Leonard Letter on Tax Policy – 2004-2008
“CMTA Panel Discussion” – January 26, 2004
Last Tuesday, I was pleased to sit on a panel at the California Manufacturers & Technology Association symposium on tax policy. The topic for the panel was whether to tweak or completely overhaul our tax system. I expressed my preference to tweak because I think it very likely that an overhaul of our tax system at a time when we have a record deficit would likely result in higher taxes disguised as reform.
I repeated a point I raised in a legislative committee last summer. The legislature should adopt both a projected revenue number and a means of calculating the tax burden on the economy. Evidence shows that when general fund expenditures exceed 6.2% of the state's personal income, the state's economy suffers. In the recession years of 2000-01, general fund expenditures rose to 7.1 percent of personal income.
I also made the case for the state not to raise the sales tax. Most of the existing local government half-cent sales tax measures for essential transportation are expiring and will need to be readopted by a supermajority of voters. Even a half-cent increase by the legislature could jeopardize the renewal of these taxes on the local level.
I was surprised to hear a fellow panel member advocate for broadening the sales tax to include some services. I think this could be a very harmful path for our economy. Some might want to use this tax to punish certain industries, like lawyers for instance. The consequence of such an action could be that lawyers move to Nevada and simply email their briefs to clients in California. Thus, we lose the attorneys’ income tax contributions. If you wonder why we should not just make all services subject to sales tax, consider whether you really want to pay sales tax for people planting crops, fixing your car (currently only parts are taxable), construction, transportation, medical services, banking services, accounting, architects, and on and on.
My philosophy is this: the more money that people are allowed to keep, the more efficient the economy is and the better off everyone will be. This is why I will continue to resist expanding the base of the sales tax, or increasing taxes generally.
“The Cost to Tax” – January 26, 2004
One of my goals as a member of the Board of Equalization is to make sure that our tax programs run efficiently. A look at the Board’s 2001-02 Annual Report indicates some areas where our costs for collecting the tax are just too high. The total costs of the Board as a percent of revenue were .77%. The natural gas surcharge tax had the lowest costs at .07% and the timber tax was at the high end at 13.08%. Given that excessive percentage, I believe the timber tax should be abolished. Much commercial logging has left California, and the total receipts from the timber yield tax were only about $15.0 million in 2001-02, down from about $25.6 million the prior year, or about .037% of 2001-02 BOE receipts. This is an extremely expensive tax that yields little revenue and is likely to worsen in performance.
The four largest tax programs administered by the Board had cost percentages as follows: Sales and Use Tax .76%; Motor Vehicle Fuels Tax .63%; State Assessed Property Taxes .94%; and Cigarette Tax .77%. The Franchise Tax Board spends approximately .76% to collect the personal income tax, but then more than doubles that to 1.96% for corporate income taxes. Clearly, the costs for collecting the corporate tax are out of line and should be reviewed.
“Who Are the Wealthy?” – February 9, 2004
Liberals, whether in the legislature or in the media, begin their thoughts with the assumption that the money you earn belongs to someone else. It is this belief that drives them to support tax increases and harbor a certain disdain for those who are financially prosperous. A San Fransisco Chronicle article last week by Robert Salladay began with the premise that President Bush’s inheritance tax cut is costing California $1 billion per year. The article explained that Assemblymembers Chan and Dutra have introduced a bill to increase the tax rate for individuals who make more than $130,000. The problem for Ms. Chan and Mr. Dutra and others who support their effort, is that when California raises taxes on what the liberals define as “wealthy,” the state actually collects less money. Back in 1991, Governor Wilson bought into the liberal logic for a moment and raised taxes on the upper-income brackets. The following two years, revenues declined by $1 billion each. Currently, the top one percent of taxpayers in California contribute 40 percent of the state income tax, and the top 10 percent pay a combined total of 70 percent. Of the 13.5 million total state income tax returns filed last year, 348,000 reported more than $200,000 in income. Do you consider $200,000 to be wealthy? $130,000? Should people in those income brackets bear an even greater disproportionate burden of state taxes because Assemblymembers Chan, Dutra and others like to spend more than they have?
“Taxes Are a Laughing Matter” – February 17, 2004
Remember when driving schools started hiring comedians to make the experience less painful and more memorable? That same edutainment philosophy has now touched the tax world. Steve Sims, an enrolled agent with the IRS who has more than 20 years experience with state taxes, offers seminars designed to teach small businesspeople and home-based businesspeople about deductions, handling audits and settling with the IRS. He offers advice about whether a venture should be a partnership, sole proprietorship or corporation and whether you need the assistance of a tax professional, all while making you laugh. Steve has a seminar coming up on March 1st in the Sacramento area. For more information, call Steve at 1-800-656-6872 or email him at Statetaxman@aol.com.
“Problem Solving at Your Service” – February 17, 2004
Good humor makes us laugh because it is so true to life. Hence, when someone says, “I’m from the government and I’m here to help,” people chuckle. However, my staff proved that to be false this week as two constituents can attest. The first positive feedback came after one of my field representatives made a presentation about the services available to taxpayers, including BoE advice letters, the Taxpayer Rights Advocate’s Office and publications about how to keep accurate business records. An audience member afterward said, “I didn’t know the Board of Equalization was here to help us—I thought they were just here to take our money.” Another member of my staff received a grateful phone call from a taxpayer whose mother-in-law’s bank account and home had been levied by the FTB. The mother-in-law was in a nursing home and the caller and her husband were on an extended vacation, trying to handle the stressful situation by phone. Turns out the 1982 taxes due were for her husband and his previous wife—not the woman who was now being dinged. My staff spent hours on the phone with the FTB’s Taxpayer Advocate's office to have the levies and liens removed, delete Social Security number from the FTB account, and begin informal settlement talks. Neither of these situations is unusual—my staff and I provide this kind of assistance to taxpayers dozens of times a week. However, the gratitude expressed this week was special and worthy of sharing.
“Ranking Legislators on Taxes” – April 12, 2004
The Howard Jarvis Taxpayers Association recently released its ranking of legislators based on how they voted on bills that would raise taxes and fees. The Association points out the importance of voters’ knowing how their legislators vote on pocketbook issues because of the propensity of legislators to hide beneath the anonymity of the dome. Last year, legislators introduced bills that would have raised taxes by $65 billion.
The Association found 65 tax bills and scored legislators negatively for each vote for bills that “would increase taxes, make it easier to increase taxes, threaten Proposition 13, or further tighten the bureaucrats' lock on the budget. Their grades went up when they voted for legislation that benefited taxpayers like creating a mechanism for closing down unneeded bureaucracies and increasing the homeowners’ exemption.” Forty-four percent of legislators received grades of “F” and 13 percent received “D”s, meaning that 57 percent of the State Legislature voted against taxpayer interests most of the time. Thirty-four percent of lawmakers received “A” grades, and only eight percent earned "B"s or "C"s. To see your legislators’ grades, go to http://www.hjta.org/reportcard2003.htm
“New Tax Proposed – Part 1” – April 19, 2004
Even as the Governor works to make government more efficient there are far too many legislators who are working to raise taxes. With the costs of doing business in California at an all time high, State Senator Nell Soto thinks you should pay another new tax. Soto’s Senate Bill 1537 seeks to raise the sales tax by one-quarter percent for two years, with the resulting revenue dedicated to firefighting and fire prevention measures. Next year’s fire season is predicted to have greater potential for conflagration than 2003 and Soto argues that her tax is, therefore, necessary. However, she served on the Blue Ribbon Commission that studied the wildfires and should know that the best sorts of prevention for such fires do not require great expenditures of money but, rather, attention to precautionary details by individual property owners. That said, if Soto seriously wants firefighters to have more money to do battle, she should consider her position on state budget proposals that continue to take money from the local governments that fund fire departments and pay firefighters’ salaries.
“Low Income Taxpayers Pay Less” – April 19, 2004
“AMT Shock” – April 19, 2004
As many Californians learned last week when filing their personal income taxes, the Alternative Minimum Tax (AMT) is beginning to hit more lower- and middle-income people. Speaking of the above-mentioned law of unintended consequences, the AMT was originally designed in 1970 to capture those high-income taxpayers who did not pay income taxes in the late 1960s. However, by disallowing many deductions and penalizing people who pay high state income and property taxes, the AMT is actually now hitting a different target. Kudos to San Francisco Chronicle columnist Kathleen Pender who wrote, “In 2001, I got the IRS to disclose that in 1998, Californians filed 11.3 percent of all tax returns. But they accounted for 19.3 percent of AMT returns and paid 22.7 percent of the nation's alternative minimum tax. Texans filed 7 percent of tax returns, but sent in 3.5 percent of AMT returns and paid 3.5 percent of total AMT. The IRS refused to provide additional or more recent data.” More data needs to be forthcoming and federal policymakers need to rethink the AMT.
“New Tax Proposed – Part 2” – April 26, 2004
In another attempt to add more revenue to state coffers by using a popular excuse, A.B. 118 (Frommer, D-Glendale) seeks to impose a 2.29% tax on rental cars. Theoretically the money generated would have to be spent on transportation projects near airports and tourist destinations, but voters would be wise to be skeptical. The proponents of this measure believe that they can pass it because Californians recognize that transportation is a high priority and worthy of more tax revenue. The problem is that California voters have already had their say on this. They approved Prop. 42 in March of 2002 to ensure that the sales tax on gasoline be dedicated to transportation projects. The legislature, however, has failed to keep the Prop. 42 promise. This budget year they are spending only $289 million for the Transportation Improvement Fund; the balance of $856 million is being transferred to the state’s general fund to pay for other programs. What will keep them from stealing this tax money, too? The legislature knows that transportation improvements are a priority for Californians, but legislators should also be expected to live up to commitments the voters already made, not invent new taxes to cover their own compulsion for out-of-control spending.
“New Tax Proposed – Part 3” – May 3, 2004
A recent Los Angeles Times poll found that 60% of Californians believe raising taxes is a reasonable solution to our state’s financial problems. However, when you look at what people want to tax, you see that what they really want is for other people to pay higher taxes, not themselves. There is not a clamor to raise the sales tax, which everyone pays. However, the Times poll found 70% of people would support raising taxes on alcohol or tobacco. Those folks then might actually support A.B. 1416 by Assemblyman Vargas (D-Chula Vista). This bill seeks a $1.50 increase to a pack of cigarettes to pay for various health programs. If you are a regular reader of Leonard Letter, then you have read about the dramatic increase in cigarette smuggling and counterfeiting we have seen recently. You know that for every increase in tobacco tax, there is a bigger incentive to avoid paying them altogether. The criminal element is catering to that desire and supplying more and more counterfeit tobacco products for Californians.
So the smokers end up with much higher taxes or illegal cheaper cigarettes (many with inferior production and less safety and testing than legitimate cigarettes), the shopkeepers make less sales and collect less tax, the state government and law enforcement fall farther behind in their attempts to identify and stop the criminals, and the state budget is no closer to being balanced than it was before. Californians may respond to polls by pushing the tax burden onto others, but ultimately, any tax increase affects us all as our economy and quality of life suffer and as those burdened with the tax hikes seek to avoid paying. It is common sense, but the legislature needs to stop spending money it does not have.
“New Tax Proposed – Part 4” – May 10, 2004
Assemblyman John Laird (D-Monterey) and Senator Liz Figueroa (D-Fremont) have dreamed up yet another fee for you, the average consumer, to pay. In A.B. 1699 and S.B. 1180, they want the state to charge a fee for every fluorescent lamp you purchase. Their reason is that fluorescent lamps contain mercury, a toxic substance that should not be in landfills. The proposed fee, amount undetermined, is to supposed to better process such waste as well as to facilitate recycling and to educate consumers, but they have no real plan on how to accomplish this. I find it difficult to keep up with what is politically correct with liberals. I was just forced by the City of Sacramento to replace incandescent lights in my kitchen with fluorescent bulbs, but now these two legislators want to make those f-bulbs more expensive. My opposition to their proposals comes from knowing how similar programs established by the government work, or, more accurately, fail to work. Their proposed retail fee will be used to create a new government bureaucracy and have only marginal benefits to the environment.
“Kudos on Commentary” – June 1, 2004
Commendation to the Inland Valley Daily Bulletin for an outstanding editorial (http://www.dailybulletin.com/Stories/0,1413,203~23127~2178123,00.html) about why taxing the internet is silly. The Bulletin, comparing its tale to Aesop’s golden-egg-laying goose, writes, “Once upon a time, the golden state of California had it all: a thriving economy, bountiful natural resources and rich intellectual capital… Then, one day, some of the lords of California had a foolish idea: ‘We will squeeze the Internet business and get all the gold now so that we can continue to spend the state’s dollar recklessly for our own benefit and the benefit of our friends. But the squeeze on the Internet business was too hard, and it snapped the industry’s neck, chased it away to other states and nations, as it did the film industry before that. Afterward, there was not more gold for California from that particular source, and it was bad.” The Bulletin concludes, rightfully so, that an internet tax is “unenforceable, arguably unconstitutional and good for nothing more than turning most taxpaying Californians into criminals.”
“Summer Study Assignment” – June 14, 2004
Summer is upon us and you thought studying was over for a few months. Wrong! You have 20 weeks to study up on 14 ballot measures before the exam on election day, November 2nd. You may not know anything about them now, but my guess is that you will be tired of hearing about some of them even before the World Series starts.
The 13 measures come in the form of three legislative bills, nine initiatives and one referendum. Three are bond measures: high speed rail, $9.95 billion; children's hospitals, $750 million; and stem cell research, $3 billion. Two ask for tax increases: one seeks higher income taxes to pay for mental health services, and the other institutes a new “telephone tax” to fund emergency and medical services. The referendum seeks to overturn the health care mandate on small businesses that was passed last year by the Legislature. There are two measures about Indian gaming and one that would effectively undermine California’s Three Strikes law.
As of this writing, there were still 28 measures circulating for enough signatures to make it to the ballot and another four being reviewed by the Attorney General’s office. Plus, the legislature could still add more to the ballot before they finish for the summer. To begin your study so you are ready for election day, visit http://www.ss.ca.gov/elections/elections_j.htm
“Tax Attacks Begin” – January 3, 2007
The celebration of New Year brings with it much that is familiar: the Rose Parade, resolutions to lose weight, the legislature’s attempts to raise your taxes. Senator Escutia is again attempting to raise taxes on non-residential property, and Assemblywoman Chang is again seeking to add 10- and 11- percent brackets to state income taxes. Escutia also has a bill to limit tax credits. Assemblyman Ruskin has a proposal to increase corporate taxes by taxing their overseas’ income. They are piling onto the Legislative Analyst’s recommendations last month to increase fees and the gas tax, as well as institute parcel taxes. The Democrats are poised to do battle with Governor Schwarzenegger who has maintained his opposition to tax increases. The taxers simply do not understand that the state’s economy cannot tolerate more takings.
“Tax Leadership” – January 3, 2007
While the plethora of new tax proposals is dismaying there is some good news from the legislature’s tax committees. The new Chairman of the Assembly Revenue and Taxation Committee is Johan Klehs, and the new Chair of the Senate Appropriations Committee is Carole Migden. Both are veterans of the Board of Equalization. I say this is more good news than bad because on one hand they will continue to defend the worthy idea of an elected tax board to bring justice to taxpayers. However, if the taxing agency tries to push any questionable ideas, they both will have the wisdom that experience brings to demand the BOE fully justify itself. I, for one, like it.
“Federal Tax Reform” –
February 14, 2005
The momentum is
growing for changes in the federal government's tax laws and Californians have
a big stake in the outcome. Controller Steve Westly has already weighed in
with a condemnation of the idea of eliminating the income tax deduction for
state and local taxes. Since California is a high tax state (which you already
know), such a change would theoretically raise federal taxes on Californians.
But Westly has ignored the larger issues. First why should the federal
government ever give incentives like this for states to impose high taxes on
their people? Second, if this reform is coupled with a lowering of the overall
tax rate and an elimination of the Alternative Minimum Tax (AMT), then this
would be a great gain for California's taxpayers.
Former senator and finance director Steve Peace has pointed out in great detail how the Federal AMT tax is a gun aimed at California. We have more taxpayers who now pay this tax and the number is growing so rapidly that Peace predicts that almost every middle income Californian will be paying the AMT soon. Even if you do not pay the AMT, Peace also explains that you or your tax preparer are required to take the time to fill out the forms proving that you do not owe this tax, thus driving up the cost of tax preparation.
I recommend that Controller Westly read up on the AMT from Senator Peace's work, which he can find at: http://www.catoday.com/default.htm
We should be joining together to find ways to kill the AMT tax in Washington before it swallows us whole in California.
“Merit in MIC” – February 22, 2005
You have read much about the controversial Manufacturers Investment Tax Credit in this newsletter. The idea is sound: let manufacturers have a tax break on equipment they purchase so that they are willing to move to or stay in California. Too many other states offer manufacturers much better tax situations than California, which means the jobs go elsewhere. However, the previous version of the MIC had manufacturers pay the sales tax on items and then apply for a refund of that amount. The Board was criticized for granting these refunds even though that is what the law required of us. Senators Abel Maldonado (R-) and Elaine Alquist (D-) have come together to sponsor a new, more straightforward version of MIC. Their measure will simply reimburse the sales tax paid for qualified equipment. I commend their willingness to step into the fray and recognize that something must be done to encourage job creators to be in California. Combined with workers’ comp reform, a renewed improved MIC will help them do so.
“What’s in a Tax Credit”
– February 28, 2005
In the debate over the
Manufacturers Investment Tax Credit many criticize the concept of giving sales
tax rebates to companies that stay in California. The media has portrayed
these rebates as taxpayer subsidy of corporate profit. What you do not read
about in the media are the other state tax credits that companies can use in California. Like the MIC, these credits represent a fraction of the total amount spent by
the company on that particular purpose so that the state’s money is leveraged.
I counted nearly 20 such tax credits. For example, we give a 20% credit for
money investment into a community development financial institution; 50% of the
costs incurred for transporting agricultural products donated to nonprofit
charitable organizations; 30% of employer contributions to child care plans or
construction of a child care facility; 50% of costs to rehabilitation
farmworker housing; 10% of the cost of property and a percentage of wages
related to building the Joint Strike Fighter aircraft; incentives to do
business in a military base recovery area; credit for building low-income
housing; a percentage of research activities conducted in the state; 55% of the
fair market value of donations under the Natural Heritage Preservation program;
and a percentage of the cost of purchasing and installing a solar or wind
energy system that produced electricity. Most of these credits encourage
companies to do things they otherwise would not do (e.g., invest in enterprise
zones, child care, or farmworker housing) and other credits that help the
company's bottom line by encouraging them to stay in CA (e.g., the research
credit).
“Terrorism and Taxes” –
March 21, 2005
In last week’s issue,
I mentioned that the sale of legal cigarettes is falling in California. The
problem is that we are seeing an explosion in illegal cigarettes from those
trying to avoid our high tobacco tax. Although we cannot keep up with the
black market in cigarettes, legislators with an environmental agenda are
proposing a new law to push the price even higher despite the warnings of
federal law enforcement officials that the proceeds from this black market
benefit terrorists. The U.S. Bureau of
Alcohol, Tobacco, Firearms and Explosives and the U.S. General Accounting
Office say that illegal tobacco sales may surpass drug sales as a prime source
of funds for terrorists in the United States.
Democrat Assemblymembers Fran Pavley and Paul Koretz are backing the bill to tack on a fee to cigarette sales that will fund litter clean-up. Their reaction to the concerns of law enforcement? Koretz says, “I don’t think there’s a lack of illegal opportunities for terrorists and others that want to engage in that kind of activity to make their money. One way or another they will find a way to engage in illegal activities and to raise money for what they are trying to do.” Pavley explains, “This is a legitimate fee. I don’t think a minor fee on cigarettes is unreasonable.” Senator Chesbro adds, “We’re not going to stop addressing public health and the environment in California because of terrorists.”
So, first these legislators call our federal law enforcement and anti-terror experts liars. Then they argue that even if the anti-terror experts are correct, their concerns should be dismissed in favor of environmental concerns. I could not disagree more strongly with their bill and their rhetoric. We need to reign in the black market for many reasons, the foremost of which is disabling terrorists. That these legislators are not willing to see and support that goal is disturbing.
“Taxpayer-Friendly Tax Bills” – March 28, 2005
If you are a regular Leonard Letter reader then you are familiar with the changes I believe would help improve the administration of California’s tax laws, increasing efficiency and fairness. Several of my ideas have been introduced as legislation this session. Here are the bill numbers, authors and summaries of my proposals. I ask for your support of these measures; please contact your legislators and encourage their ‘aye’ votes to help fix what is broken about California’s tax system.
SCA 9 (Ducheny), and ACA 14 (DeVore): Combines the Franchise Tax Board and the Employment Development Department with the Board of Equalization to form a new, comprehensive state Tax Commission under a Board of elected officials.
SB 633 (Dutton): If you are accused of a crime in court, the burden of proof of your guilt is with the government. If you are a taxpayer accused of wrongdoing, the burden is on you to prove your innocence. In 1998, the federal government passed a reform that shifted the burden of proof from taxpayers to the IRS for factual issues when dealing with cooperating taxpayers. This measure would bring that same change to California.
SB 234 (Runner): If you are thinking of appealing an income tax case before the BoE, the FTB will allow the public to see your entire tax return, including your personal information. I find this outrageous. This bill would limit the kind of taxpayer information that can be released to the public to only those issues in question that are appealed to the Board by the taxpayer.
AB 1692 (Horton): I am co-sponsoring this proposal with Board Member Claude Parrish. The bill would allow for the reimbursement of 2% of the taxes remitted for retailers, under certain conditions, for the retailer’s costs incurred for complying with the law.
I also support AB 1615 (Klehs) and SB 216 (Dutton) – both bills would consolidate the FTB, EDD and Department of Insurance, into the BoE.
“Tax Reform Reactions” – April 4, 2005
My article two weeks ago about the renewed debate surrounding a potential national consumption (e.g., sales) tax has generated several comments and concerns from Leonard Letter readers. There is agreement that the worst option would be a Value Added Tax akin to those used in Europe. The VATs there have grown from their initial level into vary high rates of taxation that require tax collecting and reporting at each level of a product’s journey to market, making them very onerous.
An alternative to a national consumption tax is a flat income tax. One reader said the current U.S. tax code collects about 12% of personal adjusted gross income. He suggests a new twist by having a 12.5% flat income tax paid by the employer without the employer even reporting the employees’ names to the government. I also heard from proponents of a national consumption tax who believe that their proposal protects privacy as well. You can learn more about the national consumption tax at http://fairtax.org/. I welcome additional comments on the various proposals to reform our national tax system.
“Tax Freedom Day” – April 11, 2005
Today has been declared national Tax Freedom Day by the Tax Foundation, which annually calculates the calendar date on which Americans have earned enough money to pay off their total tax bill for the year. While it is right to be annoyed that you must work into the second quarter just to pay all your local, state and federal taxes, there is at least a small piece of good news this year. April 11th is the earliest Tax Freedom Day in 37 years. Tax Foundation President Scott Hodge said, “Despite the dramatically lower tax burden in 2004, Americans will still spend more on taxes than they spend on food, clothing and medical care combined.” Americans work 36 days to pay income taxes (28 for federal and 8 for state and local), 28 days to pay social insurance taxes, 16 days for sales and excise taxes, 11 days for property taxes and 9 days for business taxes. California’s Tax Freedom Day is actually a bit later than the national day-- April 13th -- since our cost of living and salaries are higher and taxpayers therefore end up paying more in progressive income tax. Alaskans, on the other hand, celebrated their Tax Freedom Day earlier than anyone else in the nation, on March 26th.
“Will the Last Taxpayer
Pick Up the Tab, Please?” – May 2, 2005
Another brilliant
article in last week's Wall Street Journal, "Who Pays What"
demonstrates an astonishing fact. Even after the Bush tax cuts, our federal
tax system has become much more hyper-progressive than it was 25 years ago.
According to a joint study by representatives from IRS and Ernst and Young,
over the period from 1979-1999, the richest 0.1% of all taxpayers saw their
overall tax share double to 11.05% from 5.06%, including Social Security
payroll taxes. The top 20% of all earners saw their share of the tax burden
rise from 58.28% to 68.17% -- 67.47% at 2003 rates. Meanwhile, the bottom 20%
of earners paid only a tiny share in 1979. They now pay half of what they did
back then, because of the Reagan and Bush cuts! In 1979, the bottom 20% of
earners paid 1.22% of the total taxes, including payroll taxes. In 1999, they
paid only .63% -- .65% in 2003 rates. I agree with the WSJ, as we talk about
Social Security reform, our tax system is not fair across all income groups.
“Tax Tips for Nonprofits” – May 2, 2005
None of us want to pay our own money for a back tax bill with penalties and interest, but we would be upset if some of our hard-earned money that we had donated to a worthy nonprofit or religious organization had to go to the BoE because that organization did not follow tax laws. I have found far too many nonprofit executive directors and board members who say, “But my nonprofit is tax-exempt.” In some cases they are correct, but in many cases that tax exemption does not apply to many common taxes, including the sales and use tax. For example, if your charity holds a silent auction, or sells tee-shirts, or hosts certain kinds of fundraising dinners, it owes sales tax. Some churches run afoul of the property tax exemption rules by using the property inappropriately.
I want to help nonprofit groups and faith-based organizations understand and obey tax laws. To that end, I am sponsoring several seminars to help charities understand tax laws and what their obligations are. I will be hosting the events in Ventura on May 5, Folsom on May 12, Santa Clarita on June 2, and Bakersfield on June 16. For more information on these events or to register, see http://www.boe.ca.gov/sutax/nonprofitsched.htm. If you are not able to attend but would like the BoE publications on this subject, send me an email at bill.leonard@boe.ca.gov.
“Good Developments for Taxpayers” – May 16, 2005
I am happy to report that the constitutional amendment I am sponsoring to consolidate California's tax departments into one body under an elected board cleared the Assembly Revenue and Taxation Committee last Monday on a 4-2 vote. My thanks to the author of ACA 14, Assemblyman Devore, for his hard work, and for the helpfulness of committee chair (and former BoE member) Assemblyman Klehs. This long overdue reform will bring clarity and better accountability to our tax system. I am gaining confidence that the legislature will vote it onto the ballot for the people's approval.
Unfortunately, because ACA 14 was taken up later in the committee’s agenda, I spent a lot of time sitting in the committee room where I was treated to a strong taste of left wing ideology from the authors of other bills. The most stunning example was Assemblyman De La Torre’s AB 1644, which would have suspended all of the states tax credit programs including: 1) the sales and use tax exemption for farm equipment and machinery purchased by farmers, 2) the personal and corporate income tax credits for research activities in California, and 3) the S Corporation deductions, among other things. This bill would have catastrophic consequences for the people of California and the state's tax base.
The Democrat-dominated Rev and Tax Committee sent the bill to the suspense file, where I hope it stays. As that happened, I was struck by De La Torre’s closing comments. He said that as the chair of Budget Subcommittee #1, he has come to see how the state budget currently being considered is “hammering people” and that if the committee members believe, as he does, that the state budget is “a moral document,” then they need to consider taking away tax incentives from California businesses.
Mr. De La Torre’s analysis is incredibly flawed. Has he learned nothing from the epic battle of ideas against Communism? Has he not been touched by the entire world embracing free markets that are demonstrably improving the lives of millions? Does he truly believe that the only good ideas flow from the government? Does he think that if businesses do better that people are worse off?
“Dues or Taxes” – June 13, 2005
I do not like paying more for something unless I have a choice in the matter. That is why I so strongly support the voters’ right to have sole ability to raise taxes or fees. Two votes were just taken that point out the differences between two labor unions on this issue.
The California Teachers Association leadership just proposed a political dues increase to fund their fight against the reforms of Governor Schwarzenegger. The increase is $60 a year for each of their 335,000 members. It is mandatory on the teachers if they want to continue teaching unless the individual files a complicated waiver. The CTA executive committee is the body voting on this, and teachers are not being asked for their opinion. This is wrong.
The California Correctional Peace Officers Association leadership just proposed a political dues increase to fund their fight against the reforms of Governor Schwarzenegger. The increase is $33 a year for each of their officers. It is mandatory on the officers if they want to continue to work in California's prisons unless the individual files a complicated waiver. The entire membership of 33,000 members is voting on this proposal. All members are being asked for their opinions. This is a much better approach than the CTA is taking.
“Setting It Straight” – June 13, 2005
Los Angeles Times columnist Michael Hiltzik leveled some criticism last week (http://www.latimes.com/business/la-fi-golden6jun06,1,3603558,print.column?c)at Sacramento Bee columnist Daniel Weintraub and anti-tax activists for our condemnation of the Democrats’ proposed tax hikes. Recall that Weintraub recounted research (which I had requested from the Legislative Analysts Office) showing that the Wilson tax hikes did not bring in the new revenue that had been projected. Hiltzik said the “analysis doesn't go far enough…Neither Weintraub nor Cal-Tax mentions the other major state tax hike of postwar vintage — the Reagan hike of 1967…. Their amnesia about Reagan's increase is unsurprising: It destroys their argument about Wilson's. Tax revenue during the Reagan era rose at a record pace of more than 15% a year, pushing California's annual receipts from $627 million to $11.4 billion. The resulting unexpected surplus stoked the citizen discontent about taxes that drove Proposition 13 to victory in 1978.”
With just a little more analysis and a lot less bias, Hiltzik would have uncovered the real truth about the Reagan tax hike. Governor Reagan did impose 10 and 11% tax brackets, but they are not comparable to Wilson’s. According to California tax historian Dave Doerr, the differences were substantial. First, the 10% rate was imposed in 1967 and the 11% did not come into being until 1971. Second, those brackets were not the most important part of the Reagan tax package and probably not responsible for the cited new revenue. The new money that was realized from the 1967 changes did not come from the high income group, but from the across-the-board changes. In 1971 Reagan instituted withholding and the new revenue can be attributable to that. Third, when the 10-11% brackets were dropped by legislative consensus in 1987 it was done in exchange for better treatment of capital gains. When Reagan instituted those brackets, capital gains were capped at 50% whereas the rate under Wilson was 100%. The 1967 and 1971 bracket hikes may or may not have increased revenue, but we cannot assume, as Hiltzik does, that they are responsible for the increase in revenue because they were on a lower tax base than the Wilson hikes. As tax burden grows, as it had under Wilson, taxpayers change their behavior accordingly. That is the lesson for Democrats who want to raise the rates again, in an era when our overall tax burden is already crippling many.
“Watching Squirrels” - June 27, 2005
A few weeks ago I fell down some stairs and injured my leg. (My family has awarded me the permanent klutz trophy.) I had to have surgery to repair the damage and now I am confined to a recliner while my leg heals. My recliner is located near a picture window that overlooks my backyard and that gives me a clear view of the squirrels that inhabit my yard. They neither reap nor sow, yet God provides them with food enough for them to be fat and happy.
However, I have been trying to raise some apricots. I trimmed the tree, watered and weeded around it. My granddaughter Katie and I have been checking the crop each day to see if the fruit was ripe. The squirrels kept similar watch: each day they visited my apricot tree, picked the unripened fruit and threw it on the ground. One warm day, my wife told Katie that the next day the fruit would be ready to be picked and eaten. We were very excited about the prospect of harvesting fruit our labor had helped to bring forth and equally disappointed the next morning when we discovered that the squirrels had picked the tree clean of the ripe fruit. There was no fruit for those of us who had cared for the tree.
In this way, the squirrels make me think of those who would raise taxes on others, taking what they neither sowed nor reaped. Just as I was denied my apricots, taxpayers are denied the use of their money for their business, their family, or their own enjoyment. Just as I am reconsidering whether I will invest my labor in another fruit tree, taxpayers faced with higher tax rates reconsider whether they will continue to produce if their fruit is stolen from them. Now, I do not know what party these squirrels belong to, but I am happy that they at least they can only get to my garden and not into my house.
“BoE Reform Bill Advances” – July 5, 2005
I am happy to report that the bill I am sponsoring, SB 234 (Runner), keeps getting better-- an exception to the general rule that real reform ideas usually get watered down by the legislative process. The bill provides for greater protection of personal information on income tax returns when appealed to the BoE. The bill’s second objective is to improve the Board’s openness. Senator Runner agreed to submit my amendments that will allow for greater disclosure of the Board’s decision making process by making board materials, including hearing summaries and briefs of tax appeals, disclosable public documents. Personal taxpayer information, like Social Security numbers, phone numbers, and personal residence addresses will be redacted before release. These are the documents the elected members consult when making decisions. There have been times when the public or the press has reached erroneous conclusions about the facts in cases because current law limits the available information and restricts me from defending my vote. In fact, even the dollar amounts at issue are often not disclosable under current law. I want the public to see why I vote the way I do and I want the freedom to explain my votes. As amended, SB 234 accomplishes this goal. As such, it passed out of the Assembly Judiciary Committee last week unanimously and is heading for Assembly Appropriations Committee where it is again recommended for consent. I am hopeful this bill will go to the Governor and become law. California is very fortunate to have an elected tax board. Greater openness to public scrutiny will strengthen the public’s confidence in the BoE and increase the likelihood of its long-term preservation.
“A Tax I Might Like” – August 1, 2005
I read last week that Tennessee has recently enacted a tax on unauthorized substances, following the lead of North Carolina. I tried to get a similar tax going in California by suggesting tax stamps for marijuana, but my measure failed. So far Tennessee has taken in more than $600,000 in collections and $15 million in assessments. The law requires that anyone possessing illegal drugs must purchase numbered stamps to affix to the packages containing the drugs. If illegal drugs without the stamps are found, the possessor is given a tax bill and if he does not pay it, then tax agents may seize and auction off anything of value the person owns. The author of law says he was trying to get criminals to pay for the cost of law enforcement and jail time instead of the law-abiding citizens. Information used when someone buys the stamps cannot be used in criminal drug prosecutions, but buying the stamps does not provide any immunity either. In Tennessee, 75% of the tax goes to the law enforcement agency involved and the balance to the state’s general fund. Given the revenue Tennessee is realizing, perhaps California legislators, who seem prone to tax lots of good things, should reconsider taxing bad things and raising money for, say, the emergency rooms that end up treating those who ruin their health or the lives of others through illicit drug use.
“Tax Cut” – August 29, 2005
I like tax cuts. That being said, not all tax cuts are created equal. The plan by the Governor and Assembly Speaker to offer refundable tax credits to Hollywood film companies is not one of the better ways to cut taxes. First, nobody likes the idea of a taxpayer getting credit for more taxes than were actually paid. This bill allows that and is rightly being criticized for it. Second, the companies involved have been trooping to Canada for the last several years. They are not going for the climate but for the tax subsidies they get from the Canadian government. Now we are in a bidding war for this business. Third, every business in California is important. Rather than singling out one industry for tax credits, we should be cutting the corporate tax rate across the board to encourage everyone to do business here.
That said, if I were still a legislator I would vote for some version of this bill because the majority Democrats have been so bad about reducing tax rates that I would not get the opportunity to have a vote on tax cuts for everyone. If I cannot get it for everyone, I will take it one industry at a time. One can hope that in learning about the business economics of Hollywood that perhaps some of the anti-tax cut crowd will learn just how expensive it is to do business in California.
“Global Taxation Going Down” – September 6, 2005
According to Forbes Magazine, tax cutting has gone global. Apparently it started when American consultants convinced the free Baltic countries to establish lower and flatter marginal tax rates, which, contrary to liberal slogans, actually raise more tax revenue through easier compliance and economic expansion. The success of these economies is spreading the policy. According to Forbes’ 2005 Misery & Reform Index, more countries are decreasing marginal rates than hiking them. The most attractive (i.e., low) tax rates are --in order of best --United Arab Emirates, Hong Kong, and the USA. The worst were France, China, and Italy.
“International Taxes” – November 7, 2005
It does not escape Americans that immigrants from Mexico, either legal or illegal, simply want a better life in the United States. A recent poll found that 47 percent of the adult population in Mexico would like to migrate to the U.S. In the September/October California Political Review, Bill Mundell sheds more light on this from a tax perspective. One likely cause is that Mexico punishes its poorest workers with confiscatory tax rates. According to Mundell, who cites the August 2005 Journal of Polyeconomics, Mexico’s top tax rate of 33 percent kicks in at about $20,000 per year. Our top rate of 39 percent does not kick in until an income level of $264,000. Mexican workers who only earn about $4,000 a year pay 10 percent income taxes; those earning around $7,000 pay a whopping 25 percent. This is on top of state and local taxes, plus a federal VAT tax of 15%! Closing the border may be one solution, but perhaps we should be insisting that Mexican legislators learn about the transformative power of lower and flatter taxes.
Another note – I was pleased to read, according to the World Bank, that as of August 2005, new business registrations in Iraq have topped 30,000; this figure does not include the number of start-ups that ignore the registration rules. It would be an economic milestone of the highest order if the economy of the new Iraq passes Mexico.
“Taco Trash Tax” – January 30, 2006
According to new reports, the Oakland City Council is considering a proposal to tax fast food restaurants and convenience stores that are located near schools to help defray the cost of picking up the litter left by the young people who frequent the establishments. Oakland would be the first city in the nation to enact such a law. Councilmembers argue that the tax is necessary because the businesses make profits off the students’ patronage. The Oakland fee would range from $230 to $3,815 per year, depending on the size of the business, and be targeted at those businesses near high schools and junior high schools. The city would use the estimated $237,000 a year from the tax to hire crews to clean up the litter. Councilman Larry Reid, who represents East Oakland, was quoted in the newspaper as saying, “You can't control the customers who have no sense of cleanliness. They just throw their trash in the streets. Someone needs to be held accountable.” Here’s a novel idea: hold the litterers accountable. If we know that the students are doing the littering and we know where and what time of day it happens, issue citations. I suspect that after the student litterers have to pick up trash during community service time and pay fines of their own, they will develop a sense of cleanliness.
“Partisan Games and Bad Laws” – February 6, 2006
For the past few years, both parties in Sacramento have been wrangling over how to deal with each other’s hot button issues. Each side tries to position itself to blame the other as soft on crime or for higher taxes. What all of these machinations made me think of was a significant historical event that occurred last week: the ratification of the 16th amendment to the U.S. constitution that established the federal income tax.
Income and other direct taxes had been rejected by the Constitution’s authors, but an income tax was instituted during the Civil War. That tax was abandoned in 1872, but when Democrats took power in 1892, they instituted another income tax. Two Supreme Court cases in 1895 determined that the latest version of the income tax was unconstitutional. Historian W. Cleon Skousen explains that in the following decade, “There was great social unrest and the idea of a tax to ‘soak the rich’ began to take root among liberals in both major parties. Several times the Democrats introduced bills to provide a tax on higher incomes but each time the conservative branch of the Republican party killed it in the Senate. The Democrats used this as evidence that the Republicans were the ‘party of the rich’...”
Texas Democrat Senator Joseph Bailey introduced an income tax bill with the intention of embarrassing Republicans by putting them on record as opposing it. His trick backfired when the liberal wing of the Republican party supported his bill. President William Howard Taft and conservative Republican leaders scrambled for a strategy in light of the split within the GOP. They, too, devised a tricky tactic: come out in support of an income tax, but only in the form of an amendment to the Constitution and only if the Democrats supported reducing unpopular tariffs, which drove up the price of goods. Thus, the income tax amendment got out of Congress and was sent to the states. State legislatures were pressed to approve it to lower the pesky tariffs, which affected most people whereas the proposed income tax was only going to a small percentage of the wealthiest Americans. Of course, those wealthiest Americans anticipated the burden that would be theirs alone and lobbied for the creation of tax-exemption charitable foundations, where they put their wealth (e.g., Andrew Carnegie).
Thus, the income tax was foisted upon us a result of the parties seeking to embarrass each other, the use of catchy slogans to sway the public, and the public’s belief that new taxes were acceptable as long as they were applied to other people. Those dynamics are still in play today and they can lead to laws that do not accomplish their intended goals, effect people they were not intended to, and make both parties look foolish.
“Make More Money!” – March 13, 2006
Last week Italy’s Prime Minister, Silvio Berlusconi, was asked by a television reporter what his government could do to help Italians making only 1,500 euros (about $1,793) a month. His response was: “The answer of Berlusconi the businessman is, try to earn more.” Berlusconi then related how he earned the money he used to build his media business by working at the local market and gathering paper in the streets, rolling it into balls and reselling it to people who would use it to light their stoves.
A smart, hard working businessman like Berlusconi is fortunate he is not a California resident. More and more California politicians believe the solution to any problem is to tax the “wealthy.” That is the proposal for funding “universal preschool” and Phil Angelides, the state treasurer who is running for the Democrat nomination for Governor, mentioned this week that he wants to tax the rich to pay for more high school counselors to encourage students to go to college and for lower tuitions at state colleges and universities. Voters have already approved a surtax on our state’s highest income earners to fund services to the mentally ill. Before we hop on board more soak-the-rich schemes, consider a few facts:
“Left and Right Agree” – April 24, 2006
It is a rare occurrence that I find myself largely in agreement with Jean Ross of the California Budget Project because I perceive her advocating higher taxes and more spending. However, I came across a briefing paper of hers about California taxation that documents something I have been pointing out for some time. That is, it is California's high and regressive sales tax that makes it so California’s poor have the highest percentage of their income going to taxation than any other income group. Our highly progressive income tax does not even close the gap between the wealthiest and poorest because the rich can more easily shelter their tax liability or move. Jean and I part ways when it comes to what policy change should arise from this information. I say her data show that lower and flatter taxes are both fairer along with being better for economic growth. Jean’s good research can be found here:
http://www.cbp.org/2006/0604_pp_whopaystaxes.pdf
“Taxing Realities” – May 8, 2006
Last week the legislature debated a bill to end the state’s ReadyReturn program, which fills out personal income tax returns for you. The state figures out how much you owe, fills in the forms and you can simply sign then and send them in. I have opined before about the dangers of such a system, but Joe Bankman, the Stanford law professor who helped design the program, is a big fan. The LA Times wrote about his frustrations with getting the program extended because of capitol politics and lobbying. Beyond the realities of how a bill becomes a law, Professor Bankman ignores the underlying problem that government tax returns are too complex. They should be simplified. But instead of making them simpler, he wants the government to fill out the complex forms for taxpayers and then seems shocked that many people do not trust the government to do that. As long as tax laws are not simplified, the government should expand its assistance programs for taxpayers. But for a tax system that has been called voluntary, ReadyReturn is a big step to mandatory with a serious loss of civil rights as part of it.
“Bush’s Tax Cuts are Progressive in Reality” – May 15, 2006
It is granite-embossed wisdom that the President’s tax cuts of 2001 and 2003 benefited primarily wealthy Americans. I have never thought much of this charge because any across-the-board tax cut will benefit those who pay the most taxes. So I was struck when I came across a just released May 2006 study by the Congressional Joint Economic Committee that shows how hyper-progressive the income tax system is even after the tax cuts. According to the latest data available, the top 1 percent pay more than a third of all federal income taxes – 34%. Even more striking thing is that the top 50 percent of earners pay almost all of the federal income tax – 96 percent! Considering that the bottom 50 percent of income earners pay only 3.5 percent of our federal income tax after the tax cuts, it is rather ironic that the conventional wisdom is the President has only served the rich. See for yourself: http://www.house.gov/jec/publications/109/rr109-36.pdf
“State Should Offer Deduction to All Commuters” – May 22, 2006
Since the state is hauling in
gargantuan revenues from high gas prices, let me offer a tax cut that would be
enormously popular and would be a very small way for the state to acknowledge
its role in gouging commuters with the sales tax on gasoline. It is very
simple: California should allow commuting costs to be a tax-deductible
expense. We want people to work and we subsidize them if they use transit
to get there; why not give a tax break to all commuters?
The law that disallows straight commuting expenses is based on Internal Revenue
Code section 162 (Trade or Business Expenses), and Regulation 1.162-2(e), which
specifically disallows commuting expenses (but then allows commuting between
business locations when the employee has more than one business location).
Since California follows the Internal Revenue Code on this issue, the California legislature should modify California law. The legislature could allow all
commuting expenses (like the way “business travel” is now deductible), or
create a new category of “deductible commuting.” Many formulas could be
used, such as locations where there is no public transit, or establish an upper
and/or lower mileage limit.
“Think Oil Companies Are Greedy?” - 5/22/06
Andrew Chamberlain of the Tax
Foundation has written extensively on gas taxes. He has calculated the
extent to which federal, state and local government have profited more from
gasoline sales than our domestic oil industry. There have only been two
years between 1977 and 2004 (the latest data available) when this has not been
true. During the period, according to Chamberlain, the oil industry's
total domestic profits were $643 billion, adjusted for inflation. If you
are outraged by this number, consider that governments collected $1.34 trillion
in gas taxes after adjusting for inflation over the same period -- more than
double what the oil companies made! Chamberlain has a nice graph for
illustration:
http://www.taxfoundation.org/blog/show/1492.html
“The Cost of Taxing Consumption Only” – May 22, 2006
Libertarian and conservative
economists have long complained that it is wrong-headed and even immoral to tax
income. The argument is that it makes little sense to tax capital
that could be better deployed by individual spending, savings and
investment. This is how the economy grows in the most efficient and
productive way. Thus, by this theory, the way to maximize tax revenue
while having the least deleterious effect on the economy is to stop taxing
income and only tax purchases, or, consumption.
The cost of eliminating the state's personal and corporate income taxes in a
revenue-neutral manner is not cheap. By my math, for the last seven
years, it would have taken an SUT rate of 18.2% to have brought in enough
revenue to compensate for no income tax. It is possible that the rate
could be less, given a dynamic assessment of revenue yield from a better
performing economy.
Under a consumption-only tax system, those with modest incomes would pay more
for consumer staple items, but those who buy expensive things would pay far
more. While 18.2% is a high number, whether or not one pays more or less
tax would largely be a matter of choice because most consumer items are not
necessities, consumers can choose to buy them or not. One cannot choose
whether or not to pay income tax. Remember also, there would be positive
effects on the economy from a more efficient way of treating capital.
While this is a very difficult political decision, if it were ever be done, it
would be likely to spur income growth and make consumer goods more affordable.
“A Modest Proposal for Reforming Taxes” – May 22, 2006
In the April 24 issue of National Review, Ramesh Ponnuru argues for a way of reforming taxes rather than cutting them across the board. His thinking is that conservatives are not going to get what they really want, either a flat tax or a national sales tax, so the best alternative is an idea that can bring Democrats and Republicans together. He thinks the way to do this is to give more to families in a way that does not reduce revenues overall. Seems to me he is on to something.
The centerpiece of the plan would be a huge expansion of the child tax credit, from $1,000 to $5,000 per child. The second feature would be to replace the standard deduction with a tax credit worth $1,500 for adult individuals and $3,000 for couples. All itemized deductions, other than the mortgage interest deduction and charitable deduction, would be scrapped. No more AMT for individuals. Capital gains would be taxed as income, but half the long term gain would be excluded. Dividends would be taxed only once, either as individual income or at the corporate level. The six individual income tax rates would be replaced with two: a 15 percent rate and a 30 percent rate. The brackets would be set so as to end the marriage penalty and to raise as much money as the current tax code to make the whole plan revenue-neutral.
This would be real reform. It would be a simpler system, while helping families and economic growth. Some fiscal conservatives would not like the expansion of the child credit because they argue that it reduces revenue while not helping economic growth. But I agree with Ponnuru’s argument that it is short-sighted to look at children as if they were consumer goods. The cost of raising kids represents an investment in human capital.
“California Losing Political Clout” – June 5, 2006
Steve Forbes wrote a terrific column a couple months ago looking at why certain states like Vermont and Iowa are losing population given that these states have the things that Americans like – great public education, low crime, less traffic and nice rural scenery. This runs counter to the trend that allows people to live anywhere because of technology. These states should be thriving. Forbes notes that both of these states have heavy tax burdens. In Iowa, the top income tax rate is about 9%, in Vermont 9.5%. But the shocker in Forbes piece is the news that for the first time in its 155 year history, California is projected not to gain, and perhaps even to lose, a congressional seat as a result of the 2010 census. Why? Well, California is a high tax, high regulation state, especially compared to Arizona (projected to gain two Congressional seats) and Texas (projected to pick up three).
Forbes is dead-on. Taxes matter, not only on the federal level, but particularly on the state and local levels.
Check out the census projection chart here: http://www.polidata.org/census/st005nca.pdf
“Picking Winners and Losers” – July 10, 2006
If you paid any attention to the Democrat primary you noticed one key difference between Steve Westly and Phil Angelides was their position on taxes. Angelides talked about the need to raise a variety of taxes whereas Westly talked about the need to resist tax increases so our economy can thrive. It was not surprising that Angelides backs tax hikes; he always has. What I was surprised by was the more recent announcement by Angelides that he supports a tax break for Hollywood. I find that hypocritical. Angelides should be ashamed for taxing mom-and-pop stores out of business while advocating tax breaks to entertainment moguls. I, on the other hand, support tax breaks for everyone—from the corner dollar store to Hollywood producers.
The difference is our belief about the purpose of the tax system. I see it as a necessary evil. Angelides and his ilk see it as a way to pick winners and losers. They see it as a way to reward friends (Hollywood liberals) and punish enemies (small businesses, families, entrepreneurs, manufacturers, etc.) I do not want the film, television and commercial industries to leave California. I support the idea of tax break for them because it means more jobs will stay here instead of going to other states and countries. However, I want to take it several steps further: I want to reduce regulation that constrains every industry, not just the glamorous ones, and I want to reduce taxes for everyone, not just political allies.
“Want More Record Revenue? Keep Cutting Taxes” – July 24, 2006
Tom Nugent has a terrific analysis of the federal revenue picture over at National Review Online:
http://article.nationalreview.com/print/?q=NTlhN2ZiOGQwYWJjMTBiNzUyM2IyNWQyMTcwNTQ0MGU
=
Nugent sees the record levels of revenue as a sign that we are still over
taxed. But not for exactly the reason you might think. Nugent
argues that further tax cuts will generate even more revenue, and I think
history shows him to be correct.
To set up the argument, he quotes the latest Wall Street Journal report on
federal revenues: “In the first nine months of fiscal 2006, tax revenues
have climbed by $206 billion, or nearly 13%. As the Congressional Budget Office
recently noted, ‘That increase represents the second-highest rate of growth for
that nine-month period in the past 25 years’ - exceeded only by the year
before. For all of fiscal 2005, revenues rose by $274 billion, or 15%.” Higher
receipts from personal income tax are largely responsible, and corporate
receipts are nearly triple what they were in 2003.
Nugent is a student of Laffer's much misunderstood theory. Laffer is
often associated with lower taxes and nothing else. What Laffer says is
very simple: There exists an optimal level of taxation that is neither
too low nor too high. In other words, if taxes are too high they
are counter-productive in that they punish the economy to an extent that tax
revenues are depressed. On the other hand, Laffer says if taxes are too
low, they can be raised without hurting the economy and depressing
revenues.
When tax cuts yield sky-high revenues as they have since the cuts of 2003, it
is a sign tax rates are still prohibitive and need to be lowered still.
We will know when the right tax level is reached when continued tax cuts no
longer yield revenues higher than expected from a modestly growing economy like
ours.
“Our Most Recent Tax Increase Failed to
Deliver” – August 7, 2006
In November 2004, California voters approved Proposition 63, which increased income taxes by 1% on people
with incomes higher than $1 million per year. At 10.3%, California's
income tax rate is the highest in the nation. The revenues from this tax
increase were permanently dedicated to local mental health programs. Of
course, the initiative made no provision to “back-fill” the tax revenues lost
when the wealthiest taxpayers left the state to avoid this
highest-in-the-nation tax.
When this misguided tax increase was on the ballot, taxpayer advocates argued
that there would be little benefit from this new tax because local governments
would cut existing funding for the mentally ill, so they would get nothing more
than they did before (and maybe even less) despite a permanent tax
increase. The proponents of the initiative denied that allegation,
claiming the poorly-worded “maintenance of effort” language in the initiative
would prevent that from happening. Well, the early results are in and, as
usual, the proponents of high taxes were wrong.
California counties have already begun cutting the funds for local mental
health programs. The headline about it said “despite” the new revenues from
Proposition 63,
http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/07/31/BAGI1K8DTI1.DTL
but I think it should be rephrased: it is “because” of those new revenues. Just as predicted, millionaires are leaving our state to avoid high taxes and they are taking jobs, businesses, and the rest of their tax money with them when they go. Meanwhile, the unfortunate people who rely on county mental health services will have fewer resources available than before the tax increase was adopted. When will we ever learn?
“One More Tax Cheat” – August 21, 2006
I just read that former
gubernatorial candidate Nick Jesson has pled guilty to state tax evasion, after
previously pleading guilty to federal tax evasion. Apparently, he was
cooperative and he paid restitution, so he will be allowed to serve his
three-year state sentence concurrently with his federal sentence.
Jesson’s campaign for governor was remarkable because so many reasonable
people were quick to believe him when he claimed to have found a way to avoid
paying income taxes and employee payroll taxes. In a debate with fellow
Republican candidates Bill Simon and Bill Jones, Jesson ridiculed his opponents
for their more traditional views on taxation, while making the outlandish claim
that California has a “$400 billion budget surplus” (based on his own
misreading of the Controller’s annual report showing the value of state
assets). Nick Jesson’s tax-free siren song attracted trusting supporters
to his campaign from all over the state, eager to believe that he had found a
new way to alleviate their tax burden. He attracted almost 20,000 votes
in a high-profile, seven-candidate Republican primary election. His
billboards and campaign signs sprang up everywhere, often so close my Board of
Equalization campaign signs that people thought we must be running on a ticket
of some sort.
In the end, Jesson's story provides yet another lesson for tax evaders everywhere: you will get caught and when you do, it will cost you a great deal more than it would have cost to comply with the tax laws in the first place. Our tax burden is certainly too high and our tax laws are too complex and unfair, but changing the system requires political action rather than dishonest accounting and tax fraud. Jesson and other snake oil salesmen leave behind a trail of broken lives, ruined businesses, and lost fortunes wherever they convince innocent-but-gullible people to participate in their tax schemes. What is worse, these anti-tax charlatans give all taxpayer advocates a bad name and undermine the broad-based effort to reduce our tax burden.
“Your Money=Angelides' Expenditure” – September 5, 200
You may have noticed that
gubernatorial candidate Phil Angelides keeps suggesting new tax hikes for us to
pay. The most recent was an auto services tax so that, for example, when you
get your oil changed, you not only pay sales tax on the new filter, but also on
the labor. So much for his argument that he only wants to tax the
rich. For those of us who do not want to pay higher taxes, you may wonder
where Angelides and the budget liberals in the legislature get the idea that
you have so much extra money to share with the government.
Budget liberals have a unique way of viewing the world best explained by budget
reports. Budget reports consist of what the rest of us have in our family
budgets: revenue and expenses. But added is one thing normal people do
not track: tax expenditures. This is a category that exists on paper that
says “here is how much money the government would have collected had it not
been for this particular exclusion, exemption, credit, incentive or subsidy.”
That includes those evil exemptions advocated by the two largest and
particularly scurrilous special interest groups in the state: home owners and
food eaters.
A new requirement imposed by the liberals in the legislature is that the
Department of Finance report to the legislature each year on each of these
so-called tax expenditures in excess of $5 million. Liberals begin with
the assumption that all resources belong to the government, so tax expenditures
are just loopholes that allow people to keep resources that government ought to
have. They need this new report to identify exactly how many “government”
resources are slipping through these loopholes, so that they can find ways to
further restrict them and keep more for government. I offer this very simplified
tax expenditure report that gets to the heart of the liberals' intent:
Californians' Payments to
IRS $ 221 billion
Total State & Local Revenues $ 192 billion
Total taxes to government $ 313 billion
Californians' Total Annual Income $ 1.4 trillion
That means that government is already getting 22% of all income in California, on average, but legislators are still worried that 22% is not enough!
“Tax Cuts Delivering Record Revenues” – September 25, 2006
This is one of those stories where everybody agrees with the facts but they still want to debate the cause. I was stunned when I read a Dow Jones story that on September 15 the Federal Government reported the highest one-day revenue total ever. The $85.8 billion that came in on that quarterly deadline surpassed last year’s record set on the same day of $71 billion by 20%. I also learned from WSJ economist Stephen Moore that 2005 and 2006 federal revenues have increased more than $520 billion – the largest revenue increase over a two-year period in American history.
Now that we have dispensed with the facts, onto the debate: Democrats (I hate to say ‘never’) will probably never concede that lowering taxes can bring in more revenue even though this phenomenon was clearly evident from the Kennedy tax cuts, the Reagan tax cuts and even more so now. So entrenched is this thinking that even the supposedly non-partisan Congressional Budget Office refuses to acknowledge that tax cuts have a positive effect on the economy. The data should shame all of them. Stephen Moore, writing in the current American Spectator notes that in 2003 critics said the Bush tax cuts would blow a $2 trillion hole in the federal deficit over the following ten years. Just three years after -- in 2006 -- the deficit will be below $300 billion and it’s dropping like a rock, despite the war in Iraq and the Republicans’ spending spree.
Since the tax cuts of 2003, corporate tax receipts are up by 40%. But this is not even the best part. The biggest gains have come from capital gains and dividend tax payments, perhaps the most controversial component of the 2003 cuts. Moore cites Congressional Budget Office data that these tax revenues are up 70% since 2003, even though the tax rate was slashed down to 15%. The CBO predicted in 2004 that by January 2006 capital gains revenues would be $197 billion. Boy, do they have eggs on their faces now. The actual number will be closer to $290 billion.
The opponents of the tax cuts are stuck in a Keynesian Age. They would prefer government stimulate the economy by taking more money in taxes and pumping this to the states through programs, and having it filter down from there. This totally contradicts basic economics and ignores the velocity of money. What a supply-side tax cut does is unlock capital so it can be re-spent. This reduces the punishment on those who want to sell assets and then spend or re-invest in something else. Anybody who argues that this does not have a marvelous, stimulative effect is not looking at the data -- like the New York Times. The Times reported that revenues are exploding, but they call it a “mystery” – yeah, right. To the architects of the Bush plan, there is no mystery why American households have $6 trillion more wealth than they did in May 2003. Families that make under $40,000 a year have seen their tax liabilities go down $1,000 a year, and their portfolios and houses have not fared badly either.
Moore adds that former Treasury Secretary John Snow told him that Bush wanted the dividend and capital gains tax eliminated completely. Bush settled for a cut to 15%, but just imagine the boom we would have had the President gotten his way completely.
Vindication is sweet indeed.
“Misery and More” – November 27, 2006
Forbes magazine has published its annual Misery Index, a sum of several types of taxes (corporate income, personal income, wealth, employer social security, employee social security, and VAT/Sales) in countries all over the world. As Forbes writes, “It is our best proxy for evaluating whether policy attracts or repels capital and talent.” The nation with the worse misery rating was France (166.8), although it has lowered its rates since last year’s index. Sixteen countries on the index lowered their misery score in the last year while eight increased it.
China came in second at 160. The first American ranking was for New York with a rating of 115.7. The lowest misery index countries were Hong Kong at 43.5 and the United Arab Emirates at 18.
Perhaps the biggest lesson of this is drawn from a recent article in Le Figaro: marginal tax rates in France were 50% in 2003. They will drop to 40% next year and, voila, the French economy is growing again. The Wall Street Journal’s Daniel Henniger noted last Friday that even the World Bank is heralding two global reforms: 1) “easing regulations on new business, and 2) “reducing tax rates and the administrative hassle of paying taxes.” Henniger also reminds us that it has been 25 years since President Reagan lowered the U.S. top marginal personal income tax rate from 70% to 28%. Clinton pushed that back up to nearly 40%; Bush has taken is back to 35%. Before the newly-empowered Democrats seek to push it back up again, they would do well to consider the low flat-tax rates of the Eastern Europe nations: Slovakia 19%, Romania 16%, Ukraine 13%.
“Act Now to Avoid Tax Hikes” – December 4, 2006
The Bush tax cuts that have
so stimulated the nation's economy will expire in 2010. It takes an
affirmative action by the Congress and the President to make these tax cuts
permanent. What do you think the odds are that the new Democratic
majority will vote to extend the tax cuts when they can obtain their desired
tax increases by simply doing nothing?
I am disappointed to read that the post-election Republican Congress will take
no action on tax cuts. This is very wrong.
The rhetoric from the Democrats on this front is mixed. Last week the
Wall Street Journal quoted Robert Rubin, Treasury Secretary under President
Clinton and a key advisor to Senator Hillary Clinton saying, “You cannot solve
the nation’s fiscal problems without increased revenues.” He went
on to say, “I think if you were to increase taxes right now, you would have
probably zero negative effect on the economy.” The Journal points out
that Rubin said in 2002 that the Bush tax cuts would do little to stimulate the
economy, which has since grown a robust 4% each year until the recent housing
market slump.
Two weeks ago Representative Charles Rangel (D- NY), who is now the incoming
Chair of the Ways and Means Committee, said on NPR that tax increases are on
the table. Reportedly, Pelosi reacted by denying any increases were being
considered.
The Journal article gives ample evidence why we should at least stay the course. Federal revenues in fiscal 2006 were 18.4% of GDP, higher than the 18.2% post-1965 average. As I’ve reported here, the first month of fiscal 2007, revenues were up 12% from the year before. Yes, the Republicans have been on a wild spending spree, but the stimulus from the tax cuts has more than made up for it (so far, at least). The fiscal 2006 deficit was 1.9% of GDP, which the Journal reminds us, “is lower than all but eight years since 1975.”
The Republicans are giving up on their strongest message by not taking the appropriate action now.
“Huge Tax Hike on Beer
Drinkers” – December 18, 2006
State law is full of gray areas and ambiguities.
One old one is now the real culprit in this week's headlines. When the
Legislature wrote the first alcohol laws after Prohibition was repealed in
1933, California defined what a beer is and what wine is. The definition was
simple - anything added to beer or wine renders it something else. Sometime
thereafter beer and wine producers started adding things such as preservatives,
flavor enhancers and other things. So narrowly reading the law there is NO such
product as either beer or wine sold in California today. Now common sense and
alcohol regulators know that is not true and so for years have ignored this narrow
interpretation.
Last week a bare majority of the Board of Equalization voted for the narrow
interpretation of the law, and have begun the process to tax all alcohols with
any additives as distilled spirits. This will increase the taxes charged on beers,
wines, flavored malt beverages, and flavored beers to the level on hard liquor.
The objective offered was to reduce teenage drinking, which I support. However,
there was little testimony that by increasing the tax on beers that teenagers
would lose access to alcohol.
The dated California law defines beer as having no additives whatsoever. No
beer that I know of – except perhaps some home brews – meets this definition.
Alcopop-type beer products with some fruit flavors typically have alcohol
content between 3.8 and 5 percent. Beers out of a bar tap can exceed 10 percent
alcohol. The proponents are seeking to raise the tax on flavored beers from 20
cents a gallon to $3.30 a gallon, the rate for distilled spirits. The
proponents say they are focused on these flavored beers but chemically and by
alcohol content they are indistinguishable from all other beers and wine. Every
product will potentially suffer this monster tax hike.
We need the Legislature to step in and provide the policy guidance that addresses
teenage drinking and also “clean up” the code so that modern beer and wine is
appropriately categorized in the law.
“The IRS’s Latest Bah Humbug” – December 18, 2006
Five firefighters died while fighting the Esperanza Fire in inland Southern California earlier this fall. Their tragic deaths in the line of duty inspired generosity from people who knew that the surviving families (one of which has five young children) would need financial support in the years ahead. More than one million dollars has been raised to help these families and the Central County United Way in Riverside County has been collecting and plans to administer the funds. Now the IRS is playing Scrooge to the heartfelt generosity of the donors. The IRS has told the United Way that charitable organizations cannot collect money for small, specific group like these families because federal law requires that money so raised must go to individuals or families who are part of a “large and indefinite” class and that the money benefit the broader community, too. They ignore the fact that the donors do not know these families and to the donors the money is going to a class of families in need because their breadwinner was killed in the line of duty while protecting the public.
This is not just an issue about these five families. It is a larger and serious problem that also effect state taxation. My church is facing a similar struggle with federal tax law. As a congregation, we have given away college scholarships to worthy young people in the church. However, the IRS is now cracking down on such programs because of alleged abuse by some (not at my church). Apparently, some parents have been making tax deductible donations to particular charities or churches and then having that organization make a scholarship grant to their children. It is sad that a few bad apples are going to ruin a genuine attempt by others to be helpful to those in need. The tax agencies ought to be able to tell the difference.
“State Revenue Cannot Keep Up with Spending” – January 2, 2007
Last week's story about Taxpayer X, the Californian who settled with the state with a payment of $200 million in income taxes, shows just how volatile the state tax is. Just one taxpayer under California's hyperprogressive tax system can pay enough to meet the state’s revenue estimates. If not for this one person we would have fallen below our estimates. In truth, we did fall below our estimates because this payment is a one-time payment and will not be repeated in future years. California's spending binges are overly dependent on a few wealthy individuals gaining financial windfalls and then paying taxes on them. We are fast running out of Californians who can do this. While we may have made our estimates in revenue for this period, my prediction still stands that the state is about to hit a revenue wall. Spending cuts are the only answer.
“Hidden Taxes” – January 8, 2007
The new buzz words in political debate are “hidden taxes.” In almost every case, this does not refer to secret payments to the government. The more accurate definition of the phrase would be “cost shifting.” Because lots of people use health care services without paying for those services, hospitals and doctors are forced to charge the rest of us more to cover their expenses. But cost shifting goes on everywhere. We all pay more for products to cover the extra costs businesses have due to shoplifting or other expenses.
So, if it is true that this hidden tax is a bad thing, then what is the solution? Apparently the solution is a not-so-hidden-tax. Instead of paying extra to health care to providers, I will pay more in taxes and then the government will give some subsidy to these providers to pay for the people who do not pay. That might work if the next step is for health care providers and insurers to lower my costs since I am no longer paying a hidden tax. Care to bet on the odds of premiums and out-of-pocket costs going down?
“New Tax Laws for 2007” – January 8, 2007
Californians became subject to hundreds of new laws that went into effect on January 1st. Perhaps you read about “Move Over, Slow Down” law the makes it illegal to approach within 500 feet of an emergency vehicle or tow truck with flashing lights that is on the side of the road; it requires drivers to slow down or move at least one lane away from the vehicle. But beyond flashy new laws like that one, most new laws do not get covered by the papers, particularly the ever-so-exciting changes to your taxes. Here are some of the new tax laws you should be aware of:
1) SB 1449 creates a new 40% penalty for retailers who collect sales and use tax but do not pay it to the state in a timely manner. That is a four-fold increase in the penalty.
2) AB1418 requires the BOE and FTB to publish lists of the 250 largest tax delinquents who owe more than $100,000.
3) AB 1890 gives disaster victims five years to rebuild a damaged home or purchase a comparable home while protecting their base-year property values.
4) AB 2239 provides that vehicles, including RVs, brought into the state solely for repair or warranty service for less than 30 days are exempt from the 12-month use tax rule.
“CA Makes Life Difficult for Taxpayers” – January 8, 2007
The New Year’s Day edition of Spidell’s California Tax newsletter began with this: “With one minor exception, California does not conform to any of the provisions of The Tax Relief and Health Care Act of 2006, and the mood in Sacramento is moving even further away from conformity to HSAs (health savings accounts).” The new lawmakers who took up offices in Sacramento this week should take a serious look at why the state consciously chooses to make life so difficult, and taxes higher, for California taxpayers. There is much bloviating about increasing efficiency in government this very simple way to accomplish that is ignored.
Consider Spidell’s example of the termination of a health savings account: “In order to establish a HSA, Ron’s employer, with a home office in Colorado, terminates its [Health Reimbursement Account] and transfers Ron’s $2,000 balance into an HSA. Unfortunately, Ron is a California resident. The $2,000 is tax-free for federal purposes but is taxable income subject to income and payroll tax withholding for California purposes. The rollover is treated as a distribution to Ron for California purposes.”
If California were to conform with these federal tax laws, the taxes on Californians, including Ron, would go down. We should simply make those changes to make filing taxes easier for our residents. When taxes become simpler, voluntary compliance increases and government efficiency improves. These goals are more important than collecting a few dollars on HRA tansfers.
“Mandates for Average” – January 22, 2007
Help me search the Constitution for the mandate that it is the duty of government to tax some in order to make gifts to others. I cannot find it. Why is it in a country built on risk takers who took advantage of opportunity to succeed that it is now the purpose of government to make sure that everyone is average? Both the President and the Governor have found it in their way of thinking.
The trouble with leveling the field is once you the government tells me that no matter how hard I work, how much I earn, or how well my union bargains for me that I will not be able to keep those benefits, then I will stop working hard, earning much, or bargaining well. Can you imagine the political slogan of 2007 is: “I will make you average.”?
“Former President Bush’s Tax Increases” – February 20, 2007
On the week of the birthday of President Ronald Reagan, the foundation that carries on his memory honored former President Bush. Despite all the bad things he said about Reagan in the presidential campaigns, former President Bush was a loyal and supportive vice-president to President Reagan. However, sometimes history can be helpful to today's debates. At the ceremony, Bush wondered aloud that if he had had the communication skills of Reagan whether he might have been able to beat Bill Clinton and retain the presidency. Hogwash! Bush broke his word to the American people and raised their taxes. The tax increase contributed to the economic stagnation which Clinton so vividly portrayed in the 1992 campaign as: “It’s the economy, stupid!” Tax increases have consequences. Tax increases change people's economic behavior. Tax increases advance the false notion that the government can spend your money better than you can. And, yes, tax increases can make people decide how to cast their ballots.
“List of Tax Bills” – March 19, 2007
For anyone who cares to
follow tax legislation closely, there is an indispensable resource from Martin
Helmke, former consultant to the Senate’s Revenue & Taxation
committee. Helmke has compiled a list of all the bills-- 154 of them-- that
have tax implications and can be sorted by type of tax, author, or
status. Helmke’s list is provided to the public via the California
Taxpayers’ Association and you can find it at this link:
http://www.caltax.org/
“New Europe Improves Wages with Flat Taxes” – April 23, 2007
There is a terrific little
article in the March 19 National Review about flat taxes in the Baltic
countries in Northern Europe. Under a flat tax system, the tax rate
is the same for everybody. We instead have a progressive structure where
wealthier people pay a higher rate. Under either system people with
higher incomes pay more taxes, but our system is so progressive that the top 10
percent on the income scale pay more than 50% of all federal taxes.
One advantage of a flat tax system is predictability. The IRS has six
rates ranging from 10% to 35%. But because of the Alternative Minimum
Tax, Americans can no longer predict their tax liability based on the official
rates. Under a flat tax system like Estonia’s, the tax rate is the
same for everybody – 22% (down to 20% in 2009). Estonia exempts income up to a certain level so the very poor pay no taxes, and allows very
few deductions. Such a simple and predictable tax structure has great
merit – one being there is no need in Estonia for a tax code that spends 100
pages defining ‘income’.
Moreover, higher progressive tax rates impede economic activity, not just for
rich people, but for everybody. When an economy starts to slide, it is
the poorer among us who feel the brunt most severely. Thus, those who
advocate “soaking” the rich through higher taxes could well be sabotaging the
progressive outcome they claim to be seeking. To illustrate this, the NR
article looked at six “New Europe” countries that have opted to replace their
Communist systems with flat tax, entrepreneurial systems. The countries
are Estonia, Lithuania, Latvia, Slovak Republic, and Ukraine. Before
adopting a flat tax, Estonians’ monthly wage average was about $85 a
month. Five years after adopting a flat tax, average wages are up 265% --
$308 per month. There are other factors that contributed to this
rise. However, wages in neighboring non flat tax countries like Armenia, Azerbaijan, Belarus, Bulgaria, Croatia have seen wages rise only 8% in the same
period.
“Death and Taxes” – April 23, 2007
A Leonard Letter reader pointed me to an article that linked to this site
< http://thebudgetgraph.com/ >
that shows (and sells) a terrific poster that you will enjoy studying. The poster is titled “Death and Taxes: A Visual Guide to Where Your Federal Tax Dollars Go” and shows where discretionary federal spending happens. It shows military and non-military spending by agency in a graphically pleasing manner. One of the most interesting aspects of the poster is that the circle representing the national debt is too large to fit in the box containing the rest of the information. The poster will make a conversation-starting addition to any workplace or classroom (with an education discount), but any taxpayer may appreciate just looking at the website as the federal income tax deadline approaches. Fair warning: the poster is very detailed so you may experience long download times.
“A Lithuanian Praises Flat Tax Fairness” – May 7, 2007
A Leonard Letter reader from Lithuania responds excellently to my piece that praised the flat tax systems adopted by the
young Baltic democracies. A flat tax is one approach among many,
and I am not totally opposed to giving tax “progressivity” its due. A tax
on food, for example, does have a bigger impact on people with low incomes and
is therefore not a fair tax. But, I also think we have gone too far in
pursuing what I call hyper-progressivity, where the state’s reliance on high
income earners yields super volatile revenue streams while suppressing
investment. One way to get out of this mess is to challenge our thinking
about the meaning of fairness. I say a flat income tax is fairer than our
progressive income tax scheme because everybody pays the same rate, except the
very poor who pay nothing. It is difficult to argue how this is not
fair. My Lithuanian commenter reminds us of the importance of fair
taxation for maintaining the social compact. Moreover, I find many
of the unique components of the Lithuanian system, as described below, to be
quite attractive. Legislators should take a look.
[Reader response] “I am all for the flat tax. For several reasons, which
I believe can all be defended fairly simply but strongly. First, since it is
extremely simple and the same for everybody, it is equitable. What I mean by
that is that it is fundamentally fair: while charging the same income tax
amount (in Lithuania, it is currently 27% and by law it will be reduced to 24%
in January 2008) to everybody, it satisfies both those who say that the better
off should pay more (because they do, since the absolute amount that I pay is
more that the one paid by my neighbor in the same proportion as the difference
in the absolute sizes of our incomes.) and those who say that we are all equal.
And equality is, as we know from Tocqueville, one of the most fundamental
strivings of a liberal democracy. In flat tax, the equality is at its most
fundamental. When a liberal man finds himself equal to the rest of his fellow
citizens, he deems that the law which has brought about such treatment is a
good law. As soon as he says so, there is born in him an acceptance of the laws
that the society imposes, and he realizes that by abiding at such just laws, he
is also free.
This is something important to keep in mind. Because the Soviet man was in
essence not social. For him, the state was essentially the police which also
happened to be policing his thinking. As a result, acceptance of law,
especially such law as tax law, has been one of the fundamental challenges of
the new government. And what was well understood was the fact if the state is
to achieve a universal acceptance of the government’s power of the purse, i.e
taxation, it has to keep it simple and also attractive. Therefore, we can get
tax refunds on real estate interest, higher education spending, investments
into pension and life insurance funds and the minimum income, which is not
taxable at all. (Your non taxable income increases if you have more than two
children). Even more importantly, you can directly determine an institution to
which 2% of your total tax should be sent. (This money, however, cannot go to
support political parties – which I personally disapprove of. I normally spend
the money on schools or kindergartens to which my children happen to be going.)
To sum up, its simplicity was designed deliberately to gain, on the one hand,
its acceptance by the newly born tax payer and, on the other hand, to enable
the state to effectively enforce its universal application.”
“Tax Cuts and then Record Federal Revenues” – May 14, 2007
Federal tax receipts came in
just shy of $70 billion more this April than last April. April 24
was the single biggest day of tax collections in U.S. history -- $48.7 billion.
Fiscal 2007 revenues are up 11.3 percent from a year earlier. The much
fretted-about federal deficit has been more than halved in the past year.
The Wall Street Journal predicts the deficit could shrink to less than 1
percent of GDP this year and go to surplus in 2009.
Bush’s tax cuts of 2001 and 2003 are historically large – similar in scope to
Reagan’s and JFK’s. But so has been the economic response. GDP is
20 percent more now than in 2001, and federal revenues are up 27.8
percent. If spending had not gone up around 45 percent in the same
period there would be little debate about the efficacy of these cuts.
Do tax cuts “pay for themselves”? Presented this way, it is a straw man
argument. Common sense informs us that lowering taxes encourages the
taxed behavior and offsets at least some of the cuts. Whether the cuts
entirely pay for themselves depends on where the rates fall on the Laffer Curve.
For example, in 2003 the Congressional Budget Office estimated that the 2003
cut in capital gains and dividend income would expand revenue in that category
36 percent by 2006. In fact, those revenues more than doubled by 2006
(from $50 billion to $103 billion) and they are up another 30 percent so far
this year. This indicates the double taxation of investment income was
highly punitive and harmful to the economy. Cutting them did not “cost”
us anything – in fact, they stimulated activity that resulted in more
revenue. Not all tax cuts do this, but when punitive rates are slashed,
what a wonderful thing!
The Wall Street Journal has a good summary of the revenue report:
http://online.wsj.com/article/SB117867077879196610search.html?KEYWORDS=tax&COLLECTION=wsjie/6month
The Treasury Report can be found here: http://fms.treas.gov/mts/mts0407.pdf
“Californians Pay Enough Taxes” – May 21, 2007
The May Revise to the Budget was released and the state is in serious fiscal trouble. This means inevitable pressure for “revenue enhancements,” which is Sacramento slang for “higher taxes”. Those who oppose higher taxes will find good grounds for doing so in the latest Tax Foundation study on the federal tax burden. Among the top twenty “major city areas” for federal tax burden per household, five are in California. San Francisco comes in second overall with an average federal tax burden of $36,409. Next is San Jose at $34,577. Orange County ($27,062), Oakland ($24,818), and Ventura ($24,249) all made the list.
The study is here:
http://www.taxfoundation.org/files/sr150.pdf
The point is the household tax burden is already high in this state. With a declining real estate market, efforts to solve the structural state deficit by getting even more taxes out of Californians will likely not succeed. Remember, Governor Pete Wilson hiked taxes in 1991 because the state was in fiscal trouble. The revenues from that tax hike came in about 20 percent shy of estimates and arguably made that recession worse.
“Independence From Taxes” – July 9, 2007
I noticed a fascinating trend with the retail side of July Fourth week. I saw and heard advertisements for many sales—mostly for furniture— in which the stores offered to pay the customers’ sales tax for them. Sales-tax free marketing efforts are nothing new, but I enjoyed having them closely linked to Independence Day. It reminds Americans of just one of the reasons we rebelled against Great Britain so many years ago. The colonists were sick and tired of paying taxes, particularly when they did not have a voice in how those taxes were spent or enacted and when the way they were spent did not actually benefit those who paid them. I think today many Americans are sick and tired of our heavy tax burden as well. They may have elected representatives, but a majority of those representatives (at least in California and seemingly in the U.S. Congress as well) are more eager to dole out pork barrel projects then insist on the integrity of our tax system as the basis for limited government as the Founding Fathers intended. As the quote of the week from Alexander Tyler, supra, says, such lack of fiscal responsibility may spell the doom of this great republican experiment we embarked on in 1776. Think about that as you’re kicking back on your new tax-free sofa.
“With Your Free Time and Extra Money” – August 13, 2007
The National Taxpayers Union (NTU) has released its annual study about what it takes to comply with the federal tax code, and, not surprisingly, it is not good news for Americans. Those who use the 1040 forms spent an average of 24.2 hours and $207 to complete their returns this year. That is up from 23.3 hours and $179 just three years ago. If you are self-employed, you had it the worst: more than 80 hours. In all, Americans spent 6.65 billion hours last year complying with federal tax laws.
That time is spent because the complexity of the tax code has multiplied. David Keating, the study’s author writes, “Seventy-three years ago the Form 1040 instructions were just two pages long. Even when the income tax became a mass tax during World War II, the instructions took just four pages. Today taxpayers must wade through 143 pages of instructions, well over triple the number in 1975 and nearly triple the number in 1985, the year before taxes were ‘simplified.’ Today's short form, at 48 lines, has double the number of lines on the 1945 version of the standard 1040 tax return.”
The amount we spend on stuff to help us pay our taxes is huge: $102 billion for software, postage, tax preparers, etc. And it is likely to get worse before (if) it gets better. NTU warns us that the Alternative Minimum Tax could apply to more than 30 million taxpayers in the next three years and its complexity will have more of us spending more time and more money all to make the IRS happy.
To see the NTU’s tables and calculations, as well as read about how tax professionals get different bottom lines when working with the same set of taxpayer information, see the study here:
http://www.ntu.org/main/press_papers.php?PressID=926&org_name=NTU
“Belabor the Day” – September 4, 2007
It is interesting how an opinion writer can get facts straight but then veer off to the wrong conclusion. The Labor Day opinion piece in the Sacramento Bee is a prime example. The article rightly point out that America already has a major flat tax system in place. Payroll taxes are 15.3% of everyone's wages. Then you pay income, sales and property taxes on top of that. The total burden of taxation is enormous. Rather than propose an across-the-board reduction of these regressive tax rates, the Bee proposes extending income tax credits to payroll taxes thus making our tax system even more complicated and then raising taxes on higher wage earners to make up the difference. The Bee did not provide numbers, but I am very skeptical that the money is there. Every tax rate increase ever proposed has brought in less money than calculated because the tax experts do not account for changes in the taxpayer's behavior. Let’s make Labor Day a real holiday and lower the tax burden on all Americans.
http://www.capoliticalnews.com/s/spip.php?breve2819
“Better Rule for RVs, Boats & Planes” – September 24, 2007
Back in 2004, when the state was desperate for revenue, legislators passed a bill to require Californians to pay use tax on vehicles, vessels or aircraft purchased out-of-state but brought into California within one year. However, that bill expired on June 30, 2007 so now we are back to the old rules. Those rules require buyers of such items to pay use tax when they bring the RV or boat, for example, into California within 90 days of purchase. Keep in mind, though, that buyers generally owe no use tax if the vehicle, vessel, or aircraft is used outside the state more than one-half of the time in the first six months after it is brought to California. If you need more information, go to: http://www.boe.ca.gov/news/pdf/l-171.pdf
“Data: Tax Cuts Made Income Tax More Progressive” – October 15, 2007
The Tax Foundation has a
report on the latest tax data released by the IRS, which covers taxes paid from
the 2005 calendar year. What struck me from the report is that both the wealthy
and the less- than-wealthy are making significantly more money than even five
years ago. But the zinger is that the richest among us are paying a greater
share of the income tax burden than they did before the Bush tax cuts.
To break into the top one percent for the 2005 calendar year, a tax return had
to have an AGI of $364,657 or more. In 2003 it was $295,495. So it is clear
that wealthy people are getting more so. According to the report, “Between 2000
and 2005, pre-tax income for the top 1 percent group grew by 19.1 percent. On
the other hand, in that same time period, pre-tax income for the bottom 50
percent increased by 15.5 percent.”
In 2005, the top one percent of tax returns paid 39.4 percent of all federal
individual income taxes. In 2004, the top one percent paid 36.9 percent of
federal individual income taxes. The Foundation concludes that for calendar
2005, the top one percent of tax returns paid about the same amount of federal
individual income taxes as the bottom 95 percent of tax returns.
Someday the canard about Bush only cutting taxes for the top one percent will
be replaced with more thoughtful commentary. Yes, it is true that if there is a
broad tax cut, those who make more money will get a bigger cut -- but that is
only half the story. The less-known aspect of the Bush tax cuts of 2002 and
2003 is how many Americans no longer pay income tax at all:
“From other IRS data, we can see that 90.6 million of the tax returns came from
people who paid taxes into the Treasury. That leaves 42 million tax returns
filed by people with positive AGI who used exemptions, deductions and tax
credits to completely wipe out their federal income tax liability. Not only did
they get back every dollar that the federal government withheld from their
paychecks during 2005; but some even received more back from the IRS.”
One argument against the notion that the income tax makes a hyper-progressive
tax system is that when FICA or social security withholding is considered, the
overall tax burden becomes less progressive. There is some validity to this
point, even though social security is supposed to work more like an annuity,
rather than a service funded by taxes. I agree that we need to look at
regressive taxes, or those taxes that hit poor people harder, like sales tax.
But there is no denying that the big elephant in the room is the income tax and
it is clearly hyper-progressive.
The full report is here:
http://www.taxfoundation.org/news/show/250.html
“Tax Simplification” – October 22, 2007
I was pleased to read that
the Taxpayer Choice Act was introduced in Congress last week. It is sponsored
by three junior Republican members: Rep. Paul Ryan of Wisconsin, Rep. Jeb
Hensarling of Texas, and Rep. John Campbell of California. The Act is a
response to the problem of the Alternative Minimum Tax, which was intended to
make sure the super-rich pay income taxes but is now being applied to millions
of very middle-income taxpayers and will apply to another 23 million Americans this
year alone. Their bill gives taxpayers this option: in exchange for giving up
all current deductions, annual earnings up to $100,000 would be taxed at 10
percent and anything over that first $100,000 would be taxed at a 25 percent
rate. There would be a standard deduction of $39,000 for a family of four, and
a taxpayer could choose to switch back to the current system once in their life
or if an event such as death or divorce changed their tax filing status.
That the bill offers taxpayers the option of choosing whichever system is most
beneficial to them is a big plus, but right now most policymakers—Republicans
and Democrats—do not endorse the idea. Why? Because it would mean that the
government would collect less in taxes, probably to the tune of $840 billion
over the next decade. I think that Americans not only want their taxes
simplified and lowered, they want the federal government to run on less, spend
less and intrude into their lives less. Congressional Republicans, who are
faring poorly in the view of a majority of Americans these days, would do well
to embrace these ideas and push for tax simplification now.
To read more about the Taxpayer Choice Act, see Rep. Ryan’s site:
http://www.house.gov/ryan/press_releases/2007pressreleases/101007AMT.htm
“Taxing Growth” – October 29, 2007
In discussing the population
growth and pressures the new residents put on government services, Stephen
Levy, director of the Center for Continuing Study of the California Economy,
said, “The number of companies that move out of state is infinitesimally small.
It doesn't amount to a hill of beans. There's been all this debate about
competitiveness. ‘Do we have to give them regulatory relief? Tax cuts?’ We're
not competing for a paint factory or low-wage manufacturer. We're competing for
talented people who are on the cutting edge and can live and work anyplace.
They demand good schools, transportation that moves people, clear air. We
compete by making California a great place to live and work. That d--- well
takes investments. Investments cost money. It means money coming from the
private sector.”
Levy’s old tricks and big lies are tiring. Why are we not competing for paint
factories or manufacturers (at any wage level)? Because California lost that
competition a long time ago!! What he says “doesn’t amount to a hill of beans”
are actually tens of thousands of manufacturing jobs that have left California
in recent decades because we have made it impossible for any such business to
make ends meet in this state. Certainly, we want the cutting edge people who
can live and work anywhere, but we also need jobs for the people who are the
backbone of our nation and those jobs are rare in California. They became rare
because the breed of California politicos I have deemed Sim City Mayors has
told business how to operate, made them responsible for things beyond their
scope and charged them outrageous amounts of money for the privilege of
operating here. It is all well and good for Levy to dream of a state where the
“private sector employers” pay all the bills, but that private sector would
rather leave California than be taxed out of existence.
“Blame the People First” – November 5, 2007
Almost two weeks after the
fact, I am still struck by George Skelton’s column in the LA Times, “Living in
California Means Paying a Premium.”
http://www.latimes.com/news/local/la-me-cap25oct25,0,26329.column?coll=la-tot-callocal
Skelton, a cantankerous liberal whom I consider a friend, starts out in
agreement with the California Chamber of Commerce that the Governor helps
create jobs by vetoing “job killer” bills. I suspect there was a trumpet
fanfare in Heaven that a big government advocate has accepted this premise.
Skelton is thus concerned that the state needs a more robust infrastructure of
roads, schools and public safety to support the increasing jobs and population
resulting from the Governor not allowing the Democrats to destroy the business
climate. I completely agree that we need to invest a lot more in our
infrastructure and I think it is wonderful that Skelton and I are this far into
the discussion and still on the same page, so to speak.
But alas, liberals and conservatives have to part ways and Skelton does so by
assuming that the cost of this extra infrastructure, on a per capita basis,
must rise. He says, “There is no economy in numbers because of an exploding
population. No discount for volume. This is not like widget making.” My
response is that infrastructure is no different than any other good. Just
because something is used by all does not mean that we throw out what we know
about economics and economies of scale. I would also argue the money for
improved infrastructure is already there if we would merely set aside General
Fund money at least equal to what we are going to pay for infrastructure bonds,
and save the interest.
Skelton’s evidence that a rising population means government needs more tax
dollars per resident is that in 1950, state spending per $100 of personal
income was about $5. In 1975, it was $7.50. Current spending is about $9.60 per
$100 of personal income. Skelton thinks the statistics are saying that the
state needs to keep spending more per person to maintain the quality of life we
have here, even as he concedes the quality of life is going down.
Skelton does not like smog, clogged freeways, and high student fees. I agree
completely. But when he sees that increased government spending is not yielding
improvement in these areas, Skelton concludes we are not spending enough. I
look at these figures as devastating indictments of the state’s use of its tax
dollars and its horrid policies. Are clogged freeways and pollution the result
of taxes that are too low, or do diamond lanes that serve relatively few elites
in hybrids and carpoolers, along with constant raids on funds that are supposed
to go to road building, have something to do with gridlock and hence more
pollution? Again, are high student fees at our universities the result of
Californians not paying enough taxes, or a corrupt and unresponsive system that
lavishes extreme salaries and perks on massive numbers of administrators who do
nothing for students have anything to do with it? Note that two weeks ago our
Democrat State Treasurer, Bill Lockyer suggested the state stop supporting UC
altogether.
The rest of the column is parody: “State Sen. Sheila Kuehl (D- Santa Monica), a
leader in land-use planning, says… ‘the answer is we need more resources.’”
Note how Skelton finds an actual person who is at least partly responsible for
the horrid state of affairs and then elevates her to heroic problem solver. A
liberal who would not in a thousand years accept responsibility for how bad
things are just needs more of your money to make everything great.
For Skelton and like-minded liberals, crummy public service is always the fault
of business and individual taxpayers who just are not paying enough taxes, not
the fault of those who are responsible for providing the services.
In McCulloch v. Maryland in 1819, Chief Justice Marshall wrote, “[T]he power to
tax involves the power to destroy.” The proper response to government’s failure
to respond to our needs is not to give them greater resources and fail further.
The proper response is to look first at the policies and assumptions behind the
failures. Greater resources can be found, but failure should not be rewarded.
“Bee & Chronicle
Readers Call “Baloney” on Use Tax” – December 4, 2007
Due to outreach efforts by BoE staff, the
Sacramento Bee and San Francisco Chronicle newspapers ran articles reminding
Californians they are supposed to keep every receipt from holiday internet
shopping in order to accurately report and pay the use tax due on items that
they purchase from out-of-state.
This is a law that makes millions of Californians criminals. We at the BoE have
no way of enforcing this law without creating a police state. Somehow these
facts just fly right over the heads of the media. Or do they? Perhaps it is
more accurate to say that the liberal newspaper establishment just likes taxes.
My advice is that when it looks like one’s business is going to blow away like
dust, considering the opinions of customers is pretty important. But I
digress….
Our media staff got back to me with the reader responses to the newspaper
stories on the use tax. I am happy to report the readers of these papers do not
seem inclined to swallow what they are fed. Lawmakers and my colleagues on the
Board need to pay attention. Silly laws breed disrespect for all law. Some
sample comments taken from the web sites of the two papers:
“My use tax check is in the mail. Ha Ha Ha Ha! That was the funniest article I
read all day.”
“You can intellectualize this one all you want, but here's the gist: If it is
that wide open to reliance on the honor system where auditing nearly
impossible. . . Well, it is just a dumb, useless law!”
“If you don't want out-of-state merchants to have an advantage over CA
merchants, instead of making people pay the tax difference, here's a novel
idea. Lower or eliminate the CA sales tax. It doesn't take a rocket scientist
to figure that out. Then there's no reason to shop out of state. And the
retailer pays tax on his profits, so the loss of sales tax revenue will be made
up by the tax on the retailers' profits. So there's no loss. Duhhhh!”
“Tax Reform Nonsense” – December 4, 2007
The latest state fiscal crisis
is bringing many bad ideas, old and new, out of the woodwork. Among them is a
plan by the California Tax Reform Association to “reveal significant flaws” in
the state’s current tax system and correct those flaws to “generate substantial
revenue.” CRTA asserts that their reforms could generate another $17 billion
annually. Of course, that ignores what we have learned about all previous tax
increases: they never generate as much as the proponents claim because people
change their behavior to avoid higher taxes. It also ignores the big problem:
spending. As demonstrated so clearly by many families caught in the mortgage
meltdown, it is less important how much you make than how you spend whatever
amount you do make. The state has done a poor job at prioritizing spending and
eliminating waste.
Yet, instead of encouraging government to do that, CRTA makes irresponsible
suggestions. It argues that the tax system fails to capture pollution and
natural resource depletion costs, and suggests that California should impose a
severance tax on oil produced here. While nearly everyone else is arguing for
independence from foreign oil, CRTA is proposing a new tax that would
discourage production of oil right here in our own backyard. CRTA also argues
for expanding the sales tax to things like your cable/satellite television,
movie tickets, and gym memberships. CRTA would also like you to pay more money
in property tax, income tax and corporate tax.
You can read the entire CRTA document here, but hold on to your wallet as you
do as they want your money:
http://caltaxreform.org/wp-content/uploads/2006/08/TaxPolicyin21stCentury1.pdf
“Tax Reform Nonsense” –
December 3, 2007
The latest state fiscal crisis is bringing many bad ideas, old and
new, out of the woodwork. Among them is a plan by the California Tax Reform
Association to “reveal significant flaws” in the state’s current tax system and
correct those flaws to “generate substantial revenue.” CRTA asserts that
their reforms could generate another $17 billion annually. Of course,
that ignores what we have learned about all previous tax increases: they never
generate as much as the proponents claim because people change their behavior
to avoid higher taxes. It also ignores the big problem: spending.
As demonstrated so clearly by many families caught in the mortgage meltdown, it
is less important how much you make than how you spend whatever amount you do
make. The state has done a poor job at prioritizing spending and
eliminating waste.
Yet, instead of encouraging government to do that, CRTA makes irresponsible
suggestions. It argues that the tax system fails to capture pollution and
natural resource depletion costs, and suggests that California should impose a
severance tax on oil produced here. While nearly everyone else is arguing
for independence from foreign oil, CRTA is proposing a new tax that would
discourage production of oil right here in our own backyard. CRTA also
argues for expanding the sales tax to things like your cable/satellite
television, movie tickets, and gym memberships. CRTA would also like you
to pay more money in property tax, income tax and corporate tax.
You can read the entire CRTA document here, but hold on to your wallet as you
do as they want your money:
http://caltaxreform.org/wp-content/uploads/2006/08/TaxPolicyin21stCentury1.pdf
Flawed Law Hurts Charities and Veterans – February 11, 2008
Since 1945, California has had a property tax exemption for charities. (This is known as the Welfare and Veterans Exemption.) Unfortunately, many county assessors say that the ultimate beneficiaries of the charitable activity must ALL be California residents or the property cannot qualify. The statute does not actually say this, but the Board of Equalization has consistently—over my objection—voted with the Assessors’ interpretation. The Assessors argument that they cannot verify the charitable work if the beneficiaries are out-of-state. Yet under that view of the law, they should have a problem allowing the exemption for a charity in Redding that helps some one in San Diego. Of course, the assessors do not send inspectors outside their own counties to check on that sort of thing, so that whole argument is irrelevant.
A correlation could be made to state personal income tax law: contributions to out-of-state charities that assist beneficiaries anywhere in the world, from Sacramento to South Africa, are tax deductible on a California state tax return. However, the FTB does not have inspectors traveling the globe to make sure that the New York-based Nelson Mandela Relief Fund is really giving charity to the people of South Africa. If the New York charity qualifies, then the contributions by California residents to it are tax deductible in California. The same principle should apply to property tax law.
The Welfare and Veterans Exemption is antiquated, unduly complicated, unfair, and impractical. Consider the sad fact that most veterans’ organizations cannot take advantage of the exemption, even though they are the ones who got it passed originally, because it requires “exclusive use” of the property by the charity. So when the Veterans Hall collects a little much-needed revenue by allowing a member’s child to hold a wedding ceremony there – just one day out of the year – then the whole property tax exemption is lost. The law needs to be revised, updated, or scrapped.
However, even though the law is deeply flawed, the Assessors and the majority of the Board of Equalization members should not be permitted to write new make-believe requirements into the law and use those requirements to disqualify worthy charities that would otherwise be entitled to tax relief.
We Are All Supply-Siders Now– February 18, 2008
Last month a top staffer for a liberal Democrat Constitutional officer asked me for research that proves tax cuts spur economic growth. There must be something in the air because none other than Speaker Nancy Pelosi (D-CA) gave a great supply-side statement a couple weeks ago in support of the stimulus package. She said, “Economists estimate that each dollar of broad based tax cuts leads to $1.26 in economic growth.” Wow! Ignoring for a moment that the President’s stimulus package did not contain any tax cuts, I accept the Speaker’s statement with gratitude.
I was happy to oblige the request to provide research showing that tax cuts are great for the economy and that governments’ focus on the economy with a supply-side perspective is superior to the Keynesian “demand-side” strategy that relies on government spending to stimulate the economy. There is a lot of material to pass along, especially dealing with Reagan’s tax cuts, but I chose an article by Alvin Rabushka of Stanford’s Hoover Institution that ran in the Wall Street Journal last summer. I chose it specifically because it is not even about America. It is about China being perhaps the greatest supply-side success story in history. China’s 10% annual average growth for 19 years is a world economic record. This growth is projected to make China the world’s largest economy by 2020.
http://www.hoover.org/publications/digest/3523046.html
It all began in 1978 when Deng Xiaoping started China on the road of reform. He established coastal economic zones, increased foreign investment, liberalized trade and allowed some free markets to develop. But Rabushka argues the most important ingredient of this incredible story is massive, sustained tax cutting. In 1978 total government revenue consumed about 31% of GDP. By 1995, China’s tax burden had fallen to less than 11 percent of GDP. This is more than a 20% reduction of taxes as a share of GDP, the actual rate cuts are of the magnitude of 60%. Deng’s policy of massive tax cuts shifted one-fifth of all resources away from government and into the country’s towns and villages where the money was used to support fledgling markets. As the government allowed more of the fruits of economic activity to stay in the private sphere, more has been plowed back into the economy in the form of investment and private ownership. Now, the government sector comprises 34% of gross output, down from 82% in 1978. I now understand Jim Rogers’ recent statement on CNBC that with respect to business regulation and taxation, “Massachusetts is more Communist than China.”
Moreover, Rabushka provides evidence showing that China’s growth accelerated most when taxes were cut the most. In periods where tax rates stayed stagnant, growth was slower. Finally, he shows that China’s government was not starved of funds as a result of these tax cuts, in fact the opposite is true. And this is the essential lesson of all of this. Still if you would like a domestic version of the same thing, look at the results of President Bush’s 2003 slashing of the capital gains rate. Within three years, capital gains tax revenue more than doubled.
http://www.ncpa.org/pub/st/st307/st307.pdf
Speaking of Foreign Examples – February 18, 2008
The Wall Street Journal offered another sterling example of a foreign country’s experience with taxes last week in a piece by Mary Anastasia O’Grady. She wrote about the failure of President Luiz Inacio da Silva’s attempt to resurrect the financial transactions tax. His move failed because “elected officials are finally waking up to the fact that the government can’t squeeze the public forever.” What is most amazing is that this good tax news comes out of Brazil. That country’s tax burden as a percent of GDP is just shy of 35% and its average growth rate lurks near 2%. O’Grady says that Silva had to push for the tax extension because his political philosophy is “marinated in the same ‘equality’ theory of economics that motivates the U.S. left. This special brand of populism holds that raising taxes on the most productive sectors of the economy is the way to satisfy government’s unlimited appetite for more.” She cites the finding of a World Bank study from last year that it takes the average Brazilian company more than 2600 hours to comply with the tax system. A 2005 study by the U.S. Tax Foundation says U.S. business spend more than 3 billion hours to comply with just our federal tax laws—not including state and local. People and companies have finite resources. For every dollar and hour they spend complying with government tax law, that is one less dollar and hour they can spend being productive. That productivity, in turn, benefits their customers, and so the cycle goes on to benefit everyone. The same cannot be said of money pored into government compliance. If Brazil is beginning to recognize this, then I have hope for that idea to take root elsewhere as well.
http://online.wsj.com/article/SB120148128843820973.html
In Case You Are Tempted – March 10, 2008
It is that time of year when people are overwhelmed by the complexity of income tax filing. Most people, despite their frustrations and anxiety, get the task done and file their taxes by the deadline. Yet, there are those who never file taxes. The more famous of those end up in court and you have seen them in the news. You may find yourself falling for some of the frivolous arguments for not paying taxes, but even if you believe those passionately, you will lose in court and the financial consequences will be much worse than just paying the taxes in the first place. The IRS has compiled a list of the most frequently heard objections to paying taxes and takes on each one.
http://www.irs.gov/taxpros/article/0,,id=159932,00.html
FAST Tax Act– March 10, 2008
I have written here about many proposals to simplify the income tax system. A few weeks ago I included a link to the original income tax form the IRS had in 1913. It was a mere four pages long. Then I saw this potential income tax form:
http://dreier.house.gov/pdf/FAST%20Form.xls
The Fair and Simple Tax Act (FAST) Act is sponsored by, among others, several California Republican Members of Congress who are sharing this form as a way of explaining to people, quite vividly, how much simpler our tax system could be. As you are filling out your 1040 forms this month, take a moment to run your numbers through this form and see whether you would do better financially. I know you would save time.
Top Ten Tax Increases: #10, the iTax—March 17, 2008
Legislative Democrats are pushing for many tax increases that they claim are necessary to fix our state’s budget woes. They like to sensationalize many of their taxing ideas, and argue that they are just trying to get the extremely wealthy, yacht-owners to pay their “fair share,” but over the next few weeks I will be examining the top ten increases they are seeking and demonstrating that the real effect will be to raise taxes on you and other everyday people, not just the extremely rich.
The first on the list is AB1956 by Assemblyman Charles Calderon. It asks the Board of Equalization to tell the legislature how to tax “digital property” as if it were “tangible personal property.” In other words, the Democrats want us to figure out how they can tax your iTunes downloads. Just as technological advances make it easier for you to find and enjoy music, movies, books, and software from the comfort of your own home computer, the taxophiles are trying to figure out how to charge you for it. The problems with such an effort are numerable. We can squint as hard as we are able, but that still will not turn electrons into tangible personal property. Even if you could touch and feel those electrons, how do we determine whether they originated in California? We cannot do that. Nor should we try. Technology is changing the way you interact with the world and the information and entertainment it produces, but government is trying to behave (or misbehave as the case may be), as it always has. Democrats must face the harsh reality that in our new world there may simply not be as many “things” to tax as there once were.
Looking at the number of iPods and other devices on the street my conclusion is that this tax increase would be on all people rich and poor.
From the Flash Report: State’s Retailers Will Get Clobbered by Perata’s Tax Hike—March 17, 2008
Senate President Don Perata (D – Oakland) has thrown down
the gauntlet in saying he will hold up the state budget rather than accept the
across-the-board cuts the Governor has proposed. It is disheartening to
see Perata’s solution is a one-cent increase in the state portion of the sales
tax, which by the way is a 16% increase in the tax (6.25% to 7.25%).
Remember, this is a tax that must be paid by retailers only -- not lawyers,
therapists, web designers, political consultants, gardeners, etc. The sales tax
was meant to tax consumption, but the amount of consumption being captured by
it is decreasing every year relative to the whole economy.
In 1990 the state had roughly 900,000 retailers. 18 years later, we have
roughly 1 million. This is an 11% increase, which might sound good except
for the fact the state’s population went up 44% in the same period. Yet,
the Democrats are looking to this diminishing class of businesses for more
revenue. Our retailers are under siege already. The vacancies in
the strip malls will get even worse if this tax increase becomes law.
George Skelton’s column earlier in the week credited Pete Wilson for a $7
billion tax hike in the early 90s. What Skelton left out is that less
than $5 billion of what was promised actually came in, and one of the worst
recessions in memory was exacerbated. Although it is common sense that
people change their behavior in response to changes in the price of goods, the
taxpayers’ response to new taxes is not factored in when revenue forecasts are
made. These static estimates assume people are like cattle. The
tax-hike proponents just whip out a calculator and multiply the tax hike by the
number of people, and voila, that is their revenue number. This utterly
ignores reality. In fact, the revenues from the Wilson tax hike came in
20 percent short of expectations, or $800 million short, the first year after
the hike. Even as the economy recovered, revenues still came in short of
forecasts by half a billion per year for several years.
Now Perata is promising $5 billion from a one-cent increase in the state’s
sales tax rate. Unlike a static model, a dynamic revenue model factors in
the response of taxpayers to changes in price. The Department of Finance
has the ability to do dynamic modeling, but rarely makes that information
public. I have a dynamic revenue model from the Department of Finance
that shows an 8% decrease in revenue for every one-cent hike in the sales tax
rate. This means Perata’s tax hike would only bring in maybe $4.2
billion. But wait, this dynamic estimate was done in 2003. Since
2003, people are even more likely to choose the Internet than put up with a 9%
surcharge on tangible goods. I doubt Perata’s plan will even bring in $4
billion and even that assumes that we do not enter a full recession that could
make it even less.
From a supply-side standpoint, it is better to tax consumption rather than
savings and investment. However, the current tax scheme does not
tax consumption as much as it taxes one group of businesses over another.
The solution is not to extend the sales tax to services. That would only
put new pressure on businesses, many of which would choose to provide their
services from comfortable offices in Nevada, deliver their product over the
Internet, and no longer bother with California income tax either. Higher
and more taxes is not a long term solution that makes sense.
What is clear is the Perata tax hike is not worth the cost of increasing
pressure on the state’s retailers at a time when retailers are desperately
fighting for survival. In the Skelton article, former Governor Pete
Wilson was quoted saying the solution to the current crisis is to revisit the
massive spending increases during Davis’ last couple of years.
California had an extraordinary revenue boom in the late 1990s. The
subsequent revenue bust in the early 2000s was the result of the popping
Internet bubble, and the failure to recognize that revenues were in an
unsustainable spike. The personal income tax soared from $28 billion in
1997-98 to a peak of nearly $45 billion in 2000-01, before plummeting to below
$34 billion in 2001-02. The state’s fiscal problem has its roots in how we
treated this spike in revenue. Had we treated it as one-time money and
invested in capital projects, rather than committing the state to those lofty
spending levels permanently there would not be a budget deficit today.
But instead, as of 2002 the state had a $2 billion deficit that year and
$5 billion more the next. California went from a $5 billion surplus to a $5
billion deficit in just two years, and we have not since closed this gap.
Given this set of facts, Senator Perata, along with the Legislative Democrats,
cannot credibly argue we have a revenue problem. It is obvious how the
state’s finances got off track. To say we have a revenue problem is to
commit to imposing another massive spike in revenue. Rather than have that
revenue come naturally from good economic conditions, the Democrats want to
collect the extra money through more taxation, whether or not the economy can
deliver it.
In this new economy, tax hikes only generate a race to the bottom. We
need to compete for people and businesses. If we do not lower both taxes
and state spending, California is going to lose, and lose big.
Unbearable Competition—March 24, 2008
The Democrats, and perhaps the Governor, who are seeking tax increases or the closing of tax “loopholes,” should take a look at their local newspapers. My hometown paper this week ran a half-page full-color ad depicting a beleaguered California businessman dragging along, carrying a long-clawed, red-eyed bear on his back. The bear’s front paws are wrapped around the businessman’s neck and the bear’s mouth is full of money. The headline asks: “Doing your part to carry the un-Bearable load?” Then the text features lures, “When you can’t “Bear It” anymore, check out relocating to Las Vegas!” and notes: no corporate income taxes, no personal income tax, no inventory tax, lowers workers’ comp, pro-business attitude. If I were running a business here, saw that enticement and knew that the intent of my elected leaders was to make the burdens on me even worse, I would indeed be looking at relocating. The estimates of what tax increases and closed loopholes would generate in revenue must consider the option many job providers will make instead of taking on more tax burden.
Click here to see the ad:
http://www.nevadadevelopment.org/media_taxbear4.html
Top Ten Tax Increases: #9, the Plastic Bag Tax—March 24, 2008
Assembly Bill 2829 (Davis) would allow a new tax, at a still-unspecified level, on the plastic bags used by grocery stores and other retailers to package purchases.
If your grocery bill is not high enough, this bill is for you. In a previous extortion move against grocers, a law was passed where every store would have to provide an at-store recycling program for the return of plastic bags. In return, the law prevented local or state governments from mandating a plastic bag recycling fee. Under this new bill, stores would have to continue to provide an at-store recycling program (and pass on the cost to us), but in addition, the bill deletes the provision against government mandating that stores charge you a fee for using plastic bags. In other words, if this bill passes, you will very likely be charged for saying “plastic” when asked what type of bag you want. Presumably this is about litter control. Assemblyman Davis (D-Los Angeles) must see lots of plastic bags strewn about in his district. I will not challenge that assertion but only point out the blatant unfairness of burdening all shoppers with a new tax because of the bad actions of a few.
Taxpayer Victories at the Board—March 31, 2008
It pleases me greatly to announce there have been a couple of big taxpayer wins at recent Board of Equalization hearings. One of these involved a company that manufactures hearing implant systems. The BoE staff did not agree with the company that the entirety of its system was “medicine” and thus not subject to sales tax. The product has two components: 1) a receiver implanted in the ear and 2) a microphone worn elsewhere on the body. BoE staff made a distinction between the sound transformer that is surgically inserted into the ear being “medicine,” but not the microphone that sends signals to the implanted device. Staff also reasoned that since auditory devices are specifically listed as taxable items in law, the whole system was taxable. The taxpayer in this case argued that the implanted device did qualify as “medicine” under a different definition. BoE staff conceded this point, but would not extend this reasoning to the microphone. I am happy to report when this came to the Board, my colleagues recognized this as an example of our regulations not keeping up with technology. I am pleased the Board’s final decision was unanimous in favor of the taxpayer. Clearly, the all the components, surgically implanted or not, are necessary for the system to function as a whole and give the deaf an opportunity to hear.
Top Ten Tax Increases: #8, Making It Easier for Politicians to Raise Taxes. Sneak Attack on the 2/3 Threshold – April 14, 2008
Senate Constitutional Amendment 18 by Senator Tom Torlakson (D-Antioch) would make it easier for local politicians to raise taxes by allowing educational finance districts to impose a district sales and use tax by a majority vote in a major watering down of Proposition 13 protections. As if this was not bad enough, the true subterfuge is that Torlakson has another bill, SB 1430, which would allow the same educational finance districts to impose any tax that can be imposed by a charter city. Charter cities have the right impose transit occupancy taxes, parcel taxes, utility user’s taxes, business license taxes, and vehicle license fees. These two bills together will allow all these taxes to be raised by simple majority vote. The Board of Equalization’s analysis of the bill argues this will create havoc for consumers, retailers, and the Board because it is not clear where the boundaries of these special districts begin and end.
The basic problem with a majority vote tax threshold is it is often used to raise taxes on a distinct group. This means that half the people, plus one, can raise the taxes they themselves often do not have to pay. For example, people who do not own property are more easily able to raise the taxes of people who do own property under a majority vote threshold. In contrast, a 2/3 vote usually requires the assent of those who will actually have to pay the tax, or at least a good number of them.
This is a very important issue. Once the 2/3 vote goes away, the relatively unproductive go after the productive, and everyone loses.
Taxpayer Victory at the Board -- April 21, 2008
I reported about a good outcome for taxpayers with the ruling that implanted hearing devices were exempt from sales tax. Another case recently before the Board brings more good news for taxpayers. It is a sad fact that sometimes income tax is due on income that never actually comes in. California law conforms to federal law that requires taxpayers to pay tax on hypothetical future income from installment sales, even if the income is contingent on conditions that may never be met. I know this sounds nonsensical, but this is the world of complex tax law, which is through the looking glass. What happens is that a business is sold, but the buyer, not yet certain about how valuable the business actually is, pays a partial sum up front. Then, after operating the business for say, a year, makes another payment to the seller based on the actual performance of the business. But if the business does not perform well, the subsequent payment may be lowered or may never need to be made.
In these cases, taxpayers have been forced to pay taxes and interest on ghost income they never received. The amount of the tax due on this sort of hypothetical future income is based on the amount of tax deferred, which is based on the value of the contingent note from the sale of an asset. Unfortunately, there is no agreement about how to calculate the value of such contingent notes. This irrational law (Internal Revenue Code Section 453A) has been in place for more than 20 years, but neither the IRS, nor the Franchise Tax Board, has ever published any regulatory guidance to taxpayers. What is worse, the Franchise Tax Board has adopted conflicting positions with different taxpayers, apparently deciding on a case-by-case basis to use whatever valuation theory would create the highest tax bill.
Fortunately, the Board of Equalization decided an individual tax appeal on this issue by voting 3-to-2 in favor of using the “wait and see” method of valuing contingent notes. Under this method, the taxpayers were allowed to wait until they actually received a payment under a contingent note before having to pay taxes on the unknown value of the note. The note’s value was calculated on the basis of the funds received, rather than by some other, less certain method (such as the estimated fair market value on the date of sale or the fair market value at the end of each tax year). This case was not published, so it cannot be cited as precedent by taxpayers and few people will ever hear about it. However, I am optimistic that the Board of Equalization will eventually publish a case and provide the advice to taxpayers that the Franchise Tax Board has so consistently neglected to provide for so many years.
Warning for Non-Profits – April 21, 2008
A reader reminded me of an onerous new IRS requirement that may catch some non-profit organizations off guard this year. Previously, 501(c)3 organizations with less than $25,000 of gross receipts did not have to file paperwork, but starting this year, for 2007 records, all nonprofits need to file Form 990 (or the simpler e-postcard version) with the IRS. Failure to file for three consecutive years may result in organizations losing their 501(c) status. While larger non-profit organizations have been complying with complex tax laws for years, many smaller groups may not be familiar with these requirements and turnover in volunteer boards can mean that records and deadlines are overlooked. Each organization should review the new requirements and get help with the filing if there are questions about how the requirements apply. More information is available at the IRS’s website:
Top Ten Tax Increases: #7 A New Car Tax -- April 21, 2008
Assembly Bill 2388 by Mike Feuer (D-West Hollywood) proposes raising the car tax based on the weight of the vehicle and the amount of carbon dioxide emissions it emits, to a still-unspecified level. So unlike the current car tax where the more valuable your vehicle is the more in tax you pay, this bill could impose a very high tax on a vehicle that is not worth much at all. I thought liberals liked taxing the rich? Now, Feuer wants to introduce other elements that have nothing to do with wealth into the car tax. So under this bill, instead of hitting “the rich,” the idea is to hit people who are environmental offenders because they drive heavy vehicles, like, for instance, the guys who come out to trim your trees, truckers, delivery drivers etc.
Apparently it is not enough for limousine liberals to settle for hyper progressivity (rich vs. poor); now they need to establish who is greener than thou. On top of being absurd, this bill is also unnecessary. People who own heavy vehicles already face severe punishment at the pump and end up paying a lot more gas tax than people who have smaller vehicles. But alas, people who work hard for a living are pretty much invisible to urban liberals.
Feuer cancelled his first chance to have the bill heard in the Assembly Transportation Committee last Monday.
Getting Punked by the Franchise Tax Board-- April 21, 2008
Now that tax season has passed, you may not have positive regard for the Franchise Tax Board. I know my regard has waned after I became a victim of the FTB’s legislative unit last Monday in an Assembly committee. I sponsored a bill carried by Assemblyman LaMalfa (R-Redding) that would have brought two IRS pro-taxpayer reforms signed by President Clinton to California. One of the elements is already policy at the Board by our own rule. The other element sought to shift the burden of proof from the taxpayer to the government in a very limited number of situations. I want it to be the government’s obligation to prove there own new assertions if they dispute the tax calculation of a fully cooperating taxpayer. This idea is to give those taxpayers who fully co-operate the benefit of hearing FTB’s proof of why the taxpayer is wrong.
I had sponsored a similar bill last year and the Democrat Chairman of the committee, Assemblyman Charles Calderon (D-Whittier), liked it enough that he encouraged me to bring it back with some changes to satisfy some minor concerns. This was in January. In this new session, I sponsored the same concept, but I pared it way down so it would only affect cases that come before an oral hearing before the full Board, with restrictive definitions that would have made very few taxpayers eligible for the benefit. In the last five years I can think of only a handful of taxpayers, small business owners all, who may have benefited from this. Some might ask if the bill is so narrow, why bother? I am pushing this concept simply because I am bothered that, unlike criminals, taxpayers are always considered guilty under California law unless they prove otherwise. I want there to be at least one instance where taxpayers have the same rights as accused criminals.
Shortly before the committee hearing, I learned the FTB had done an analysis of the bill which claimed it would cause California to lose $300 million in revenue in the first year and $365 million the next, and more each subsequent year. Too bad the FTB did not have to prove where it came up with such a silly number. Not only does this bill potentially affect just a few taxpayers it also means that FTB does not believe that they can prove the taxpayer is wrong if they are ever required to do so. The result of this outrageous analysis is that when the bill came before the committee, rather than being favorably disposed toward it, the committee chair announced there would be no vote because the bill was going to the suspense file – the place where bills that cost the state too much money go to die quietly. Calderon even lectured LaMalfa that he had a lot of nerve bringing a bill that cost so much money before the committee because of the state deficit.
So, I am sorry to report that there will be no change in law this year. Taxpayers still will not have the same rights as accused criminals thanks to the FTB analysis of my bill.
Vested Interest—April 28, 2008
Those of us who are in high tax brackets are often befuddled by those around us who are seemingly uncaring about the tax burden. A recent Wall Street Journal article by Stephen J. Entin, president of the Institute of Research on the Economics of Taxation, explains. He takes on the current debate about extending the Bush tax rate cuts or focusing on tax credits for rearing children. He observes that fewer people are interested in tax rate reductions because fewer people are actually paying taxes, and that some conservatives are pushing for the family benefit. Entin writes, “The bottom half of the income distribution pays barely 3% of the income tax,” and he notes the Tax Foundation’s finding that “over 40% of the population owes no federal income tax, and about half who owe nothing actually get net refunds.” Thus, “[f]or people who pay no income tax, general government is practically a free good.” Indeed, if they can get all the government they need without paying and have more tax credits that give them even more money back, they are all for it. The problem is, the rest of us end up paying more because the cost for general government does not go down. Indeed, with so many free riders, it just keeps going up. Entin says that if that happens at the expense of “growth-oriented tax reforms, the loss in pre-tax income may be greater than the tax breaks.” I join his conclusion that “the true pro-family solution is less government, not more.”
http://online.wsj.com/article/SB120770167885700061.html?mod=djemEditorialPage
Environmentalist, Meet Big Government– May 12, 2008
A situation that seems cut from a satirical movie treatment is laid out in Friday’s San Francisco Chronicle. A Half Moon Bay mechanic and local hero has been getting a lot of positive attention for his fleet of cars that run on disposed grease from a local chowder house. When he was contacted by BoE investigators, he thought the government wanted instruction on being greener. Not so, the government wanted taxes, and it wanted to see his diesel fuel supplier license as well as his license to pick up grease from the restaurant from the Meat and Poultry Inspection Branch. Turns out the poor guy also needs permission from the Air Resources Board to burn fat.
Enter the Chron interviewing one frustrated environmentalist: “‘It is ridiculous that we live in what is presumed to be one of the greenest states in the nation, yet we have the most antiquated laws to deal with green energy,’ said Josh Tickell, an alternative-fuels advocate and filmmaker.”
Well, I suppose if repressive big government is “antiquated” then limited government can perhaps become the new “progressive” policy. We can dream anyway.
Terrific headline, BTW: “Veggie oil burners get burned by state's regulatory red tape”
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/09/BAB210J7BF.DTL
Chocolate Chore – May 12, 2008
Late last year an article entitled “Why Is Buying Hot Chocolate So Confusing?”appeared in a tax journal. It was bandied about as an example of how difficult it is for California retailers to comply with the state’s sales tax law. I asked the Board of Equalization staff to respond to the article and have now reviewed a 3 ½ page letter attempting to explain when hot chocolate is taxable. That it takes 3 ½ pages to answer what should be a simple yes-or-no question gives you a window into the absurdity that is state tax law. So when I hear the calls to raise the sales tax or apply it to services that are not currently taxes, I cringe. If figuring out a mug of hot chocolate is this complicated, can you imagine what we can do if we attempt to tax legal services and get even more attorneys involved?
You can try to decipher the 3 ½ hot chocolate memo here:
http://www.test.boe.ca.gov/leonard/info/hot_chocolate.pdf
Read My Lips – May 19, 2008
Just as President Bill Clinton set certain precedents that have done extreme damage to the presidency, the first President Bush set a horrible precedent for Republican executives when he reneged on his “read my lips, no new taxes” pledge. Governor Schwarzenegger is now backing a proposal that should be anathema to Republicans, though apparently those of his stripe do not mind either borrowing money we cannot afford or raising taxes. To those who would increase taxes I ask this: what convinces you that Californians are undertaxed? Being for more spending on favorite programs is understandable, but jumping to the conclusion that taxpayers owe the government more is a big leap.
Senate Republican Leader Dave Cogdill said it well: “To hear my colleagues on the other side of the aisle talk, you would get the impression that state government is a bare bones operation that has been pared down to its limit, leaving us with no choice but to raise taxes, lest draconian measures be inflicted on vital state programs and the people they serve. Quite the contrary, state spending has increased by $25 billion over the past five years, well beyond the expansion that population growth and inflation might dictate…. Republicans know that Californians pay more than enough of their hard-earned salaries and wages in taxes to this state and to the federal government. We know, too, that raising taxes during a pronounced economic slowdown is a recipe for even greater fiscal and economic problems down the road.”
See some of the Senate Republicans’ research on California taxes here:
http://cssrc.us/publications.aspx?id=4031
Happy Birthday, Prop. 13 – June 2, 2008
June 6th marks the 30th anniversary of the people of California voting to support property tax reform in the form of Proposition 13. In the subsequent three decades, Prop. 13 has become the target for everything anyone dislikes about government. Fortunately, it wears those targets like badges of honor. Prop. 13 was not dreamed up by people who hate government and wanted to handicap worthwhile governmental functions. Rather, it was a legitimate reaction to out-of-control property taxes, a fact that seems forgotten in the past 30 years. Joel Fox reminds us that back in 1978, “The tax rate throughout California averaged almost 3% of market value, and there were few limits on increases either for the tax rate or property value assessments. Some properties were reassessed 50% to 100% higher in just one year.” This was causing people not to pay overwhelming tax bills and many people, especially the elderly on fixed incomes, were losing their homes through no fault of their own.
High, unpredictable tax bills are no longer the cause for people losing their homes. Indeed, according to the California Tax Association, the pre-Prop. 13 property tax system was 2.86 times more volatile than acquisition-value property tax system put in place by Prop. 13. Tax historian David Doerr has written, “Proposition 13 removed the fear that future taxes would be controlled by an inflated value, representing unrealized paper gains, and based on activity in the real estate market and other economic factors over which the taxpayer had no control.” And despite cries that the change has hurt tax revenues and government coffers, Fox notes, “California has seen a steady increase in property tax revenue while Proposition 13 is protecting taxpayers from large jumps in their taxes.”
There are three ironies to Prop. 13 that are often missed in today’s discussion about it. First, the crisis atmosphere was created by county assessors who were taking advantage of the system with the complicity of all local governments except schools. Despite this, Prop. 13 is viewed as a blow against state government when really it was a reaction to the liberties being taken by locally elected officials.
Second, one small phrase in Prop. 13 was put in place by Howard Jarvis to allow the state legislature to determine whether all local governments should experience the same resulting budget shift, or if, say, cities should receive more or less of an adjustment than fire districts. The legislature interpreted that phrase differently than the author intended it and used that language to seize control of all local property taxes. It was perhaps a foreseeable consequence, but it was not the intentional result of the measure.
Third, California had an obscene budget surplus that was revealed in the May Revise of 1978, just weeks before the vote on Prop. 13. This created the impression in the mind of voters that governments had more money than they knew how to spend. It also allowed the Governor and legislature, in the wake of the proposition’s overwhelming voter support, to backfill the loss to local governments created by the legislature’s interpretation of the measure. The surplus allowed Governor Jerry Brown to promise to hold local governments harmless from Prop. 13’s effects. Since the state started “giving” local governments tax dollars that had, heretofore, been considered “the state’s,” the state also decided to start assigning more and more duties to local governments in exchange for a slice of the revenue pie. That solved a political problem for the Governor and legislators in the short term, but the surpluses ran out by the 1980s, the programs now required of locals by the state continued to grow, and we find ourselves today with state-local financial relationships that are complex, not understandable by the average voter and very difficult to change.
As you may know from personal experience, a 30th birthday is a time for serious self-reflection. There are reasons to celebrate and things to regret. One settles into new goals and priorities, and looks at life a little more realistically than just a few years before. One begins to understand the consequences of choices made by himself and others long ago that help define one’s character at that moment in time. So California finds itself with Prop. 13. We are grateful for a property tax system that is stable, predictable and reasonable, but we are mindful that the price of those benefits is a complicated responsibility for tending to the public business in an era ever-more challenging that the one before.
Hours of Toil – June 2, 2008
So you think you work eight hours a day to fill your gas tank and put groceries on the table? Well, yes, that and to feed the beast that is your government. The Tax Foundation’s annual report about Tax Freedom Day, the day on which you have earned enough money to cover your tax bill and now get to keep the rest for your family (April 23rd this year), also calculated the tab for each work day. The average American works 3 hours and 28 minutes every day just to fund government: 1 hour and 37 minutes to pay federal taxes, plus 51 minutes to cover state and local taxes. Of the rest of your workday, 17 minutes takes care of your clothing, 28 minutes covers transportation, 46 minutes for food, and 1 hour & six minutes is needed for health care and medical expenses.
http://www.taxfoundation.org/files/sr160.pdf
At Least You Can Name Your Daughter “Elvis”—June 30, 2008
I often complain about the excessive reach of California tax agencies, but after reading about the Swedish tax authorities, I realize we still have a long way to go. A couple there named their new baby girl “Elvis.” Strange choice, but theirs to make. Until the National Tax Board said it was not. In a ruling, the Board wrote, “It is the National Tax Board's view that Elvis is a first name of a masculine type and as such may, in light of standard practice, be considered clearly inappropriate as a first name for a woman.” No word yet on when California’s tax board will exercise such authority, but this is political correctness carried to its ultimate absurdity!
http://www.thelocal.se/12214/20080604/
McCain v Obama: Taxes —June 30, 2008
If you have been a reader for awhile, you know that I was late to endorse in the Republican presidential race and reluctant to support the eventual nominee. However, as the general election nears, I am becoming more enthusiastic about voting for Senator McCain, and this recently compiled information from friends at Americans for Tax Reform demonstrates why. ATR took both candidates’ positions on various taxes and compared them side-by-side. A few examples:
Current law on Top Tax Rate: 35%
McCain: 35%
Obama: 39.6%
Current law Death Tax: 0% by 2020 (repealed)
McCain: 15% for estates over $10 million
Obama: 55% on estates over $1 million
Current law Alternative Minimum Tax: 28%
McCain: 0%
Obama: 28%
Current law Marriage Penalty: none under $150,000
McCain: none under $150,000
Obama: full from dollar one
Check out the rest of the list and share it with your friends particularly any who are wavering:
http://www.atr.org/content/html/2008/june/0616-obama_mccaintaxes.html
Hyper Progressive Taxes are Self Defeating--- July 28, 2008
Last week I offered a dynamic revenue estimate for a one cent sales tax increase, which can be found here:
http://www.boe.ca.gov/leonard/info/Dynamic%20Sales%20and%20Use%20Tax%20Revenue%20Impacts.pdf
This week I offer some thoughts on the Personal Income Tax program. There is new discussion on raising rates on the top 1% of earners. This would be a serious mistake. Two weeks ago, liberal George Skelton pointed out in the LA Times one of the reasons. California’s hyper-progressive tax structure, or tendency to make wealthy people shoulder the greatest share of the tax burden, is a major part of our current deficit. When you rely on a relatively small group of people to deliver so much, when something happens to members of this group, the effects are magnified. Skelton’s example of this is in 2000, the peak of the dot-com craze, the top 1% of earners paid 49% of the California income tax. Two years after that bubble imploded, the top 1% paid only 37%, and we have been in deficit ever since because we counted on revenue that never came in.
According to the latest figures, the top 1% is back to shouldering almost half (48%) of the state’s income tax burden. In calendar year 2006, 14.1 million California income tax returns were filed with the Franchise Tax Board. 1.9 million had adjusted gross income above $100,000. This group paid a whopping 83% of the total ($36 billion) even though they comprised less than 14% of the returns filed. Roughly 120,000 Californians had an AGI of over $500,000. This group comprised less than 1% of California’s returns, but paid 46% of the income tax.
These numbers are from the Franchise Tax Board’s Annual Report for 2006:
http://www.ftb.ca.gov/aboutftb/annrpt/2006/2006AR.pdf
As I have argued many times, going after wealthy people by raising taxes makes the wealthy change their behavior. When people’s wealth is not secure, they hide, hoard, and consume it -- or move -- rather than put it to work in pursuit of greater gains. At the root of all this is the basic fact that wealth is created only one way -- by private production, not government spending. One phenomenon we ought to cheer is the incredible growth in the number of households making more than $1 million a year. In just three years (2000-20003), American millionaires nearly doubled from 181,000 to 354,000. Since rich people pay a lot more taxes, and create wealth by investing and starting businesses, the best tax policy is one that does not impede the growth of the number of wealthy people.
increases occur in a vacuum – are known in advance to be wrong and thus betray the people’s trust.
I have posted a simplified “cheat sheet” of the dynamic sales tax increase estimate and impacts:
http://www.boe.ca.gov/leonard/info/SalestaxAnalysisCheatSheet.pdf
Tax Justice --- August 11, 2008
A Nevada District Court ruling last week brought some justice to a taxpayer that has been festering for years. California’s Franchise Tax Board had relentlessly pursued former California resident Gil Hyatt. The FTB contended that Hyatt owed back taxes and was only pretending to live in Nevada to avoid paying taxes rightfully due the Golden state. In pursuing this belief, the FTB investigators crossed many ethical lines and demonstrated how tax agents are not held to the same legal standards we demand of law enforcement officers. Tax agents rummaged through his trash without warrants, visited business partners and doctors, and shared his Social Security Number and other personal information with the media. This is outrageous behavior and I call on the FTB to rein in their agents. What really galled me is the FTB testified in open court that this level of harassment was only a typical audit. If true, then the stormtroopers are alive and well at the FTB.
Unlike most taxpayers who are subject to this treatment, Hyatt had the means to fight back. Hyatt invented a microprocessor and was not going to knuckle under to this harassment. He sued the FTB for their agents’ misconduct during the investigation, but the FTB argued that its employees are not only immune from California but Nevada law as well when carrying out their official duties. The case ended up before the U.S. Supreme Court, which sided with Hyatt and sent the case back to the Nevada District Court. Last week the Nevada jury agreed with Hyatt on all the claims he made against the FTB, including their fraud, intentional infliction of emotional distress, abuse of process, breach of confidential relationship and invasion of privacy. The jury awarded $137 million plus $1.08 million for attorney fees and court costs, and has yet to consider punitive damages which could run the total to half a billion of California taxpayer dollars.
So far, California has spent $8.8 million pursuing Hyatt for a $49 million tax bill (only $7.4 million of actual taxes, the rest is penalties and interest). And now California taxpayers are on the line for more than $138 million because of our tax agents’ arrogance and misconduct. I am pleased Hyatt won. I hope that tax bureaucrats everywhere have learned their lesson about respecting taxpayer rights and I hope that the FTB does not appeal this decision thus exposing California taxpayers to even more legal fees.
Speaking of Stupid Tax Ideas… -- August 11, 2008
Maybe you are not as annoyed by the idea of everyone paying for me to enjoy state parks, but surely there is some stupid tax idea that has made you outraged. Certainly California has plenty. Right now the legislature is contemplating taxing your grocery bags. At 25 cents a pop, the sponsor wants you to be inspired to change your behavior and take recycled bags or tote bags to the market instead of relying on their plastic bags.
What taxes would you like to see to influence the behavior of others? For example, we could tax legislator for every silly bill they debate and every day the budget is late. For irony’s sake, we could impose a tax on nannies. Here is the wish list of behaviors I do not like: a tattoo tax, a tax on reality television, a tax on movie star press releases, a tax on people who vote for taxes, and a tax on people with six-pack abs.
I invite you to email me with your best nanny state tax ideas. I will publish the best ones here, but be warned that the legislative Democrats read this and may not see the sarcasm in our proposals.
Total Tax Take --- August 18, 2008
In the midst of all the budget mess, it may seem like the legislature does nothing else. Truly, most legislators are not even involved with the budget negotiations or have any role whatsoever in the budget process until they are asked by leadership to cast a vote. But there are other things going on under the dome. For example, see the Cal Tax list of all the various tax bills winding their way through the process. Some are minor or technical changes, but others show an inclination to raise taxes, increase rates, revoke credits, etc. Glance down through the 135 entries to see what legislators are thinking about when it comes to tax changes.
http://www.caltax.org/documents/2008/BillTrak%2008-08-08.xls
Such changes are particularly relevant when thinking about the overall tax burden of Californians. Cal Tax also points to a new Tax Foundation study showing that “California's combined state and local tax burden is the sixth highest in the nation.” We pay an average 10.5 percent; the national average is 9.7 percent. Cal Tax observes that the states California competes with are much lower: Nevada at 6.6 percent, Arizona at 8.5 percent and Oregon at 9.4 percent. To see the Tax Foundation report go to:
http://www.taxfoundation.org/publications/show/22320.html
Punitive Damages, Too --- August 25, 2008
I wrote a few weeks back about a Nevada jury’s ruling against the FTB’s egregious actions toward Gil Hyatt. At the time I wrote, the jury had awarded Hyatt $137 million plus attorney fees and court costs for the FTB’s reckless pursuit of taxes he did not owe. Now the jury has added punitive damages, bringing the total judgment against California to $388 million. Hyatt’s attorneys expect FTB to appeal which would be wrong. I expect the FTB to revise its investigative policies, and begin retraining their agents about appropriate treatment of taxpayers.
What is really sad is that California law protects these same tax agents when they commit these acts in California against Californians. This law needs to go.
Disappointed in Cal-Tax – September 15, 2008
I was disappointed last week to see that the California
Taxpayers Association (Cal-Tax)’s Board of Directors voted to endorse the
Governor’s tax-hike plan as a means to “solve” this year’s budget crisis. I
quickly dashed off a letter to my friends there to ask how such a position does
not violate the charter of their low-tax advocacy organization. I
wrote:
“I must admit to you that I fail to understand the Board's motivation or logic,
and I am left with every variety of speculation. With California's taxpaying
individuals and businesses operating at a low margin as it is, the idea of
raising the state sales tax 14% does not make economic sense. With both
presidential candidates talking about lowering the tax burden on working
families, the Cal-Tax position does not make any political sense either. Nor
can I imagine that this decision will help at all to move the debate on the
state budget itself.
“While I share your board's concern that the budget needs to get done, it would
be more helpful for Cal-Tax to offer its own middle ground between all five
parties rather than recycle a plan from last month. Since the Governor's August
compromise has already been rejected by all four legislative caucuses, this
move only serves to remind everyone that the plan has no legislative sponsor.
“I am extremely disappointed with this decision by Cal-Tax. Cal-Tax has been
the universally acknowledged leader in thoughtful analysis of tax policy and
has been steadfast in holding the line on tax increases, revenue enhancements,
fee adjustments, or whatever euphemism has been used. Holding the line on
government tax increases is an honorable and full-time challenge. Your organization
has earned the thanks of all California taxpayers. Yet, in this one vote you
have thrown away that sterling reputation.”
If you would like to share your thoughts with Cal-Tax, send an email to karl@caltax.org
Stay in Business – October 13, 2008
Some of the heartbreaking tax cases I hear do not even involve a tax dispute. Situations where businesses have closed forever while still owing taxes are tough. Our collectors are sworn to collect all taxes due, but closed businesses do not have any income to use to pay those taxes. The State of California operates a program called Offer and Compromise where former business owners can negotiate with the state to pay as much of their taxes as they possible can.
The program is being expanded. AB2047 was signed into law last month and will allow tax officials to negotiate with business owners who are on the verge of going out of business. Our goal should be to collect all taxes rightfully owed to the state, but not to put people who make mistakes out of business or to hound their credit forever. This bill is a step in that direction.
However, there are lots of restrictions so if you are having a tax issue, please do not wait until the problem reaches this stage to ask for help. Contact me as soon as you have a question or concern so that we can resolve the issue right away.
Things to Tax – October 20, 2008
A few weeks ago I solicited your ideas for taxes to influence human behavior that you disliked. It sounds like a fun exercise until you remember that there are legislators who actually want to tax the plastic bags you use first at stores and then around your house for various purposes. (As an aside, take a moment to educate yourself about plastic bags. The nonsense you hear about how they are destroying the world can be overcome with a few actual facts:
< http://www.plasticsindustry.org/about/fbf/myths+facts_grocerybags.pdf >)
There were suggestions to tax: loud stereo systems; Democrats and Republicans differently based on tax increases they support; vegan food; pedestrians to pay for the pollution they cause when making cars idle; and tax sunburns to discourage skin cancers.
Finally, and not surprisingly, someone wants to tax legislators for each day the budget is overdue. The problem with that one is that it might raise so much money that we actually want the budget delayed even more! Now that is funny.
Thanks to all who made the suggestions, and keep them coming. I enjoy the laughter.
Basic Fairness --- November 3, 2008
Most of us learned about fairness on the playground. In games where there were no referees, we had to agree on a set of rules and make fair decisions ourselves. That basic sense of fairness continues through life, though when it comes to California’s tax system, it has been suspended. In a court case involving the Franchise Tax Board, the State of California has taken the position that when a tax statute is unconstitutional, the victims are not entitled to a full refund of taxes paid. Instead, the State argues that victims are entitled only to the difference between the amount paid and what they would have paid IF the statute had been drafted properly and applied in a constitutional manner. In other words, when the Legislature (or local governments) ignore the Constitution and collect taxes under an unconstitutional statute that is later declared “null and void,” taxpayers still do not get all their money back. This is outrageous!
We should all want harsh penalties when the Constitution is violated and illegal taxes are collected. At a minimum, that should mean that the victims get all of their money back, plus interest. That result follows logically from the basic concept of fairness: when a law has been declared unconstitutional, it should be null and void. If an unconstitutional law has no force or effect, how it be used to keep some portion of taxpayers’ money? Obviously, issuing full refunds will cost the State (or local governments) a lot of money, but that is the point. If the consequences are severe enough, politicians will be much less likely to ignore or intentionally violate the taxpayer protection provisions of our Constitution by passing bad tax laws.
The case in question is Ventas Finance I LLC v. Franchise Tax Board (California Supreme Court No. S166870).
Tax System Review, Long Overdue --- November 3, 2008
I did not see much media coverage of the Governor’s and the Speaker’s announcement last week that they are creating the Commission on the 21st Century Economy with the goal of modernizing “California's out-of-date revenue laws that contribute to our feast-or-famine state budget cycles.” I have been calling for changes to our state tax code for some time and I am pleased that the Governor is moving to study this. There is much to be done to make the tax system fairer and easier to understand, and there are significant changes needs to improve taxpayers’ rights. I hope it does not become a vehicle simply to push for tax increases, and I hope that the commissioners understand that to have stable revenues that the tax rates must be reasonable.
If you are interested in reviewing our tax system and wish to ask for an appointment to the Commission, I encourage you to apply to the Governor (6 appointments) or the Speaker (3 appointments) or the Senate President Pro Tempore (3 appointments) and volunteer to serve.
http://www.gov.ca.gov/index.php?/press-release/10927/
Tax Complications are ….Complex --- November 3, 2008
In my piece last week on sales taxes I cavalierly suggested that people shop around for cars in order to avoid the super high sales tax in certain cities and counties around the state. I unintentionally made my point on how complex these laws are because while the local city and county sales tax is based on the place of sale, the add-on sales tax voted in by city or county voters is based on the buyer’s home address so it does not matter where in California you buy the car. But this only applies to the sale of vehicles, boats, and airplanes. Thus, it would not be worthwhile for an LA County resident to make the drive up to Lake County to buy a car, but it might to buy a home theater system.
However if the buyer is a business and gets audited then the auditor will ask for evidence that the Use tax was paid properly on this add-on amount.
The BoE has a Frequently Asked Questions section to help make sense of the differences:
http://www.boe.ca.gov/sutax/faqtrans.htm
Politicians Cannot Cut Taxes on the Poor --- November 3, 2008
The Obama campaign and Democrats generally have been successful in convincing Americans that Bush’s policies have favored wealthy Americans at the expense of the middle class. The mantra “tax cuts for the rich” has been difficult to counter because the wealthiest did get a significant tax cut in 2003. Of course all Americans got a good tax cut, and now only 60 percent of Americans pay any income tax at all as a result. The bottom 40 percent of all income earners pay no taxes.
But despite the tax cut for the rich rhetoric, the Tax Foundation tells us that researchers at the Organization for Economic Cooperation and Development (OECD) in Paris found that when it comes to what they call “household taxes” (income taxes plus social security contributions), the U.S. “has the most progressive tax system and collects the largest share of taxes from the richest 10% of the population.” As far as making the rich pay their “fair” share, the U.S. is already more progressive than France or Sweden by this measure, and second only to Ireland among 24 rich nations surveyed. A progressive tax system is where the higher income taxpayers pay more than a proportional rate of taxation.
Scroll down to the table at this Tax Foundation site:
http://www.taxfoundation.org/blog/show/23856.html
The extent to which an Obama/Reid/Pelosi triumvirate could extract more from the wealthiest Americans is clearly approaching an upward limit. In California, the wealthiest one percent paid 46 percent of the taxes, according the latest data. I asked our researchers to find out how much the top one percent would pay if we had a flat tax. The response is quite striking:
According to the Franchise Tax Board, the top one percent of adjusted gross income earners would pay about 28 percent of all personal income taxes under a pure flat rate system that had no deductions or exemptions. So, by a fair measure, a flat tax would still have a progressive outcome. Moreover, for this scheme to be revenue-neutral, or to get the same amount of revenue we are receiving now, the rate would only have to be 5.1% for all taxpayers. That sounds attractive, does it not? If you were to accept a 6% rate as being fair, the conclusion is that a lower and flatter rate than many pay now could potentially bring in more revenue.
Since we are approaching the limit on extracting revenue from the wealth creators, a flat tax looks like a better alternative all the time. Ironically, the Bush tax cuts and the California income tax system make this idea less politically viable because -- thanks to tax cuts on lower income categories -- so many pay no income tax at all. Thus, any flat tax would be a tax hike on a large number of Americans and Californians. However, I say for the long term health of our democracy, every citizen should pay something and hold the government accountable for how their tax dollars are spent, no matter how small.
Service Tax – November
10, 2008
Good friends alerted me to rumors that state leaders were dragging out old
ideas on the taxing of services. I was working on an in-depth response showing
the adverse economic impacts of such taxes and the administrative difficulties
in taxing labor or services for the first time in this way. But I am already a
week behind because serious, permanent, billion dollar service tax proposals are
now on the table.
Yes, there are a few other states that tax services in this way. Most of them
have low or no income taxes so the tax burden on families is very different and
usually lower in the other states. Some states like Hawaii add service taxes to
tourist type services and most of those tourist businesses offer discounts to
locals.
A hat tip to LA Times staff writer Martin Zimmerman for good research in a
short time describing the burdens that Californians bear compared to other
states. I concur that if enacted that such a tax is likely to backfire.
http://www.latimes.com/business/la-fi-caltax7-2008nov07,0,4976048.story?track=rss
Another issue related to local government is that none of these taxes on
services will include the local share of the state sales tax. The local sales
tax for all cities and counties, and those special add-on sales taxes, cannot
be levied on services without a separate vote of the people in each
jurisdiction.
If this tax survives a week I will be back with more.
California Already A High Tax State – December 1, 2008
Given the legislature’s lack of action last week on fixing the burgeoning budget deficit, I direct
your attention to a link to the table the Los Angeles
Times provided earlier this month entitled
“How California sales taxes compare.” Click on that link, scroll down and
you can see a comparison with other states showing California is one of the
highest taxing states already by two criteria, high sales tax and high income
tax.
http://www.latimes.com/news/local/la-me-arnold7-2008nov07,0,4137915.story
Only New Jersey, New York, Connecticut, Maryland and Hawaii have higher taxes right now. California is so close to these that if Governor Schwarzenegger gets his way, California should go to the top or very close to it.
When I look around at the deterioration of the California economy, the vacant store fronts and office buildings, the growing foreclosures and unemployment, I cannot think of a single way that extracting more money out of a shrinking economy can help this state.
The Stockholm Tax Tutorial – December 15, 2008
Despite our domestic troubles, we cannot afford to take out eye off the ball internationally. With all the focus on California’s problems you may have missed the announcement that Sweden proposes to fix its troubled economy by slashing business, personal income and payroll taxes. The leader of the country’s liberal party said that among these, the corporate tax rate has a very large effect because that is the tax large companies really look at before they set up business. The corporate tax cut will bring their rate down to 26.8%, from a high of 57% in 1987. With the cut, the Swedes will have a corporate tax rate one-third lower than the U.S. average of 39.5% (federal rate plus state average), according to the Wall Street Journal.
I encourage President-elect Obama to bone up on tax policy through visits to Sweden and Ireland.
http://online.wsj.com/article/SB122264826575484095.html