Taxable Talk

It appears that legislation for a mandatory health care system with employer mandates may pass the California legislature. Apparently the Governator and our legislators haven't figured out that high taxes drive out small business from California.

Luckily for you and I there's a problem looming for the plan: ERISA. Passed in 1974, the Employee Retirement Income Security Act prohibits states from mandating health insurance. The Supreme Court has upheld the prohibition, and an appeals court recently upheld the law (again) when Maryland tried to mandate health care benefits on Wal-Mart. As this story in the San Diego Union-Tribune makes plain, the Democrats and the Governator don't think much of the federal law. It's a pity that they don't think much of small business either.

State tax collections in April have exceeded projections, a pleasant change for California fiscal authorities. As of April 19th, the Central Valley Business Times reported that California has a $1.9 billion surplus compared to a $1 billion deficit in January. The big question: Will the Legislature and Governor reduce California's structural deficit or will it be spend, spend, spend (as usual)?

California requires a balanced budget, and a budget passed by June 30th. The latter has rarely happened in the last few years; the former has happened through gimmicks and the movement of funds rather than fixing California's structural deficit.

Governor Schwarzenegger has said,

"I have an obligation, which is a promise to the people of California that I will bring down this structural deficit to zero, and that we will be fiscally responsible. So there is two choices: one is to create extra revenue through all the various different means that I have proposed, or the other one is to go and start making those cuts."

The Governator released his new budget today, and the structural deficit is still around at $1.4 billion. And that's before the Legislature gets their hands on the budget.

The news story from the Associated Press indicates that no one is happy with the budget. Democratic Assembly Speaker Fabian Nunez (D-Los Angeles) is upset with the cuts to social programs. Assembly Minority Leader Dick Ackerman (R-Tustin) wants more cuts so that the state isn't running a structural deficit.

The budget requires a 2/3 vote to pass meaning that Republicans must consent. I think the spending cuts in social programs are d.o.a. and we'll see yet another year with magical movement of money so that everyone can announce that the budget is balanced...but where the structural deficit increases. I hope I'm wrong but I doubt it.

Back in 2005, I reported on the Orange County Sewage District's hiring of a spiritual counselor. The idea of spiritual sewage made me laugh...at least, I'm not in the OCSD so the tax dollars didn't come out of my pockets. I couldn't imagine any other government agency in California repeating the OCSD's mistake.

I should never overestimate the intelligence of bureaucrats.

The Los Angeles Times reported today that the Los Angeles Housing Department has paid over $18,800 to a Hawaii Zen Buddhist priest. According to the story, Norma Wong has conducted management training, "...that includes teaching breathing with sphincter control, learning 'how to stand' and playing with wooden sticks."

Of course private industry sometimes does things like this. I've seen and participated in outdoors training, team-building exercises, etc. in my career in private industry. However, I've never done stick exercises.

Residents of the City of Los Angeles will be happy to know that the L.A. City Council has approved a new contract with Ms. Wong for $15,000. Your tax dollars at work....

The California Court of Appeals upheld a District Court ruling that the City of Los Angeles increase in their tax on cellular phone service was invalid. The City will likely appeal the decision to the State Supreme Court. The case is interesting because the Court told California cities that if you change the methodology of a tax, you need to submit it to the voters under Proposition 218.

The decision involves two issues: Proposition 218 and the methodology used in the tax. Proposition 218, passed by the voters in 1996, states that voters must approve all new taxes (and extensions of existing taxes) by a majority vote (a 2/3 vote is required for "special" taxes). As the Court noted, "In 1997, the Legislature passed the Proposition 218 Omnibus Implementation Act (Omnibus Act) (Gov. Code, § 53750 et seq.) and, in Government Code section 53750, subdivision (h)(1)(B), provided that a tax increase occurs when a decision by an agency revises the methodology by which a tax is calculated and the revision results in increased taxes being levied on any person or parcel. [footnote omitted]"

The methodology of the tax changed in 2002 after Congress passed the Mobile Telecommunications Sourcing Act. The City of Los Angeles felt that, "...it had the authority to unilaterally impose the cell tax on all airtime and thereby increase cell taxes."

The City argued that the goal was to have the tax cover everything permissible; given that the law changed, it was the City's right to change the methodology of the tax. The Court noted that the City could do this...if they submitted the change to the voters, as per Proposition 218. "And if Proposition 218 had not passed, the City could collect an increased cell tax based on the evolved constitutional parameters. But Proposition 218 was passed, and it arrested the cell tax’s maturation over time. This restriction on local tax authority is of course characterized by the City as an unreasonable policy that is sure to create numerous administrative headaches. This fear is unjustified."

The Court's conclusion is worth printing in full:

"In sum, the City wants us to interpret Proposition 218 so that it permits a fluctuating local government tax if the fluctuation is due to expanding constitutional boundaries. The voters of California stand in the City’s path. They demanded the right to approve increased local taxes after finding that such increases “threaten . . . the California economy.” We are obligated to uphold that right and adhere to that finding despite the City’s protestations. To be sure, the City must be credited for offering thoughtful arguments on a complex issue, but those arguments cannot carry the day, which leaves us to but one conclusion: The trial court properly granted the carriers’ petition for writ of mandate."

Appeals Court Decision: AB Cellular LA, LLC v. City of Los Angeles, B185373

News Story: Metropolitan News-Enterprise

Once a week I receive the Leonard Letter. Bill Leonard, a member of California's Board of Equalization, each week states his views on what's going on in the tax world in California. It's essential reading for anyone in California concerned about their taxes. You can subscribe here.

On April 25th Bill Leonard reported on a case that almost was argued in front of the Board. In California, a taxpayer appealing a decision of the Franchise Tax Board first must move through that agency. If he can't get a satisfactory result through that appeals process, he then can appeal to the Board of Equalization. After that, a taxpayer can then take their case to the courts.

You can find the case in question from Bill Leonard's blog entry of April 25th. A taxpayer hadn't filed his return in some time, and the FTB estimated his income and then added his W-2 to it. But the W-2 was all of his income, so they double-counted his income. He went through the FTB and got nowhere, so he appealed to the BOE. Amazingly enough, on the morning of the appeal the FTB "...changed their story and returned the gentleman his money."

There are many good people at the FTB, but this case spotlights some of the bureaucratic shortcomings that I have seen. Bill Leonard (rightly) noted, "Had this situation not been presented in public before the Board I am doubtful this taxpayer would have received justice." Unfortunately, that's the problem.

Yes, the taxpayer didn't file returns, and that was a cause of the problem. But it shouldn't take an appeal to the BOE for the FTB to realize there's a problem with double counting of income.

There's a moral here—actually two morals. First, if you're a Californian, file your tax returns. Second, the Franchise Tax Board can become adversarial instead of working to resolve problems.

The Franchise Tax Board released county income statistics for 2005 last week. Not surprisingly, the San Francisco Bay Area had the wealthiest individuals (as measured by tax returns), with Marin County leading the way with a median income of $48,854 (income here is defined as an individual's Adjusted Gross Income). Second was San Mateo County at $45,992 while Santa Clara County came in third at $45,239.

California received the most returns from Los Angeles County—which isn't surprising when you consider it's the most populous county in California. However, Los Angeles County ranked 39th out of California's 58 counties in income.

At the bottom for income is Imperial County, with an average individual AGI of only $22,962. Tulare County is second lowest at $24,774.

You can find the statistics here.