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Inside the Leonard Letter
By: Bill Leonard on: Tuesday, March 09th, 2010

***Until We Meet Again***

It has been an honor and pleasure to provide you with information and commentary about state government these past years.

Today I am accepting an appointment from Governor Arnold Schwarzenegger to serve as the Secretary for State and Consumer Services with the mission to hold down government spending. I am resigning my position the Board of Equalization and turning it over to the capable hands of my chief deputy, Barbara Alby.

Because I now have only one boss, the Governor, this will be the last edition of the Leonard Letter for 2010. I need to focus exclusively on helping the Governor with the duties he assigns me.

Thank you for your comments, support, suggestions and prayers, as they are all greatly appreciated.

You may continue to reach me at or connect with me on Facebook.

Inside the Leonard Letter
By: Bill Leonard on: Monday, March 08th, 2010

***California Budget Mess Will Not be Solved on Margins***

I was struck by an excellent column by Timm Herdt of the Ventura Star. He posed a very insightful question, “Are efforts to better collect taxes that are already owed the political equivalent of actually raising taxes, or are they designed to ensure fairness for those who are already paying their full share?” I say the answer is they are tax increases, but so small as to be inconsequential. Fairness is pursuing individuals who falsify their tax returns and purposely do not pay. Raising other people's taxes is not fairness.

Herdt focuses on several issues, like the proposed “Amazon tax” that would require internet retailers with affiliates in California to collect sales tax on behalf of the state for sales that they do not make. Another is a proposal to assess penalties on high-income taxpayers who are denied eligibility for certain tax credits. Under the bill (SBX8 32), those who unsuccessfully claim credits that defy “reasonable basis” in an “excessive amount” – both undefined terms – face a 20% penalty of the amount claimed, if the taxpayer makes over $250,000 a year. At the same time, the bill would allow people who short-sell their homes to have the difference between their loan balance and sale amount not count as income. According to the legislative analysis, even with the higher penalty for rich people, the proposal is a net revenue loser.

The common element between these is the majority Democrats identify people they do not like and then go after them. They know the electorate is angry and think if they can project that anger onto others they will get a break with public opinion. That is leadership of a certain kind, but not what is needed to balance the budget.

The Amazon tax is hyped as a way to close the tax gap and make fairer the tax treatment of California retailers. Both goals are unattainable with this approach. The BoE already collects 96% of the overall sales and use tax due. The Board brings in around $44 billion in sales tax collections every year. The Amazon proposal is estimated to bring in only $107 million a year more, or two-tenths of one percent. This estimate assumes Amazon does not fire their California associates, as they did to their New York affiliates when New York passed the same law. Amazon simply hired new associates in New Jersey. New York ended up with no new revenue and more people without jobs. There are a lot of under-employed people in Nevada who would happily service California consumers. As I have stated many times, the way to mitigate the Amazon tax inequity is to lower the sales tax enough so the difference between shipping to California and paying sales tax is more equal.

The voters want the Legislature to get serious. Legislator approval rating is diving. The proposals highlighted here neither increase fairness for other taxpayers, nor bring in anywhere close to the revenue needed to close the deficit. These proposals are tinkering on the margins in ways that have no practical effect but appeal on an emotional level to some. That is not “getting it done.”

***The Liberals’ Free Speech Problem***

In case you did not see, there was a party off campus from UC San Diego that had as its theme mocking black history month and “ghetto” culture. It was offensive to me and many others. Both the University and concerned alumni should talk to these students and appeal to their reason that their actions reflect badly on their school, and to contemplate the isolation some black students feel. However, what the students do on their own time, at a private party, is hardly a matter of State. I am reminded of the Golden Rule. It is not the people we love that we are called to forgive; rather we are called to forgive people we can hardly stand. The spirit behind the First Amendment is similar – it protects expression even when it is repulsive.

Others apparently disagree with me. There was a big press conference with a rally on the Capitol steps with a large contingent of liberal lawmakers, including Speaker Karen Bass (Republican Anthony Adams spoke, too) berating and threatening the students. This bothers me even more. There is merit to the idea of black history month because it is worthwhile to take note of the contributions of black Americans. But the idea of a special month is undeniably a construct of America’s elite. Therefore, in the best American tradition, it is absolutely eligible to be mocked by young people. It would be highly ironic if the fallout of making fun of black freedom and achievement results in a loss of freedom to those who spoke. The American response must be to strongly express disagreement with the mockers but not to sanction them.

There is no doubt in my mind that if modern liberals had the power to make certain expression illegal, they would exercise it. This is far more offensive to me. Conservatives writ large have been building a reputation as defenders of the First Amendment in the face of political correctness for a long time. My first-in-the-nation 1991 “Leonard Law” protecting the free speech for students is one example. The recent Citizens United case is another. So, kudos to the Sacramento Bee for a recent editorial that urges lawmakers to focus on the budget, not protesting off-campus college parties. They got it right.

***New Speaker of the Assembly***

It is always a time of hope and celebration when a new Speaker is sworn-in and John Perez is no exception. Although he is part of a long line of Assembly leaders with strong ties to organized labor, in this era of limits he will be spending a lot of his time cajoling those government workers that they must accept less. I wish him the best. A few things caught my attention as Speaker Perez assumed the mantle last week.

One is that, like proud parent, it is fun to see the kids growing up and taking their place. Perez related that he was part of the Boys State program and visited the Capitol to learn about state government. He was 16 in 1985 and I was serving my seventh year in the State Assembly at the time of his visit. I hope he learned what to do and what not to do.

Second, Perez has announced that he will appoint a couple of Republicans to committee chairmanships. While it is a generous gesture to share the power, the reality is that these chairmanships are empty gavels and the Republicans should respectfully decline. Even with a Republican chair there will be a super-Democrat majority on those committees as there is on every other committee. And some position like Chairman that is freely given can be just as freely taken away if that Republican chair disagrees with the Speaker. Given the disagreements between the parties on a host of policy issues some dispute is sure to occur.

And lastly, the new Speaker has ordered legislators to not receive text messages from lobbyists. Short of banning all electronic devices from the Assembly floor (including members' laptops), this new rule is unenforceable, violates the First Amendment guaranteeing free speech, and suggests that legislators are so weak in their integrity that a text message would sway their vote. Decorum on the floor is enforced by the Sgt. at Arms. I cannot see how the Sgt. at Arms can patrol the floor reading phone screens over the shoulders of legislators. It would be better to spend the time training legislators in how to say and mean, "No."

Inside the Leonard Letter
By: Bill Leonard on: Monday, March 01st, 2010

***California Needs a Diet, Not Bankruptcy***

To conclude that the state is bankrupt is to suggest that the state is unable to pay its debtors even after selling all its assets and giving up all its income. That is simply not true. The reality is that the state is choosing to spend more than it takes in, which is a policy choice that needs to change, but those who believe bankruptcy would make Sacramento face reality would not like the result.
In the past I have been loose with the word ‘bankrupt,’ but even if some court could have bankruptcy jurisdiction the state would still not be insolvent to file for relief. To be insolvent is to have debts greater than assets. Our debts are roughly $131 billion in General Obligation Bonds (issued and eligible) and leasing arrangements, plus around $500 billion in present and future pension and health liabilities, for a total of around $630 billion. On the asset side, the PERS account (underfunded but still substantial), plus all state property – the buildings, state parks, beaches, oil leases etc and other investments – is greater than $635 billion. As far as debt service, according to the Treasurer’s 2009 report, our annual total debt service is around $7.3 billion, a debt service ratio of about 6.7%. According to the State Treasurer, this ratio will peak at over 10% by 2015 absent new bonds. This is not a healthy level of debt, but since our annual income even in these tough times is $80-some billion, it is not bankruptcy level.
A better diagnosis is that the state is addicted to spending and needs to admit that it has a problem. The state must close or slash programs to live within its income. Clearly there would be lots of disruption and angst. Nevertheless it is the responsible choice.

Given the history of Federal judges telling the state to spend more money it is highly ironic that some folks are suggesting bankruptcy as a solution because then a Federal judge would decide how the state would spend its income.

***Attack on First Amendment***

Where is it most likely that the right to it and free association would not be recognized? A California law school, of course.

The Hastings College of Law at the University of California refused to recognize the Christian Legal Society. The school said that requiring members to take an oath that in part says "Jesus Christ is my Savior," was discrimination. The group sued to be officially recognized by the school and now the case is before the U.S. Supreme Court.

The Hastings College of Law is another embarrassment to California students and the Constitution.

***Overly Aggressive Tax Collection***

Most people assume that all tax collectors are overly aggressive, but it is not so. Many tax collectors work to implement the law fairly without forcing the taxpayer to prove every claim for exemption, deduction or credit. But what gives tax agencies a bad name is when just one auditor or collector becomes overly aggressive. We had such a case up for appeal last week. The taxpayer is a religious youth camp operator and for decades all several hundred of these youth camps have been exempt from charging sales tax on meals. Apparently someone in the department decided to test this longstanding practice under an audit that found one camp to be liable for sales tax on the meals. (One big question, of course, is what is a mess hall meal worth as a portion of the campers' tuition?) Dozens of camp organizations joined in support of the camp before us and the board, in a unanimous vote, told the staff that they had overreached.

It is clear to me that state law means to exempt these camps from the sales tax on meals. It is also clear the incredible work they do with youth from all over California. I remember fondly my summers at YMCA and church camps, and I know those memories are shared by millions of Californians. Commendations to the BOE board members for fairly applying the law.

Inside the Leonard Letter
By: Bill Leonard on: Monday, February 22nd, 2010

***Taxing Amazon is Government’s Conceit***

On Thursday the California Senate passed a bill, ABX8 8 that will make internet retailers with affiliates in California collect sales tax on behalf of the state. The bill is now in the Assembly for a vote on concurrence. Many good points were raised in the debate. I completely agree with the Democrats that there is a great inequity between internet retailers who sell without collecting sales tax and California retailers who have to collect the tax. However, this is a fight that cannot be won because of the nature of the internet.

When Jeff Bezos was thinking about establishing Amazon back in the '90s, his first thought was to set up on an Indian reservation. Bezos is a wonderful, mad genius, and his sophistication has only increased. When New York passed this same mandate on Amazon last year, Amazon immediately fired all of its affiliates in New York and signed up new ones in a neighboring state. You can call it radical, but it is a great business decision that is in the best interest of Amazon shareholders. Some say the answer is a national sales tax program, but that misses the mark as well. Consider that Google is rumored to be designing floating islands for their servers to be positioned offshore so they are not answerable to any government. If Google does not do this, someone else will. Or, a very wise government, say Iceland, will invite these companies to place their servers on their soil, tax-free. Such a decision would reap a huge windfall in property and employment taxes.

There only solution is this: either lower the sales tax rate so that it is about equal to the average cost of shipping from an internet retailer, or do away with the sales tax completely. It is an old, unfair tax that no longer reflects the economy and there is nothing government can do about it.

Some highlights from the debate can be seen here:

***Big Brother on Campaigning***

The Fair Political Practices Commission will be holding a hearing about the use of the internet in campaigns and is seeking testimony on what "the appropriate regulatory structure" of internet campaign communications should be. My friend Jon Fleischman, who runs the political news and opinion website, has been asked to testify. Though I know Jon can hold his own in telling these bureaucrats what's what, he asked for suggestions so I am offering my thoughts.

I fear any attempt by state government to regulate the internet because only those Californians already within the FPPC's grasp will be held to standards. That will result in unequal ability to attack, respond or inform. We will end up creating an internet version of the independent expenditures spawned as the unintended consequences of FPPC rules.

Those voters who care enough to go to the internet for political information or read political emails are knowledgeable enough to understand that a website or email without any disclosure information is less than credible. But even if such common sense does not deter the regulators, the bad actors will find ways around the rule. After all, you can run a website from Nevada, too, or Iceland for that matter.

Inside the Leonard Letter
By: Bill Leonard on: Tuesday, February 16th, 2010

***Begging for a Tax Revolt***

On July 2nd, 2009 in a special session of the Legislature dealing with the budget, a bill was introduced to mandate new reporting and filing requirements for tens of thousands of California businesses that previously never had to deal with the Board of Equalization. The bill passed and was chaptered on July 28 without any of the usual public outreach or amnesty period. So far, only about one percent of the mandated businesses have registered and filed a return for Use taxes owed over the last three years. This new filing requirement under penalty applies to any business with $100,000 or more in gross revenues and who are not already registered with the Board. The deadline is April 15 and probably 90% of the affected businesses do not even know about this shocking tax form. There are a lot of service businesses that are not required to have any license so finding these and making them aware of this mandate is a big challenge itself.

I have pushed for the Board to grant a blanket one-month extension, the longest allowed under current law. Our Chair, Betty Yee (D-San Francisco), has agreed to put the matter on the agenda at the March 23-25 BoE meeting. Meanwhile, I am looking for a legislator willing to introduce legislation that would provide a six-month extension, at the minimum. I would rather the entire program be rescinded.

Along with last summer’s “acceleration” of our tax payments that automatically increased withholding by 10% for California residents, this is another ill-thought policy that is turning ordinary taxpayers against their government. has the story:

***Legislature, Pay Your Bills***

Controller John Chiang released a new actuarial report last week that shows California faces a $51.8 billion bill to pay for health and dental benefits for state retirees.
The unfunded obligation as of June 30, 2009, grew $3.6 billion from $48.2 billion in the prior year. Unlike state pensions, which are covered by pre-funding and investment returns, California pays for retiree health benefits on a pay-as-you-go basis as the costs come due each year.

The State would need to contribute $2.8 billion in 2009-10 to fully fund its obligation. But Controller Chiang did not go far enough. These are contractual obligations that legally are more important than regular legislative budget appropriations. Chiang should announce that he will prioritize what checks to write to make sure that contracts are honored.

The report can be found here:

***Alum Success***

In my more than 30 years of public service I have been honored to have hundreds of staff members go on to impressive careers after working in my office. The latest Leonard alum I continue to be impressed by is the new Secretary of Education for the state of Virginia, Gerard Robinson. He was assigned to my office as State Senate Fellow back in the early 1990s. He spent his time on my legislative staff researching and advocating for education reform, particularly for parental choice in the form of vouchers, charter schools, private schools and other creative manifestations. I know that his early research now informs his service to Governor McDonnell, and I wish him well. Learn more about how he went from Compton to Harvard and beyond here:

Inside the Leonard Letter
By: Bill Leonard on: Monday, February 08th, 2010

***Payroll Tax Credit a Start***

First, the California payroll numbers in my last email need correcting. On top of the federal deductions, the correct calculation for California withholding for a single person making $45,000 with no deductions is roughly $41.25 withheld for SDI, along with $159.98 for state income tax withholding, all told (federal and state) the worker is left with just $2,720 out of a gross pay of $3,750. The corrected item is posted here in its entirety:

Again, a temporary suspension of these taxes would be a more direct stimulus for hiring than scatter-shot spending programs. Either option is not cheap, but if the goal is to increase employment, it makes abundant sense for government to do what it can to lower the cost of labor directly.

Rather than tax credits and other such indirect attempts to encourage employment, the federal government should directly cut its payroll taxes. The President’s new proposal is really not new and really not very productive.

***Projections Moving Faster than the Trains***

In the face of the state's perpetual budget crisis, some Californians are beginning to regret their votes in favor of the $9.9 billion high-speed rail bond last year. Even though proponents of the train have now admitted the bond was only a down payment on the actual cost to build the system, the numbers that were projected are changing—and all in the wrong direction.

The business plan released by the train's advocates last month show the dramatic differences in what the voters were told and what reality is. For example, the price of a ticket from San Francisco to Los Angeles is now projected at $105, up from the previous $55 estimate. That new number changed the ridership predictions: now 41 million annual riders by 2035, down from last year's prediction of 55 million passengers by 2030. The cost for building the train system has also grown. The proponents had been thinking $33.6 billion (2008 dollars) but have revised upward to $42.6 billion. Recently, the Obama administration announced $2.25 billion in funding for the project. Proponents said federal money would be used to close the gap between the voter-approved bond and the ultimate cost, but this is a drop in the bucket and still will not work.

You can read the plan for yourself here:

This is the train to nowhere and California could really use that $9.9 billion for more immediate, important and better projects.

***Pray the News***

My friend, Joe Walsh, advocates that believers use the newspaper and television news as the starting point for their prayers. Indeed, the troubles and disasters of the world are all over the news and there are lots of people in need of prayer. He has now sponsored a campaign for California-- not political, but statewide nonetheless. He is asking for volunteers to sign up, at least one in each of the state's 25,000 voting precincts, to pray for California and its people.

Those interested can find out more at:

Two announcements last week have prompted me to think about the important things in life and reflect more than usual on the value of prayer. First, Governor Schwarzenegger's Secretary of Education, Glen Thomas, announced his resignation in order to care for his 96 year old mother. May God bless him in that mission. And then later in the week Congressman George Radanovich lost his wife, Ethie, to cancer. The Congressman had announced just a month ago that he was not seeking re-electing in order to spend more time with his ill wife. Our prayers are with the Congressman and his family.

As much as we all criticize politicians for their mistakes and bad ideas (and they deserve it), it is also important to note that they are accountable to the same challenges and issues that affect everyone.


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