New Jobs, Not a New Jobs Tax

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on June 24, 2010

What do you need when you don't have a job? You need a job. That seems pretty obvious. And with 2 million Californians still out of work, what California needs is a lot of jobs.

Instead, what we now have on the ballot in November is the Jobs Tax Initiative. A proposal that would cost us jobs, a lot of jobs. A proposal that would punish with higher taxes, businesses that want to hire Californians and create new jobs. That would push existing jobs out of the state. That heaps new burdens on already struggling small businesses. That goes right after high tech and bio tech, the very industries that we are expecting to create the next wave of good jobs.

What seems pretty obvious about the Jobs Tax initiative - is what a bad idea it is.

That's why the opposition to the Jobs Tax Initiative includes the California Small Business Alliance, TechNet, California Taxpayers' Association, Industrial Environmental Association, California Manufacturers & Technology Association and many other small businesses, high tech, bio tech and taxpayer groups.

Now the proponents of the Jobs Tax Initiative say they are out to close corporate tax loopholes - that only a handful of big corporations would be affected - that schools need the money they say their initiative would bring in.

In fact, this initiative doesn't close a single loophole - it doesn't guarantee that a single cent would ever reach our classrooms - but it would affect more than 120,000 California businesses - and it does close the door on the jobs we need to get out of this recession, 144,000 new jobs, according to a new economic study of just one part of this initiative.

Here's how the Jobs Tax Initiative wreaks its havoc with our jobs and our economy.

Federal tax law allows businesses to level out their losses over time, which is especially important in this recession. Our laws were recently reformed to more closely mirror that same sensible policy. The Jobs Tax Initiative would undo that reform - taking away a lifeline for our small businesses.

Another state tax reform, would allow companies that do business in more than one state - to be taxed in California based on their sales in California. The Jobs Tax Initiative would return us to an outdated formula that means higher taxes on a business, whenever that business creates a new job, or opens a new facility here. That's a formula that penalizes job growth. No surprise then, that almost half the states in the country have moved away from that sort of jobs tax, to keep their jobs at home.

And the Jobs Tax Initiative takes an extra shot at some of our most innovative industries - the high tech, the bio tech firms that are developing the technologies and medicines of the future. These businesses, which are all about researching and developing new products - would be prohibited from fully utilizing the credits they've earned for that research and development.

The Jobs Tax Initiative would overturn needed, common sense reforms. The groups behind this proposal are trying to dress it up in the rhetoric of closing tax loopholes, but the only thing this initiative would close, is the door on bringing new jobs to California. We need to keep the jobs we have, and we need to encourage the economic growth that creates new jobs and moves California out of this recession. In short, California needs jobs, not a Jobs Tax.

You'll find more information at www.StopTheJobsTax.com. Get the facts for yourself. Read this initiative. And then, please join us in voting no on the Jobs Tax initiative.

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The poor, unfortunate, disadvantaged tax agency

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on April 23, 2010

Today, all Californian’s can rest easy knowing that the State of California’s tax enforcement and administration functions are split between two agencies. The Franchise Tax Board (FTB), who administers the Personal Income and Corporation Tax laws, and the Board of Equalization (BOE), whose responsibilities include the administration of the state’s sales and use taxes, excise tax, special taxes and fees, as well as property valuation.

In addition to the BOE’s regular duties, the Board also serves as adjudicator of personal and corporate income and tax appeals after specific issues have exhausted the FTB’s administrative dispute process. Under current law, if the BOE denies the taxpayer's appeal, the taxpayer may bring action in state court. However, if the FTB's original decision is overturned, the taxpayer has prevailed and the issue is considered resolved.

Legislation now moving its way through the capitol would change this important taxpayer protection. SB 1113 (Wolk) would authorize the FTB -- after a final BOE decision on a taxpayer appeal -- to bring a civil action against a corporate taxpayer with a tax discrepancy of more than $1 million or a personal income taxpayer with a tax discrepancy of more than $100,000.

The proponents claim this is all about leveling the playing field -- that the Board of Equalization is somehow inadequately prepared or unqualified to adequately adjudicate these taxpayer appeals. Remember this important fact: Two of the Franchise Tax Board’s three-member board are constitutionally elected members of the five-member Board of Equalization. SB 1113 would not only allow the state to appeal, but also would require the taxpayer to maintain the burden of proof throughout the entire process, both during administrative appeal, and then again in court should the FTB decide that they do not like the decision made by their own members.

Proponents of the measure seem to claim that the system is unfair. That the poor, disadvantaged tax agency of the State of California has somehow been abused and disadvantaged by the taxpayer for years as a result of an appeals process. Does the final adjudication by some of the FTB’s own members provides an advantage to the taxpayer? Under the guise of “leveling the playing field” SB 1113 gives the state's tax collection agencies on more bite at the apple -- apparently agencies representing a state with the 9th largest economy in the world are being abused by the unfair rights of taxpayers.

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Classroom vs. Boardroom: Economic Theory and Reality Collide in California

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on Oct. 16, 2009

The 2008-09 budget cycle will long be remembered as a tipping point in California's economy. But will we learn from it, or will the state repeat mistakes (or make new ones as the case may be) that will continue our long-standing hold on the precipice of economic collapse?

As California stumbled into 2009 having "solved" a budget crisis just three months earlier that proved to be no real solution, the Governor, teaming with the Democratic leadership, formed California's Commission on the 21st Century Economy, a commission who's purpose was to evaluate the state's outdated and volatile tax system in hopes of bringing some measure of reforms, and with it stability to the state's revenue stream. After 9 months, the final product provides no more answers to the state's ills than the current system, in fact, creates even more uncertainty and unpredictability. What it does do however, is provide an opportunity for a classic battle between academic economic theory versus boardroom/dining room economic realities.

We applaud the commission for their efforts and contributions to this seemingly herculean task of reforming the state's tax system. I believe that most everyone understands and agrees with the fundamental need for reform. Unfortunately, that appears to be where the similarities of thought end.

As the Assembly Revenue and Taxation Committee conducted informational hearings on the Commission's proposals end of last week and yesterday, it became even more clear that stark contrast of the academic exercise conducted by the Commission versus the economic realities of the state's economic base. During testimony last week, former Assembly Speaker and current commissioner Curt Pringle recognized that there were many industries and taxpayers that would be adversely affected by the proposal, but suggested that it was "not the Commission's job to look at the impact of their decisions on various industries or taxpayers, but rather very basically to look at a very finite, static view of volatility." Unfortunately, it is this very narrow view that has led to today's current chaos.

The Commission has ignored what is likely the single most important component of California's revenue stream, the effect on the taxpayer. The most significant contributors to any economy's volatility are the decisions made in high-wage company board rooms (i.e. manufacturers) and at family dining room tables (i.e. manufacturing employees averaging $66,000 wages).

The Commission's economic theory related to the Business Net Receipts Tax (BNRT) proposal suggests that any such tax increase can be passed through to consumers or to internal cost reductions in the form of salary and benefits cutbacks. Economic realities in day-to-day boardroom, tax department and dining room family budgeting discussions suggest the opposite however. Our domestic and global competition gets tighter every day. California produced products are either faced with raising prices to uncompetitive levels, or internalizing the cost, affecting already razor-thin margins. In other words, reality steps in and suggests that California companies will be placed at a significant disadvantage.

While having admittedly struggled over the past decade, California manufacturers still employ 1.35 million Californians with an average annual salary over $65k (over $20k more than a comparable service economy job). The industry also carries a multiplier jobs effect of 2.5, higher than almost any other industry. It is not a far stretch to understand that continuing to implement policies (even under the cloak of "reform") that provide further erosion of California's manufacturing and research & development base is the clear path to increased volatility, not less.

Statistically we know we've already lost 31 percent of our manufacturing base in the last eight years. Perceptively we know that California's nascent trend of lost high wage jobs and irretrievable opportunity for growth is now becoming a noose around the neck of our economy. Anecdotally we know a large tax increase on business will make our manufacturers less competitive. Because California is so dependent on a wide range of production based jobs, allowing a reform proposal to go forward that has the potential for significant harm to this industry seems perilous to California's economic well-being.

CMTA strongly encourages the legislature to utilize the resources and experts available to them to fully evaluate the economic impact of implementing these proposed reforms. Otherwise, the Commission's attempt to reduce volatility in the tax system could create significant volatility in the state's industry base, and thus a draconian and potentially irreversible erosion of California's economy. This is one theory California cannot afford to test.

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Business Net Receipts tax could mean less Business

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on Aug. 14, 2009

Next month, the California Commission for the 21st Century Economy is expected to report to the legislature it’s proposal(s) for reforming California’s tax code. While the general themes for the Commission’s work has centered on the need to address the volatility in California’s existing tax system, proposals to attempt to achieve this objective are as potentially dangerous with far-reaching impacts on California taxpayers as they are revolutionary.

One proposal could actually mean less business in California and its getting traction, the Business Net Receipts Tax. The BNRT would basically replace all or part of existing sales and corporate taxes, but casts a much broader net to include service sector jobs that currently do not pay sales taxes in the state. As a result, the BNRT proposal has been dubbed a "stealth tax" by one of the Commissioners, as the tax accomplishes what no one else has been able to do with existing sales tax law, apply a tax on services provided in the state.

While casting a broader net may ultimately prove to be the right decision for California, the BNRT proposal under consideration lacks the necessary detail and proper vetting necessary when considering such a massive overhaul of the tax system for the 8th largest economy in the world.

For instance, the current proposal penalizes employers for any producing activity in the state by taxing the activity regardless of profit or loss. This alone could wipe out some of the innovative start ups that usually operate at a loss in the seminal years, especially some of those pioneering green companies we need so badly.

Under the BNRT proposal, employers would have more incentive to hire or contract with employees out of the state. This conflict is further compounded by the potential for eliminating deduction for employees (essentially discouraging hiring in the state), investment credits for California lifeblood activities like research & development and various other deductions in the current tax code that provide some basic level of incentive for employers to operate in the state.

In essence, the Commission’s push to broaden the base for taxation has the potential to be the ultimate recipe for the final destruction of California’s production economy.

At a time when businesses and all taxpayers continue their struggle to survive in this economy, any "tax stabilizing proposal" must retain and grow our job base. We encourage the Commission to take a much harder and comprehensive look at the real impacts of a Business Net Receipts Tax.

Rome was not built in a day, nor was California’s existing tax code. We shouldn’t expect to overhaul the system in one either.

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Paying Your 'Fair Share' & the Tiger Woods Effect

Posted by Greg Hines, Legislative Director, Tax & Corporate Counsel on Nov. 22, 2008

As members of the California State Assembly Budget Committee discussed the merits of the Legislative Analyst and Governor’s Administration’s budget proposals, a handful of members on the committee repeatedly called for certain California taxpayer’s that need to "pay their fair share." Of course, most people around the Capitol know this terminology is usually code for raising taxes on high-income wage earners and the business community, but given the dire circumstances facing the State’s revenue picture, it begs a deeper dive. What is your "fair share" of taxes?

The state's personal income tax is the largest single revenue source, representing almost 55% of all General Fund revenues. Here's how it breaks down:

1% of Californians pay 50% of income tax. Income tax represents approximately 55% the entire General Fund, meaning that out of a state of over 34 million, less than 150,000 contribute approximately 27.5% of the state’s entire general fund.
Corporate and Franchise taxes account for another 11% of the General Fund.
All total, California depends on the upper middle and high wage earning individuals and the business community to contribute over 56% of the state’s revenues.

That is a lot of numbers, but breaking it down to basic terms, that means that a large majority of Californian’s pay very little for their California residency status and the services and entitlements afforded to them by that right. That makes sense to an extent.

The problem is that we have slowly sent signals to businesses and individuals that California will tax success more than any other State. Why would any business leader operating in today’s global marketplace make a decision to expand or invest in California? Ask Intel why they no longer manufacture in the state they were founded, or try to talk to Tiger Woods, the Southern California native golfer, about moving to Florida after turning pro.   Simple answers: Less taxes for the former and $9.6 million less taxes for the latter.

Here's where the disconnect really starts. Every change in tax law has some affect on the overall position of the state’s economy.   Without a strong economy -- of which high wage manufacturing plays a crucial role -- we can't pay for quality government programs.   Moreover, in a weak economy, more citizens need these entitlements.   I know, that concept is not exactly groundbreaking news. But it is almost impossible to get the Legislature to acknowledge that in their decision making.

So, as we proceed in these difficult times, we must recognize the consequences of new revenue policies in terms of their short and long term effects on the economy and wealth creators that fund our programs. California has learned the hard way that leading the country with bold programs is visionary, but expensive.   For this reason, every tax policy coming out of the State Legislature should come with an answer to the question: Is this policy "fair" to our economy.   In other words who will stay and who will go as a result?   We owe that to all 34 million of us who need the State's government funded programs.

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