How the Prop 8 Ruling Threatens Prop 13 (and other future tax reforms)

California's ballot initiative process is vital to Californians and helps ensure that the will of the people is expressed, even when California politicians are uncooperative.  Over the years, ballot initiatives have been proposed and passed that have advanced both liberal and conservative causes.  In each of these cases, the initiative process was the only way to advance these issues as the legislature would not, or could not, pass effective legislation. 

While the recent Supreme Court case on Proposition 8 may have advanced gay marriage, its unintended consequence is to put into question the sustainability and power of future ballot initiatives.  Justice Scalia ruled, in essence, that the defenders of the Prop 8 initiative did not have standing to sue because only the State of California had standing to defend Prop 8 from attacks.  While Gov. Brown and Kamala Harris, the State A.G., put up a begrudging defense of Prop 8 at the trial level, they opted not to appeal the trial court decision finding Prop 8 unconstitutional.  Defenders of Prop 8 then stepped in and decided to appeal.  The California Supreme Court held that clearly, the Prop 8 defenders had standing and could appeal the decision and were essentially representing the interests of the State. 

Unfortunately, Justice Scalia's holding now weakens almost any ballot initiative--especially those that the Governor and Attorney General personally dislike. Consider the following hypothetical.  A homeowner sues alleging that Prop 13 violates their equal protection because their neighbor who bought their home 50 years ago pays much less than they do for their new home, despite the fact the homes are identical and have the same value.  Although merit less, the Governor and state AG could opt to not defend the suit.  All of a sudden, an injunction is issued finding Prop 13 to be unconstitutional.  The State decides it won't pursue an appeal and the defenders of Prop 13 have no standing in federal court to pursue an appeal either.

In a single opinion, Justice Scalia was able to do something many California politicians have been trying to do for year--weaken the initiative process. 

Income Earned by Tribal Members on Reservations Now CA Tax-Exempt

The Franchise Tax Board has recently announced that tribal members who live on reservations and who receive income from reservation sources are not subject to California state income tax on that income.  This position came as a response to several recent court cases where courts had to determine whether "reservation source income" should be interpreted broadly as income earned by a tribal member living and working on the reservation or more narrowly limited to income earned on the reservation and paid only by the tribe.

Thus, if a tribal member lives and works on the reservation, income earned by the tribal member, whether paid by the tribe or any other third party, is California tax-exempt. 

If tribal members have been paying California taxes on this income, they are entitled to refunds going back approximately four years.  

California Has A Negative Net Worth in the "Hundreds" of Billions of Dollars

The Sacramento Bee has a headline that reads: "State auditor: California's net worth at negative $127.2 billion".

As troubling as that headline is, the most startling material is buried in the last paragraph of the article:

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees' future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody's, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California's, it could push its negative net worth down by several hundred billion dollars.

High-Speed Boondoggle? $800 Million to Save 10 Minutes

Admit it.  When the federal government talks of investing huge sums of money into high-speed rail you picture aerodynamic bullet trains humming along at 220 miles per hour. 

So when the government proclaims that it has invested $12 billion into "high-speed rail" you presume that those funds will be used to fund actual high-speed rail projects.  Not so says CNN's Drew Griffin who has released another expose on where these funds are actually going.

To sum up Drew's report, the $12 billion dollars is being used to make conventional freight trains a wee bit faster.  In essence, while the public was sold on bullet trains, the monies are really just being used to improve conventional rail lines. 

The cornerstone of Drew's report is the fact that $800 million in taxpayer "high-speed rail" funds were used to improve conventional rail track between Seattle and Portland.  The big pay-off?  Shaving 10 minutes off the travel time.

The CNN video report can be seen here.

A Depressing Look at the CA Sec. of State's Office: why it takes CA 43 days to do what TX does in 5

I've always wondered why it takes week for the CA Sec. of State's Office to process business filings. Often these delays prevent business owners from getting licenses and opening bank accounts.  I was surprised to learn (not really though) that it only takes New York seven days and Texas five days to process similar filings.

Recently, Debra Bowen, the Secretary of State was grilled in front of the CA legislature and it wasn't a pretty picture.  It revealed an office so out of date that it actually relies on 3 x 5 index cards as its filing system.

More from the OC Register:

"I almost needed smelling salts the first day I took a tour of the Secretary of State's office," said Bowen, a former Marina Del Rey legislator who was first elected California's chief elections officer and business records clerk in 2006. "It was just so incredibly paper-driven."
Bowen's office has taken heat in recent days after it was revealed that her staff was taking 43 days to process business filings. As Assembly Budget Committee staff reported, this backlog delays businesses from starting up or hiring employees and postpones business tax payments.
New York processes such documents in seven days, committee staff found. Texas, five days.
"There is a scoreboard," Daly said, referring to the other states' better turnaround times. "At some point, the time for excuses is over."
Bowen says her office needs $8.9 million in new money over the next fiscal year, and millions more after that, to fund dozens of new staff positions necessary to handle the workload and reduce the backlog until a new, digital filing system comes online in 2016.
That new system, known as California Business Connect, will create a central records database and put the Secretary of State's services on the Internet. But Bowen complained that the state's procurement process is needlessly protracted and requires her to spend "a ridiculous amount of money" just on the paperwork to "get the project on the docket to get done."
"We spend a year getting the feasibility report done. Then it takes a several months after that to hire a contractor to write the request for proposal. That's another three to four months – it could be even longer than that," Bowen told the subcommittee. "That one was approved by the Legislature in July of 2011. The request for proposal, the RFP, was released in August 2012. Draft bids from vendors were submitted in late January of this year and are currently being reviewed.
"So ... the normal processing time for a large IT project ... you get to 2016," she said. "That has to be changed."
Further complicating matters, Bowen said, is her office building's lack of outlets and her staff's requirement to use the state Department of General Services to procure rewiring services. She specifically asked the committee for authority to pursue the rewiring on her own, without the assistance of the department, which acts as the "business manager" for other state agencies.

California Fire Prevention Fees Are Not Tax Deductible Says IRS

California has begun mailing bills to rural property owners for fire prevention.  If you own habitable property the CalFire's jurisdiction, you will eventually receive two bills this year--one for the State's 2011-2012 fiscal year, and one for its 2012-2013 fiscal year.

Each bill will be $150 per habitable structure on your property.  So if you have one house on your property and no other habitable structures, you will receive two bills this year totaling $300. 

The Howard Jarvis Taxpayer Association warns:

PAY CLOSE ATTENTION TO THE DUE DATE. You may have fewer than 30 days to pay. If you are late, there is a 20% penalty, plus interest. Every 30 days after that, another 20% penalty is added, plus interest. The fee is a lien on your property, and failure to pay can result in foreclosure.

Unfortunately, it appears the IRS has taken the position in a recent Memorandum that such payments are not deductible property taxes. 

 Office of Chief Counsel, IRS Memorandum 2013-10-029 (Jan. 14, 2013) (released Mar. 8, 2013):

Issue:  May California residents deduct the Fire Prevention Fee they may pay on their federal income tax returns as a real property tax deduction under section 164 of the Internal Revenue Code and § 1.164-4 of the Income Tax Regulations?

Conclusion:  California residents may not deduct the Fire Prevention Fee as a real property tax deduction because (i) the fee is not a tax under California or federal law (ii) the fee is not levied at a like rate, (iii) the fee is not imposed throughout the taxing authority's jurisdiction, and (iv) the fee is assessed only against specific property to provide a local benefit

The "Jock Tax" Payback: How Pro Athletes Are Cashing in on CA Worker's Comp

Many readers may be familiar with the fact that most states have their own version of the "Jock Tax".  Essentially, if a pro-athlete and resident of  a neighboring state plays a game your state, your state will be owed an amount of income tax from that athlete since the athlete is essentially conducting business in your state.  Although the average citizen would see this as a blatant maneuver to fill state coffers from wealthy pros, almost all states have enacted their own version of a Jock Tax.

Now it appears the Jocks have a way to fight back--filing worker's comp claims.

Consider this:  A professional football player and resident of Colorado, in the course of his 88 game career ends up playing just 9 games in California.  After retiring he gets awarded a $199,000 injury settlement from the California workers compensation court for his football injuries.  The player.  Terrel Davis, former Super Bowl MVP and Denver Broncos running back.

A recent article in the LA Times gives the details:

Over the last three decades, California's workers' compensation system has awarded millions of dollars in benefits for job-related injuries to thousands of professional athletes. The vast majority worked for out-of-state teams; some played as little as one game in the Golden State.

All states allow professional athletes to claim workers' compensation payments for specific job-related injuries — such as a busted knee, torn tendon or ruptured spinal disc — that happened within their borders. But California is one of the few that provides additional payments for the cumulative effect of injuries that occur over years of playing.

A growing roster of athletes are using this provision in California law to claim benefits. Since the early 1980s, an estimated $747 million has been paid out to about 4,500 players, according to an August study commissioned by major professional sports leagues.

California Out of Funds to Disarm 19,700 Felons and Mentally Ill People

I was surprised to find out that California already has laws in place that enable it to confiscate weapons from the mentally ill in addition to convicted felons.  Unfortunately, the State does not apparently have the funds to actually go out and seize the weapons.

From the LA Times:

SACRAMENTO — California authorities are empowered to seize weapons owned by convicted felons and people with mental illness, but staff shortages and funding cuts have left a backlog of more than 19,700 people to disarm, a law enforcement official said Tuesday.

Those gun owners have roughly 39,000 firearms, said Stephen Lindley, chief of the Bureau of Firearms for the state Department of Justice, testifying at a joint legislative hearing. His office lacks enough staff to confiscate all the weapons, which are recorded in the state's Armed Prohibited Persons database, he said.

The gun owners typically acquired the firearms legally, before being convicted of a felony or diagnosed with mental illness. Each year, the state investigates and seizes the guns of about 2,000 people on the Armed Prohibited Persons list, Lindley said, but each year about 3,000 names are added to the list.

"Despite our best efforts, the bureau does not have the funding or resources to keep up with this annual influx," he told the 15 assembled lawmakers.

Will Fresno's High Speed Rail Look Like Vermont's "Higher" Speed Rail?

CNN's Drew Griffin did an excellent report examining Federal high speed rail funds that were paid to Vermont in order to fund a "high speed rail" project through the State.  The only problem . . . the funds in Vermont weren't used for "high speed rail", but were instead used to turn a "slow speed" rail line into a slightly faster rail line.  In all, the new line shaved a minuscule 28 minutes off the commute time with the "higher" speed trains occasionally reaching max speeds as fast as 79 mph.

Mr. Griffin's report is a must see:

  

The Unintended Consequences of Plastic Bag Bans: An Armful of Designer Clothes and Ecoli

Recently, I was visiting with my sister and her family who told me of San Louis Obispo County's "plastic bag ban".  I had heard of other counties and cities implementing such bans but always assumed that these bans only applied to plastic grocery bags and not any other vendors.  To my surprise, the SLO County ban applied to virtually all types of plastic bags provided by retailers to customers in which to carry purchased items.  So not only did it apply to grocery stores, but it also applied to clothing stores.  Of course, while most people had gotten used to bringing their own cloth tote bags into grocery stores--they were not accustomed to carrying their own bags into other stores.

My sister hilariously told me how shortly after the ban was implemented they visited a large mall.  Hundreds of mall shoppers were walking around the mall with their arms full clothes and other items because they did not bring their own cloth tote bags.  It looked like the shoppers had ransacked and looted the place, walking off with as much as they could carry. 

This unintended consequence, however, is a mere inconvenience when compared to the health concerns. As reason magazine points out, a recent study by my Alma Mater shows that in jurisdictions where plastic bags were banned, ER visits increased by about 25% compared with neighboring counties where the bags remained legal.  Essentially, people were carrying leaky packages of meat and other foods in their canvas tote bags, then wadding up the bags in the trunk of their cars for awhile, leaving bacteria to grow until the next trip, when they would fill the contaminated bags with fruit and vegetables.  

Surprise, Surprise...Prop 30 Funds Steered Towards Salaries and Benefits--Less Than Half For Education

Governor Brown's budget proposal for the upcoming fiscal year has a big surprise for those who voted for its passage, believing that the bulk of the funds would be used for education.  Of the $6 billion raised by Prop 30, only $2.7 billion would go to K-14 eduction.  In addition, the budget has at least $1.3 billion for salaries and benefits to state employees who don't work in education and would generally cease the one furlough day a month policy.  The budget also includes $502 million for negotiated pay raises and health care benefit contribution hikes for state employees.

The OC Register points out that the advertising for Prop 30, however, led voters to believe that this wouldn't be the case:

Yet the Prop. 30 campaign led voters to believe that the majority of the money from higher sales and income taxes would go to schools. One TV ad run by Gov. Brown's official Prop. 30 campaign, "Teachers for 30," featured several teachers explaining the need for the money for schools. Then state Controller John Chiang was shown, assuring voters: "With strict accountability, money must go to the classrooms and can't be touched by Sacramento politicians." The spot ended with Gov. Brown positioned in the midst of 17 school kids about age 8, as he implored, "For the students, and for California's future, vote Yes on 30." The kids cheered.

Are Tax Hikes The Cure For CA Budget Woes?

One can only wait and see how the Passage of Prop 30 will affect California, but politcal cartoonist Michael Ramirez has his own take.

(Coutesy of National Review)

What the Passage of Prop 30 Means for You

Proposition 30 was passed on Tuesday carrying about 54% of the vote.  Here's what it means.

There will be an across the board sales tax increase from a base rate of 7.25% to 7.5% for the next four years.  This will have an impact on all consumers.

In addition, there was a significant increase in marginal rates for those making more than $250,000, which will be retroactive to the beginning of 2012 and last for seven years. 

Under Prop 30 the new brackets for single filers will look as follows:

             In excess of $250,000----10.3% (up from 9.3%)
             In excess of $300,000----11.3% (up from 9.3%)
             In excess of $500,000----12.3% (up from 9.3%)

Proposition 30 will keep California in first place for having the highest state sales tax in the nation and should move California from second (behind Hawaii) to first place in state income tax. 

The biggest question I have, however, is will this seven year "temporary" tax increase be enough or will Governor Brown and his new super-majority legislature push for additional tax increases. Also, is Proposition 13 also soon to be on the chopping block?  Time will only tell. 

Sacramento Man Hit With 17 Year-Old Tax Bill

Bill Elkins, a 66-year-old man from Sacramento was recently hit with a $6,166.39 tax bill from the Franchise Tax Board involving a tax debt from 1995.  The state says he never paid it.  Mr. Elkins claims he did.

Unfortunately for Mr. Elkins, his bank records don't go back that far to prove he ever made that payment and the CPA who prepared the return has passed away.  While the IRS can collect on 10 year-old assessments, the Franchise Tax Board can collect on 20 year-old assessments.  Local news video below. 

Fresno County Keeps Williamson Act Tax Break...For Now

From the Fresno Bee: 

Fresno County supervisors agreed Tuesday to preserve a longtime tax benefit for farmers, even as the benefit is costing the county millions in lost revenue.
The state's 47-year-old Williamson Act, which provides property tax breaks for landowners who commit to keeping their land in agriculture, has been under scrutiny ever since state reimbursement for the program dried up.
But amid heavy lobbying from the Valley's powerful ag industry, the county Board of Supervisors narrowly voted to continue the tax-relief program and absorb the losses.
The 2-2 vote not to touch the Williamson Act pitted two rural supervisors, who were not in favor of changes, against two members from the county's urban core.
The decision was cheered by the farm community, many of whom turned out for Tuesday's hearing in downtown Fresno to deliver personal accounts of how they couldn't afford a tax hike. ...

The Williamson Act was passed by the Legislature in 1965 as a way to provide incentive for farmland conservation.
Because the state no longer provides reimbursement for the program, counties have the option of partially recouping losses by reducing tax breaks for farmers by 10% -- in exchange for shorter conservation commitments from farmers.

Amazon Sales Tax Loophole? When your purchase will NOT have sales tax withheld

On Saturday, September 15th, pursuant to an agreement reached with the Board of Equalization and State politicians, Amazon.com will begin to collect CA sales tax on items it sells to CA residents. 

But, not every item sold through Amazon.com to a CA resident will have sales tax withheld.  From CNET:

...Amazon will continue to not collect taxes on hundreds of thousands of items that it lists for sale on its Web site, stores in its warehouses, and packages for quick shipment to California residents. Those orders -- called "fulfilled" by Amazon -- amount to a tax loophole that has left Sacramento tax collectors a tad unhappy....

A representative of the State Board of Equalization, which collects California sales taxes, told CNET today that whether Amazon can be required to collect taxes on "fulfilled" orders is a tricky question. "It's difficult for us to comment on the way Amazon is set up within its family of companies (and) whether there there would be a consignment relation," the representative said.

Amazon says the law is clearly on its side. Spokesman Scott Stanzel said that for fulfillment sales, "sales tax collection depends on the tax obligations of the seller," not Amazon itself.

Roughly one-fifth to one-quarter of the items that Amazon offers to ship are "fulfilled by" products. It's a staggering selection, including everything from Calphalon non-stick pans, iced tea, stereo speakers, video games, and even the PetZoom Pet Park Indoor Pet Potty. 

  Of course, even if Amazon does not withhold sales tax on the purchase, the CA resident is supposed to pay a "use" tax on the item in CA equal to what the sales tax would have been.  In reality, this use tax is often not reported or paid by CA consumers, which can be a significant sum as tax rate can top out at 9.75%.   

Brown's Plan to Stem CA Public Pension Costs Not Sufficient

From the LA Times regarding Gov. Jerry Brown's newly released plan to reduce public sector pension costs:

Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.
The governor's plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.
Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown's proposal — will be needed to get runaway retirement costs under control.
Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.
...[E]very California household may be on the hook for roughly $23,000 for public retirements over the coming decades. Brown's plan might whittle that tab to $18,000.
"It doesn't solve the problem," said Joe Nation, a former Democratic assemblyman and professor of the practice of public policy at Stanford University. "We still have many, many miles to go."
Brown's negotiations with lawmakers resulted in a more modest plan focused on raising the public retirement age, limiting the annual sums collected by retirees whose jobs paid them six-figure salaries and tinkering with the formulas on which pensions are based.
The leaders' decision not to take any benefits away from workers already on the payroll, however, limited their ability to confront the soaring debt.
"You can't address these problems unless you address the existing liability," said David Crane, who advised former Gov. Arnold Schwarzenegger on pension issues.
"The only way to do that is to go after benefits for existing employees."
An exhaustive study last year by the Little Hoover Commission, an independent oversight agency that reports to the Legislature, warned that pension debt will continue to overwhelm government budgets if benefits for existing workers are not scaled back.
Making changes that affect only new employees, the commission's report said, "will not deliver savings for a generation, while pension costs are swelling now as baby boomers retire.... The promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due."

Homeowners See Jump in Property Taxes--what happened to prop 13?

Many California homeowners, while owning properties worth less than what they paid for, are at least getting some benefit by paying lower property taxes.

While many homeowners are familiar with Proposition 13 (which caps the tax assessed value on properties to a growth rate of no greater than 2%) they are most likely unfamiliar with Proposition 8 (the other one).  When Proposition 13 was passed in 1978, Proposition 8 was also passed. 

When your property declines in value, it is actually Proposition 8 which kicks in and allows you to claim a lower taxed assessed value on your property.  The tricky part is that once the housing market rebounds, the cap on Proposition 13 doesn't kick in until you reach a value essentially equal to your purchase price of the home.  In other words, if values rebound over night, the property's tax assessed value will be allowed to increase at more than the 2% rate until the purchase price value is met.  So surging home values could mean surging property taxes as well. 

While most homeowners are faced with depressed values, there are a few counties where property values are increasing and homeowners are getting assessed additional property taxes. For instance, some 37,000 residents in Santa Clara County received notice that their property taxes were increasing this year as a result of rebounding housing values:

"It's a double-edged sword,'' said Kreshel, a senior manager at eBay. "The value is going up and so are my property taxes, even though it's still below what I had to pay for it,'' she noted with a sigh. "It's part of being a homeowner.''

It is really only a matter of time before home values start to recover state-wide and homeowners realize that the property taxes will increase dramatically as result.

CA School District Borrows $100M, Will Pay Back $1B.

In a transaction that makes a pay day loan look frugal, a California School district borrowed $105 million over 40 years by selling "a bond so unusual that the State of Michigan outlawed it years ago". Taxpayers in the Poway school district will be on the hook for $1 billion--10X the amount originally borrowed.

In the bond deal, taxpayers were told that there would be no tax increases for 40 years.  In fact, there is no interest or principal due for the first 20 years, which means that all the payments will be due on the back end.  On top of that. the bonds are not callable and cannot be paid off early or refinanced.

The "bond costs will go towards new classroom and library computers, state-of-the-art wireless data systems with increased bandwidth, new voice and video alarm systems, green 'recyclable building materials,' and landscaping" as well as "new storm water drainage systems to comply with the Federal Clean Water Act".

Poway has only 34,000 students in its district and school administrator and teacher compensation eats up 85% of its annual budget.

CA State Slush Funds Flush With Cash

As California politicians begin begging for increased tax revenues, new reports show that the state's 500-plus obscure special funds are raking in funds:

California now spends nearly $40 billion on special fund programs, more than every state except New York and Texas spends on its entire general fund. The special fund money pays for an amazing array of services, from major priorities such as mental health, hospital construction and highway repairs to obscure things like bingo halls, acupuncture and midwifery.   Fees like the cost to enter a state park or the 5-cent recycling fee on a soda can -- not your taxes -- fuel the state's special funds. Yet more and more, the state is borrowing billions of dollars from these special accounts to balance the general budget used to fund such things as education and prisons.

Usually out of the spotlight, special funds make up one-fourth of all state spending and are now receiving rare scrutiny and will be the focus of  legislative hearings after finance officials found $54 million in funds hidden in two state parks accounts. An analysis by this newspaper showed the state's books for all the special funds were off by $2.3 billion, a discrepancy finance officials are now investigating.

The discoveries could result in political headaches for Gov. Jerry Brown as he tries to convince voters in November that the state needs tax increases to avoid massive cuts to schools and social programs.