumers would include a lower rate.

What do you think modernization of California's tax law should include?

For more, see my 3/25/13 post on California tax reform and a short paper on weaknesses in California's tax system.