Taxable Talk

Governor Arnold Schwarzenegger announced his revised budget today. California is now looking at a $15.2 billion deficit, which the Governator is hoping to close by (a) selling bonds backed by expanding the California Lottery (raising $5 billion), (b) and cutting an additional $12.2 billion in additional spending cuts. If the lottery bonds don't happen Schwarzenegger proposes a "temporary" one cent increase in California's sales tax.

Both Republicans and Democrats in the legislature reacted negatively to the Governator's proposal. Bill Lockyer (D), Treasurer: "[This is a] sizable bet that Californians will double their current level of lottery participation within a few years." He doesn't think it's realistic.

President Pro Tem of the State Senate, Don Perata (D-Oakland) told Reuters: "Democrats are not going to accept this budget...I reject its defeatism."

Mike Villines, Assembly Minority Leader (R-Clovis), told AP: "The idea that we use the lottery to pay down debt is a good one. Tying it to borrowing is, I think, a mistake, and tying it to a tax is a mistake."

With Democrats still proposing to create new taxes to balance the budget and Republicans promising not to approve any new taxes, it still looks to me like the unstoppable force meeting the immovable object. A budget requires a 2/3 approval in both houses of the state legislature, so Democrats and Republicans will eventually have to come to an agreement. Expect the emphasis this year to be on "eventually" as I expect the budget to drag on well past the constitutional deadline for passage of June.

Press Coverage:
Associated Press
Reuters
San Jose Mercury

As California continues looking at a massive budget deficit (somewhere between $8 billion and $20 billion) some in the state legislature are looking to implement a tax on the Adult Entertainment Industry. A 25% tax on film production, strip, er, adult entertainment clubs, and pornographic videos.

Larry Kaplan, head of the California Branch of the Association of Club Executives, said that this proposed legislation would "...devastate the San Fernando Valley...[I]t would take $3.5 billion out of California." Matt Grey, a lobbyist for the Adult Entertainment Film Industry, told Reuters that it's cheaper to fly performers to Bucharest, Romania than to drive them to the Valley.

Meanwhile, Republicans are still promising to block all tax increases so it's likely that this porn tax is doa.

One of my favorite weekly reads is the Leonard Letter. Bill Leonard is one of the elected members of the Board of Equalization. Mr. Leonard notes,

"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."

The letter that Mr. Leonard references is here. The question arises as sales tax was collected on hot chocolate sold at a Starbucks inside a Target store but not inside a Safeway (grocery) store nor in the lobby of the Bank of America building in downtown San Francisco. From the letter:

"Sales and Use Tax Regulation 1602, Food Products, (copy enclosed), provides that generally tax does not apply to sales of food products for human consumption except as provided in Regulation 1503, 1574 and 1603. “Food products” include among other items, coffee, tea, noncarbonated and nonalcoholic beverages, breads, bakery products, pizzas, candy, confectionery, chewing gum and cookies. Generally, tax does not apply to sales of the above items except when they are sold under circumstances as provided in Regulations 1503, 1574 and 1603."

After nearly three pages of legalese the author of the letter notes, "Based on the information presented in the article, it is not clear why sales tax was collected by Starbucks on the sale of the hot chocolate."

And some legislators want to extend sales tax to services. Oh, joy....