Taxable Talk

California's budget deficit has grown another 10%, from $14.5 billion to $16 billion. Why? Because all sources of tax revenues are down: sales tax, personal income tax, and corporate income tax. This will be the year that our Legislature has to make tough choices—band-aid fixes will no longer work.

The non-partisan Legislative Analyst, Elizabeth Hill, doesn't think that Governor Schwarzengger's 10% across the board budget cut will work. She proposes "a combination of cuts and $2.7-billion in new taxes, including reducing tax credits for dependents, adding a dime to every gallon of gasoline bought in the state, increasing tuition by 10-percent at all Cal State and U.C. campuses and closing the yacht tax loophole."

There's no way that this budget deficit will be closed without major program cuts. The math just doesn't work without them. And there are many, many programs that a state shouldn't have that California does. I'll post about that over the weekend.

In any case, I think we're going to have a very bad budget season in Sacramento. And we will see some new taxes and major cuts. Businesses will again start looking across the borders to Arizona, Nevada, and Oregon (and elsewhere) if the tax increases are too high.

Last Tuesday, the Wall Street Journal ran an excellent editorial titled "States of Opportunity."

"But one reason to conclude that taxes are also a motivator is because the eight states without an income tax are stealing talent from other states. They are Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, and each one gained in net domestic migrants. Each one except Florida -- which has sky-high property taxes on new homesteaders -- also ranked in the top 12 of destination states.

"Politicians who think taxes don't matter might want to explain the Dakotas. North Dakota ranked second worst in out-migration last year, while South Dakota ranked in the top 10 as a destination. The two are similar in most regards, with one large difference: North Dakota has an income tax and South Dakota doesn't."

The editorial also contrasts California, which has lost 1.5 million residents, with Nevada, which is booming. Perhaps our legislature will begin to think logically about this and start cutting taxes. And maybe pigs will fly....

California's legislature sent a $1 billion bipartisan package of budget cuts to Governor Schwarzenegger; the Governator signed the package yesterday. The budget cuts will come primarily from school funding and from Medi-Cal (California's medical program for low income individuals).

Yet Californians should carefully watch their wallets. Assembly Speaker Fabian Nunez (D-Los Angeles) wants the $13.5 billion shortfall to be balanced 50% from spending cuts and 50% from revenue increases. For those who aren't in government, revenue increases are more commonly referred to as tax increases. Given California's abysmal ranking as a state to do business, politicians in Sacramento should be talking about tax cuts instead of tax increases to balance the budget.

If California implements tax cuts, these might lead to more businesses locating in California and more tax revenue. But that's thinking outside of the box, and the Democrats in control of the legislature in Sacramento rarely do that. Luckily for California's taxpayers, the budget requires a 2/3 vote—Republicans in both houses must approve the budget balancing methods for it to pass into law. Expect a very contentious legislative session this Spring in Sacramento.

Apparently some of our legislators are unhappy with California's low ranking as a place to do business. They'd like to make this just as bad a place for non-profits. AB624 would require foundations and non-profits in California to collect gender, ethnic and sexual orientation data on their board, members, staff and grant recipients. Yes, a non-profit would have to ask their Board members what their sexual orientation is.

This is, of course, ridiculous, but nothing surprises me about the Bronze Golden State anymore. Hopefully, the Legislature will realize that this is as ridiculous a measure as it truly is and it will die a quick death in some committee.

Every year the Orange County chapter of the California Society of Enrolled Agents and local CPAs donate their time to answer tax questions by phone for four hours. Tomorrow (Tuesday) you can call 714-796-5000 between 5pm and 9pm PST and get your tax question answered. It's sponsored by the Orange County Register; I'll be one of the volunteers answering your questions.

Tax agencies love computerized notices. The computer does the work, finds probable tax scofflaws, and the notices are mailed in an automated fashion. This saves the agencies money. Assuming the tax debt is real, it's a good bargain for everyone.

However, there are problems when matching programs are used based on people's names. It appears that the Franchise Tax Board is doing just that. This story details that a retiree living in Omaha, Nebraska received a notice from the FTB about a $200 tax debt from 1999. The problem is that Wally Grant, the man who received the notice, hadn't stepped foot in California since 1943.

Sure, the FTB rescinded the debt and the past due notice. But why did the FTB send out a notice like this in the first place? The notice refers to someone with the same name who lived in Pasadena. I have to assume (like the television station that covered this story) that the FTB used a matching program of names. When the computer found a Wally Grant, it sent out the notice. I doubt a human looked at the notice until the telephone rang at the FTB.

Of course, it's possible that I'm wrong. It could be that the FTB matched social security numbers rather than names. If that were the case the social security number of Mr. Grant of Omaha could have been used by anyone, causing the problem. However, given the reference in the notice this seems unlikely.

In any case I'm wondering what's going on. The FTB refused to comment to the Omaha television station. I'd love to hear from someone at the FTB (or the Board of Equalization) as to what's going on. I'm all for the FTB going after tax scofflaws but this appears to be a case of big brother and it disturbs me deeply.

Today is the first of three election days in 2008 in California. If you're in Orange County, you can find your precinct here. If you're elsewhere in California, the Secretary of State's website can direct you to your county's registrar website to find your precinct.

If today is your election day, exercise your right to vote.