VOL. 55 NO. 7
CALIFORNIA TAXPAYERS ASSOCIATION
FEBRUARY 21, 2017
IN THIS ISSUE:
INCOME TAX: San Francisco Supervisors Want
Authority to Impose Local Income Tax
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WASTE, FRAUD & MISMANAGEMENT: Your
Tax Dollars at Work: BART Station Has Eight
Employees, Despite Being Closed
CALTAX COMMENTARY: In the Interest of
Fairness, State Should Pay Fair Interest
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CALIFORNIA COMPETITIVENESS: Software
Company Moves Headquarters Out of California
TAX TRIVIA: Who Could Turn the Tax Auditor on
With Her Smile?
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BLAST FROM THE PAST: Verbal War Erupts
During Tax Agency Meeting
INCOME TAX:
San Francisco Supervisors Want Authority to Impose Local
Income Tax
The San Francisco Board of Supervisors considered a resolution February 14 asking the
state Legislature to grant local governments the authority to impose personal and
corporate income taxes.
The resolution is sponsored by seven of San Francisco’s 11 supervisors – including
Supervisor Malia Cohen, who has filed papers to run for the State Board of Equalization in
2018 – and thus is expected to be approved. Because the resolution was amended at this
week’s hearing, it cannot be taken up again until the board’s February 28 meeting.
“The City and County of San Francisco continues to look for progressive revenue
sources
Lake Tahoe
to fund the transportation and health and human services needs of the City’s growing
population,” the resolution states.
Additionally, the resolution indicates that supervisors would seek to impose an income tax
to fund “Sanctuary City policies” and budget shortfalls they anticipate as a result of
federal policy changes, including the repeal of the Affordable Care Act.
If the Legislature and governor authorize local income taxes, jurisdictions would have to
win voter approval before the taxes could be imposed. Taxes used for general purposes
Founded in 1926, the California Taxpayers Association
has a dual mission to guard against unnecessary
taxation and to promote government efficiency.
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would need approval from a majority of voters, and taxes earmarked for special purposes
would need at least two-thirds approval.
California Revenue and Taxation Code Section 17041.5 bans local governments from
imposing any tax on income, or any portion thereof. The law was passed in 1963 with the
signing of AB 661, by Democratic Assemblyman Nicholas Petris. The bill was supported
by the Franchise Tax Board, the California Labor Federation and the California Teachers
Association, among others.
The state income tax “is an important source of revenue and should be protected from
any possible erosion which might arise from a municipal income tax,” the FTB stated in a
letter supporting the ban on local income taxes.
In 1968, FTB Assistant Executive Officer Bruce W. Walker told the Assembly Revenue and
Taxation Committee that the complexities associated with local income taxes are “so great
as to be an absurdity.”
Proposals to authorize local income taxes have failed in the past, over the span of many
years – most recently last year.
CALTAX COMMENTARY:
In the Interest of Fairness, State Should Pay Fair Interest
By David Kline, Vice President of Communications and Research
The concept of fairness comes up frequently during tax policy discussions,
usually in subjective terms of whether people are paying their “fair share.”
While fairness is in the eye of the beholder, there should be no doubt that
one aspect of California’s tax system is patently unfair, and cries out for
change. That is the state’s refusal to pay interest on all tax refunds.
Under current law, when a corporation underpays its state income tax, it is liable for 4
percent interest in addition to the unpaid tax and various penalties. But if the same
corporation overpays, the Franchise Tax Board pays no interest on the refunded amount.
Things aren’t any better at the State Board of Equalization. If you owe taxes to the BOE,
be prepared to pay an additional 7 percent in interest (and you will be charged for a full
month’s worth of interest, even if your payment is only a couple days late). If the BOE
owes you a refund, you will receive no interest at all.
It wasn’t always this way. The FTB’s rate for corporate income tax refunds bounced
around from 2003 to 2009, from a high of 5 percent in 2007 to a low of 1 percent in 2003
and 2004. Since July 1, 2009, the rate has been 0 percent. The BOE’s interest rate for
refunds also went up and down in the 2000s, hitting a high of 6 percent in 2001, and
dropping to absolute zero as of July 1, 2009.
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Even when the tax agencies paid interest, the rates were lower than they should have
been. When the BOE was paying 6 percent interest on refunds, it was collecting a
whopping 12 percent on deficiencies. When the FTB was paying 1 percent interest on
corporate income tax refunds in 2003, the rate assessed on deficiencies was 5 percent.
The interest inequity came about not because it is a good policy, but because of politics
and money. In 1990, the Court of Appeal held in Aerospace Corporation v. State Board of
Equalization that the taxpayer was entitled to a refund of sales and use tax payments on
overhead materials, including office supplies. State lawmakers realized that the refund
would be large, and that the case likely would trigger refund claims from others, so they
decided to save money for the state by lowering the interest rate on refunds.
Apologists for this questionable maneuver might argue that the state budget was in dire
straits at the time, and desperate times called for desperate measures. But surely the
budget is stable enough now to correct the situation.
There have been more than two dozen legislative attempts to equalize interest rates, but
all have failed. The most vocal opponents are state employees’ labor unions.
The unions, which seem more interested in money for salaries and pensions than in
fairness for taxpayers, claim that if interest was paid on all refunds, corporations would
intentionally overpay their taxes so they could get a guaranteed return from the state.
The flaw in that claim is that existing law makes it a crime to intentionally overpay taxes
with the intention of gaming the system, so any business that attempted such a strategy
would be taking an untenable risk. If this law isn’t enough, legislators undoubtedly can
devise other ways to thwart gaming while still treating honest taxpayers fairly.
Two years ago, Assemblyman Bill Brough carried legislation to use the same interest rate
at the BOE for refunds and deficiencies, stating that the bill “attempts to fix a gross
inequity in the law.”
CalTax supported the effort, and noted that no-interest refunds are especially unjust given
that California requires taxpayers to pay disputed taxes before they can challenge them –
and the challenges can take many years.
The BOE also supported the bill, and noted that since interest is simply a charge for the
use of funds, it should be equal regardless of whether the state is the giver or receiver.
Interest rate equity is a simple, long-overdue step toward fairness.
CALIFORNIA COMPETITIVENESS:
Software Company Moves Headquarters Out of California
Xero, a company that makes accounting software for small businesses, this month moved
its U.S. headquarters from San Francisco to Denver.
The New Zealand Herald reported in late 2016: “The company currently employs about
100 people in Denver in its sales and customer experience teams, and chief executive Rod
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Drury expects that will expand to ‘a few hundred’ as he tries to build a mass of people in a
more affordable city than San Francisco, where its U.S. leadership team has previously
been based. Drury said San Francisco was a ‘great place to get started’ and the first port
of call to raise capital, but as the company moves into an ‘operational phase’ he had to
weigh up whether to stay in that city or move.”
Mr. Drury told the Herald, “It’s difficult to grow this business in San Francisco.” (Sources:
San Francisco Business Times, February 14; New Zealand Herald, November 1, 2016.)
WASTE, FRAUD & MISMANAGEMENT:
Your Tax Dollars at Work
BART Station Has Eight Employees, Despite Being Closed. The Bay Area Rapid
Transit Warm Springs Station, in south Fremont, has eight full-time staff despite being
closed to trains and riders.
The staff include five $73,609-a-year station agents and an $89,806-a-year train dispatch
supervisor, even though no trains will be running there for at least two months. Workers
are there from 4 a.m. to midnight on weekdays, and for slightly shorter hours on
weekends.
“Two janitors are also assigned to the empty station,” San Francisco Chronicle columnists
Phillip Matier and Andrew Ross wrote February 13. “But because it’s pretty clean – what
with nobody using it – the custodians typically clock in, then commute in a BART sedan to
other stations along the line to finish out their shifts.”
The remaining workers stay at the unused station. A BART spokeswoman said they are
“helping prep the station for opening, and they are keeping an eye on the station to
prevent vandalism, theft and so on.”
The situation came to pass because of a union contract that allows employees to sign up
for station postings only twice a year. Warm Springs was put on the list on August, in
anticipation of opening in November, but a computer problem and other issues delayed
the opening. The station’s opening date remains unknown, but the union contract keeps
the workers from being assigned to stations where they might be needed.
Two Sacramento Firefighters Worked “Almost 70 Percent of the Time They Are
Living.” The Sacramento Fire Department spent more than $13 million on overtime pay
in 2015, in addition to more than $44 million in regular pay, City Auditor Jorge Oseguera
reported this month.
The Sacramento Bee reported:
“The audit found that more than 90 employees worked at least 1,000 extra hours beyond
the regular 3,000 that year. Two employees each worked more than 6,000 hours, which
amounted to ‘almost 70 percent of the time they are living and breathing,’ Oseguera said.
“The top 10 earners at the department were all rank-and-file employees with significant
overtime pay; Fire Chief Walt White earned less than 10 firefighters under his command.
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“One captain nearly tripled his pay by earning $168,876 in overtime by working an extra
2,971 hours, putting his compensation at nearly $300,000 and making him the
department’s top overtime earner.” (Source: The Sacramento Bee, February 2.)
TAX TRIVIA:
Who Could Turn the Tax Auditor on With Her Smile?
In 1970, the first season of what groundbreaking television series featured an episode
about a shy IRS auditor who develops romantic feelings for the show’s lead character –
the subject of his audit? Super bonus question: The title of the episode is “1040 or Fight,”
which is an allusion to what dispute? (Answers below)
BLAST FROM THE PAST:
Verbal War Erupts During Tax Agency Meeting
The State Board of Equalization’s December 8, 1988, meeting featured a public airing of
grievances by BOE Members William Bennett and Paul Carpenter, with each accusing the
other of doing favors for campaign contributors.
“If you want my views on yourself, I will say, yes, I think you are corrupt,” Mr. Bennett
told Mr. Carpenter. “… Note that in the record. And if there is any doubt, I’ll repeat it
again.”
Mr. Carpenter responded: “To find you sitting here sitting sanctimoniously calling people
corrupt when you are the only person on the board with an arrest record strikes me as
quite an anomaly.”
The insults continued to fly, with Mr. Carpenter accusing his colleague of “using
anonymous letters and making obscene phone calls” to discredit him in the press, and Mr.
Bennett quipping, “At least Diogenes will have not to look past you when he comes to
Sacramento.”
It wouldn’t be long before both men were proven correct in their assessments. In the
early 1990s, Mr. Carpenter was convicted of racketeering charges for crimes committed
during his pre-BOE service as a state senator, and he became a fugitive. Mr. Bennett was
charged in 1991 with 23 felony counties of filing false expense reports and misusing state
credit cards, and he resigned in 1992 after pleading no contest to a misdemeanor count of
filing false expense reports.
Tax Trivia Answers: “Mary Tyler Moore.” Partial credit given for the show’s ensuing title,
“The Mary Tyler Moore Show.” The title of the episode is a play on “Fifty-four Forty or
Fight!” – a slogan used in the 1840s during the Oregon boundary dispute, and often
wrongly described as a campaign slogan for James Polk in the 1844 presidential election.
The numbers refer to parallel 54°40′ north, a line of latitude that now forms the
southernmost boundary between Alaska and British Columbia.
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