Regulators Propose Cap-and-Trade Program Relief

Vol. XXVI, No. 31
September 6, 2013
IN THIS ISSUE

California Air Resources Board:
Regulators propose cap-and-trade program
relief.

Franchise Tax Board: Reducing time to
resolve protests is high priority for tax
agency.

Guest Commentary: State Board of
Equalization has opportunity to partially
remedy Legislature’s bad decision on lumber
tax.

Legislative Update: With one week left in
session, Assembly and Senate stay busy.

Public Employee Pensions: Governor
proposes exempting some workers from
recent pension reforms to avoid losing
federal funds.

New Wine in Old Bottles: Recently
amended legislation of interest.

Waste, Fraud & Mismanagement: Your
Tax Dollars at Work: Six years after $1.2
billion approved for new jails, none have
been completed.

Potpourri: Symposia, Sightings, Salutes
& Snafus: PwC partner Bruce Daigh dies in
motorcycle accident.

Who’s New in State Government: New
judge on the Orange County Superior Court.

Tax Trivia: What is in the Income Tax that
is subject to the alcohol tax?

Blast From the Past: Tax proposed on
government-owned utilities.

Coming Up: State Board of Equalization
meeting, and legislative floor sessions.
CALIFORNIA AIR RESOURCES BOARD:
Regulators Propose Cap-and-Trade Program Relief
The California Air Resources Board (CARB) released proposed revisions to the state’s capand-trade program September 4, in preparation for the board’s October 24 meeting. If
adopted, the revisions could provide significant relief for businesses that otherwise would
be forced to purchase additional cap-and-trade auction allowances beginning in 2015.
The Global Warming Solutions Act, approved in 2006 (AB 32, Nuñez, Chapter 488,
Statutes of 2006), requires California to reduce its emissions to 1990 levels by 2020. One
of the programs adopted by CARB to achieve this was a cap-and-trade auction that
requires certain businesses to purchase allowances in order to maintain their business
operations.
The proposed amendments to the cap-and-trade program come at a time when the
program is under much scrutiny from the business community. Businesses have recently
filed suits challenging CARB’s adoption of the cap-and-trade auction, arguing that the
auction constitutes an illegal tax under Article XIII of the California Constitution.
In proposing the amendments, CARB staff noted that the existing cap-and-trade program
could negatively impact businesses. CARB wrote that “an express purpose of the proposed
Editor
David Kline
Principal Contributors
David R. Doerr, Robert Gutierrez
1215 K Street, Suite 1250
Sacramento, CA 95814
(916) 441-0490
www.caltax.org
amendments is to ensure that California businesses’ ability to compete is not directly
affected.”
Specifically, the proposed revision to the cap-and-trade regulation would delay a
requirement that certain industries must purchase a set percentage of their allowances
beginning in 2015. Under the proposed revision, this requirement instead would begin in
2018.
According to CARB documents, revisions are “needed to provide additional certainty and
time for industry to successfully transition to lower-carbon production methods while also
allowing additional time for staff to obtain the results of new research that will improve
the data, measurement, and metrics of economic leakage risk and will provide additional
insights into the potential leakage risk posed by long-term program implementation on
industrial sectors.”
The cap-and-trade program was adopted in October 2011, and the first statewide auction
occurred in November 2012. After discussions with the public and stakeholders, CARB
staff plans to propose a number of revisions to the program at next month’s board
meeting.
The stated purpose of amending the cap-and-trade program is to “provide additional
details to clarify implementation, address stakeholder concerns on cost containment,
extend the transition assistance for covered entities in the program and enhance ARB’s
ability to oversee and implement the regulation.”
Among the proposed revisions:
•
Provide allowance allocation for additional sectors, and modify allocation for existing
sectors based on new information;
•
Implement additional cost-containment mechanisms;
•
Define new covered entities and exempt sectors where direct regulation best meets
the goals of AB 32;
•
Exempt certain covered entities’ emissions from incurring a compliance obligation
under the program for the first compliance period;
•
Provide additional clarity on the prohibition against resource shuffling in the
electricity sector;
•
Provide for better coordination of the regulation with other state renewable
electricity requirements;
•
Include a new offset protocol and clarify and add processes for implementation of
the compliance offset program;
•
Provide modifications to market rules for auctions and transfers in the tracking
system; and
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2
•
Include additional provisions to enhance market security, such as requiring
submission of information on voluntarily associated entities that may have a
relationship with covered or opt-in entities.
To submit public comments on the proposed revisions to the cap-and-trade program, click
here.
FRANCHISE TAX BOARD:
Reducing Time to Resolve Protests Is High Priority for Tax
Agency
Franchise Tax Board Executive Officer Selvi Stanislaus told the board at its September 4
meeting in Sacramento that shortening the time that taxpayers wait for a tax protest to
be resolved is a top priority for FTB’s staff.
In a budget change proposal presented to the board, staff reported that the FTB takes an
average of 44 months to close a docketed protest, despite the 24-month “guideline”
outlined in FTB Notice 2006-6. Incoming protests have increased 35 percent in the past
three years, and those requiring docketing have increased 28 percent, staff said.
CalTax Chief Tax Consultant David R. Doerr told the board he was shocked to see how far
the FTB is from meeting its goal. Deputy State Controller for Taxation Marcy Jo Mandel,
representing Controller John Chiang, said she also was shocked by the data. She added
that she used to see reports on this issue, but has not seen one recently.
Ms. Mandel and Mr. Doerr both suggested periodic reports to monitor progress toward
reaching the 24-month goal. The board approved the staff request to ask the Department
of Finance to augment the agency’s budget by two positions in the 2014-15 fiscal year to
address the problem. State Board of Equalization Chair and FTB Member Jerome Horton
asked staff to look at systemic issues, as well as added staff.
Other developments from the FTB meeting:
Combating Identity Theft. Identity theft is becoming a big problem at the FTB. Jennifer
Roussel, head of the Fraud and Discovery Section, said incidents of identity theft were up
from 6,000 in 2009-10, to 18,000 in 2012-13.
Primarily, identity theft problems facing the board involve someone using someone else’s
personal information, without permission, to obtain a fraudulent tax refund. FTB’s new
efforts to combat identity theft include a partnership with the IRS, new electronic
detection capabilities, and the formation of an enterprise study team. Ms. Roussel said the
board was able to stop $11 million in fraudulent tax refunds before they occurred.
Mr. Doerr urged the FTB, as part of its identity theft prevention program, to guard
zealously the confidentiality of tax returns. Specifically, he urged the board not to sponsor
legislation in the future that would allow private firms to access confidential tax
information (this year, the FTB sponsored SB 211, Hernandez, which until recently
included provisions allowing third-party access to confidential tax information).
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3
Mr. Doerr cited his 28 years of legislative staff experience, during which the Legislature
requested and received such confidential information. He said the problem is not making
the information public – which is prohibited – but how it is used privately. He added that it
would surprise everyone on how the information was used in the past when obtained by
the Legislature, and this is the reason the information should be kept out of the hands of
private parties.
Ana Matosantos Still Key Advisor to Governor Brown. Ana Matosantos, who abruptly
announced in June that she would resign effective September 15 as director of the
Department of Finance, is still a key advisor to Governor Jerry Brown. Ms. Matosantos was
scheduled to represent the Department of Finance at the September 4 meeting, but it was
announced that she was called into a special meeting with the governor.
Anyone who has been in meetings with the governor can attest to the fact that the length
of such a meeting is unpredictable. Ms. Matosantos was not able to make it to the FTB
meeting before adjournment. Ms. Stanislaus said it was to be her last FTB meeting, and
lauded her service to the state and the board.
Input on New Like-Kind Exchange Reporting Program. This year’s state budget
contained provisions requiring taxpayers to report like-kind exchanges for out-of-state
property. To implement this provision, FTB staff requested $357,000. The board approved
submitting a request to the Department of Finance for a budget augmentation of this
amount. Mr. Doerr testified that taxpayers are worried about onerous reporting
requirements. FTB attorney Bruce Langston said interested parties will be consulted
before the form used for reporting like-kind exchanges is finalized.
Generator Troubles. Two power outages have occurred at the FTB headquarters since
2009. The most recent was on August 9, 2012, when the existing generator failed to
operate. The board approved staff’s request to submit to the Department of Finance a
budget change proposal of $540,000 for a back-up generator. Staff said this will ensure
that FTB business continues during power outages. Staff also reported that the
Department of General Services thinks the original generator works, but staff noted that it
didn’t work on two occasions.
Other Budget Requests. To deal with the current accounts receivable inventory, the
board approved FTB staff’s request to ask the Department of Finance $8.8 million to
continue, for two more years, 115 expiring two-year limited term tax program positions.
The current positions will expire June 30, 2014, but FTB staff said that the extension of
these positions will address the ongoing accounts receivable inventory.
Also approved was a request to submit a budget request for $1.8 million and 23 positions
to combat the “tax gap.” Staff estimates that this proposal will generate an additional
$13.9 million in general fund revenue in 2014-15. The proposal will focus on federal audit
revenue agents’ reports and automated audit workloads, withholding services, and
compliance workloads and fiduciary e-file workloads.
Another budget request approved by the board was staff’s request for $2.6 million and
seven positions to meet workload demands for ensuring confidentiality. There is a concern
that failure to protect IRS data received by the FTB could result in the IRS cutting off this
supply of data, which would have a substantial negative impact on state revenue.
September 6, 2013
4
Superior Accomplishment Awards. FTB Business and Human Resources Bureau’s
Robert Moreno presented the 2012-13 superior accomplishment awards to the following
workers, with their accomplishments, as stated by the FTB, noted in parentheses:
•
Analisa Espinosa (withholding compliance innovator);
•
Aldo Lema (collection correspondence backlog reducer);
•
Richard Skidmore (the ultimate voluntary compliance promoter);
•
Daniel Tahara (master media communicator);
•
Kathleen Andleman, (master multistate negotiator);
•
William Gardner (business entity specialist extraordinaire);
•
Ann Hodges (business tax incentive expert);
•
Cynthia Curcuro (complex audit case simplifier);
•
Kimberly Pantoja (highly motivated team leader);
•
Gary Shaner (magnificent leader and trainer);
•
Laura Shuck (disclosure compliance guru);
•
Mariann Clark (innovator in audit processes);
•
Curtis Coles (IT monitoring magician);
•
Jayson Gottman (tax form print coordinator super saver);
•
David Hazelwood (24 x 7 web access guarantor);
•
Tanya Kelley (quality customer contacts);
•
Clarita Landes (2Cool 2D barcode developer);
•
Michelle Lowe (keen lien processing machine);
•
Michelle C. Martinez (customer satisfaction guarantor);
•
Patricia Mike (groomer of tomorrow’s leaders);
•
Brian Morrison (IT builder);
•
Valorie Reynon (budget tracker);
•
Rikki Saldana (fast collection processor);
•
Patti Swanson (revenue reporter);
•
LeRoy Valdez (file space phenom); and
•
Jim Webb (automated audit case selection tool creator).
Awards also went to various teams of analysts, auditors, IT workers and others.
September 6, 2013
5
GUEST COMMENTARY:
State Board of Equalization Has Opportunity to Partially
Remedy Legislature’s Bad Decision on Lumber Tax
By Ken Dunham, executive director of the West Coast Lumber & Building Material
Association
On September 10, the State Board of Equalization will consider the amount of money that
California lumber retail dealers will be reimbursed for their costs in implementing the
controversial “lumber products assessment” that was part of a last-night-of-session piece
of legislation in 2012 that shifted the costs of forest oversight and regulation from timber
producers to fees paid by the public and collected by retail lumber dealers. The bill added
a 1 percent “fee” on the retail purchases of most lumber products.
It was a last-minute deal, supported by every Democrat in the Legislature, joined by three
termed-out Republicans to give it enough votes to get the necessary two-thirds vote.
There were no hearings, no opportunities for input, and the bill passed at 2:45 a.m., as
the final action of the Legislature. The bill, AB 1492 (Assembly Budget Committee), has
been described as one of the worst examples of legislative abuse in years. Several large
timber companies and the governor were active participants in this bad deal.
The legislation directed the BOE to determine how to implement the new assessment.
The new law has been the subject of two hearings in which BOE staff first recommended a
token $250 reimbursement to lumber retailers, and later amended that amount to a token
$735. BOE staff used highly inaccurate, out-of-date and non-germane data to come up
with their figures.
BOE staff, as part of their recommendation, used a 2006 report from an accounting firm
as their original justification for the token $250. The problem is that the study was on the
cost of reconfiguring cash registers to implement sales tax changes – not the complex
computer systems used by most lumber businesses – and unlike the sales tax, the lumber
tax is an assessment on only certain retail items, not all items in the business. Add to it
that the report was based on 2003 data, and the report authors freely admitted their
report was riddled with “missing data,” “measurement errors” and “sampling errors.” The
report should have never seen the light of day, but BOE staff says this was all they had to
go by. They apparently will accept inaccurate data rather than do original research for the
correct numbers.
The retail lumber industry, represented by the West Coast Lumber & Building Material
Association (WCLBMA), provided the BOE with statistically valid data that showed the
average cost of implementing the assessment collection was $5,500 per location. This
amount was largely the same no matter what the size of the lumber business, or how
many locations there might be. WCLBMA is asking the BOE to reimburse lumber retailers
up to $5,500 per location.
BOE staff also struggled with the number of businesses in California that would be subject
to the new “fee” collection. The agency originally claimed that as many as 40,000
business would be involved, a figure later reduced to perhaps 10,000 business. The
WCLBMA has consistently told BOE that 3,000 to 3,500 businesses will be subject to the
September 6, 2013
6
new law – a figure largely reinforced by first quarter 2013 BOE collections, which showed
2,543 businesses remitting assessments.
While this issue is largely confined to the wood products industry, it is yet another
example of state government, unable to fund its activities from the regular state budget,
seeking to increase its scope and fund programs from additional “fees” and assessments.
It is a dangerous trend, and should serve as a warning for any business and industry in
California. Who is next?
LEGISLATIVE UPDATE:
With One Week Left in Session, Assembly and Senate Stay Busy
The Assembly and Senate held several floor sessions this week, attempting to wrap up
legislative business by September 13, the adjournment date for the first year of the
current two-year session.
While significant proposals are expected to surface next week at the eleventh hour, with
little or no opportunity for public input or scrutiny, the floor sessions this week were
relatively quiet. Both houses voted on hundreds of bills, including many non-controversial
items that prompted no debate or discussion.
Legislative activity, including action from August 30 committee hearings that occurred
after the deadline for the last edition of the CalTaxletter:
Committee Approves Vehicle-Related Fees. AB 8 (Perea), extending various charges
on vehicle registrations, boat registrations and tire sales, and extending the authority of
local air districts to impose vehicle registration surcharges, was approved by the Senate
Appropriations Committee on August 30 with a 5-2 vote.
Minimum Wage Increase Advances. AB 10 (Alejo), increasing the California minimum
wage from $8 per hour to $8.25 per hour beginning January 1, 2014, with additional
increases annually thereafter, was approved by the Senate Appropriations Committee on
August 30, and was referred to the Senate Rules Committee.
Water Surcharge Measure Clears Committee. AB 30 (Perea), removing the sunset
date for the Small Community Grant Fund, which provides grants to small communities for
the construction of wastewater collection, treatment, or disposal projects (funded by a
surcharge assessed by the State Water Resources Control Board), was approved by the
Senate Appropriations Committee on August 30 with a 7-0 vote.
Financial Institution Tax Credit Measure Advances. AB 32 (John Pérez), increasing
the aggregate cap on the community development financial institution tax credit from $10
million to $50 million, was approved by the Senate Appropriations Committee on August
30 with a 7-0 vote.
Unemployment Insurance Proposal Fails. AB 37 (Perea), relating to unemployment
insurance, failed to pass out of committee by the August 30 deadline. While the bill’s
existing language relates to unemployment insurance reporting requirements, many
September 6, 2013
7
Capitol observers believed this would be used as the legislative vehicle for Governor Jerry
Brown’s unemployment insurance reform package.
Senate Prison Reform Bill Advances. AB 84 (Assembly Budget Committee), amended
September 3 to be the vehicle for the Senate Democrats’ prison reform provisions, was
approved the next day by the Senate Budget and Fiscal Review Committee, on a partyline 11-5 vote. The bill would authorize each county to establish a public safety
performance fund and authorize the state to put up to $315 million each year into the
fund.
Governor Jerry Brown, who has proposed a very different prison reform plan (SB 105,
Senate Budget and Fiscal Review Committee) that has bipartisan backing in the Assembly,
made it clear that he will not sign AB 84 even if it reaches his desk. In a written
statement, he said: “The plan approved by the Senate Budget Committee is an inmate
release plan by another name, totally dependent on an illusory legal settlement. I will not
turn over our criminal justice system to lawyers who operate at the behest of their inmate
clients, and not the people, whose interests we are sworn to uphold. Moreover, the plan
adds huge burdens to local government, which threaten to undo the remarkable progress
we’ve made in realignment.”
Senate Approves Restrictions on Use of Costly School Bonds. AB 182 (Buchanan),
a CalTax-supported bill establishing restrictions on the use of capital appreciation bonds
(CABs), and requiring local school boards to be provided specified information regarding
the issuance of CABs, was approved by the Senate on September 3 with a vote of 36-0.
Senate Approves Weakening of Voter Protections for Infrastructure Financing
Districts. AB 243 (Dickinson), authorizing local officials to create an infrastructure and
revitalization financing district, and to issue debt with 55 percent voter approval (rather
than the current two-thirds vote), or without any voter approval at all for bond issues
related to closed military bases, was approved by the Senate on September 3 with a 2213 vote.
Senate Approves Extension of Check-Off for Senior Legislature. AB 247 (Wagner),
extending from 2015 to 2020 the California Fund for Senior Citizens check-off on the
personal income tax return, was approved by the Senate on September 3 with a 38-0
vote. The check-off funds the activities of the California Senior Legislature, which is a
group of older Californians who meet in Sacramento once a year – in hearings and floor
sessions modeled after the California Legislature – to develop legislative proposals on
issues relating to seniors. Many of the proposals have been introduced in the Legislature
and have become law.
Oil-Related Tax Increase Held. AB 282 (Wieckowski), extending the underground
storage tank tax of $0.006 per gallon of petroleum until 2016, was held on the Senate
Appropriations Committee’s suspense file August 30, effectively killing the bill for the
year, given the Senate committee’s schedule for the remainder of session.
Reform of Local Prepaid Wireless Phone Collections Clears Committee. AB 300
(Perea), enacting the Prepaid Mobile Telephony Service Surcharge Collection Act to reform
local prepaid wireless phone collections, was approved August 30 by the Senate
Appropriations Committee, on a 7-0 vote.
September 6, 2013
8
Income Tax Exclusion for Specified Compensation for Same-Sex Couples Wins
Committee Approval. AB 362 (Ting), providing an income tax exclusion for
compensation received for employer-provided health insurance for same-sex couples, was
approved August 30 by the Senate Appropriations Committee, on a 6-1 vote.
Bill Dealing With Property Taxes of Former Redevelopment Agencies Clears
Committee. AB 662 (Atkins), relating to successor agencies to former redevelopment
agencies, and allowing cities and counties to keep a portion of the former redevelopment
agency property tax increment that is to be distributed as regular property taxes, was
approved by the Senate Appropriations Committee on August 30 with a 7-0 vote.
Expansion of Local Lien Authority Passes Senate. AB 683 (Mullin), authorizing cities,
counties and special districts to order unpaid fines or penalties to be specially assessed
against a parcel if the fines or penalties are related to ordinance violations on the real
property that constitute a threat to public health and safety, was approved by the Senate
on September 3 with a 23-12 vote. Senator Jim Beall said the bill “closes a loophole.”
There was no debate before the vote was taken. The Senate analysis of the legislation
notes: “This bill is nearly identical to AB 129 (Beall, 2011), which Governor Brown
vetoed. The Governor’s veto message expressed his concern that the bill weakened due
process requirements for local agencies to obtain property liens and stated his reluctance
to change the current process for collecting unpaid fines and penalties. This bill is also
substantially similar to AB 2613 (Beall, 2010), which Governor Schwarzenegger vetoed.
The Governor's veto message cited the need to balance homeowners’ due process rights
against a local government’s right to collect an ordinance violation fine.”
Small Business Incentives Stall. AB 780 (Bocanegra), appropriating $2 million from
the state general fund to the Governor’s Office of Business and Economic Development
(GO-Biz) to provide administrative support to financial development corporations (FDCs),
was held on the Senate Appropriations Committee’s suspense file August 30. Given the
Senate’s schedule for the remainder of session, it is likely that sending the bill to suspense
effectively killed the bill for the year. According to the author of the bill, FDCs stand to
lose out on more than $50 million in federal funding, and more than $500 million in
leveraging opportunities, without administrative support.
Virtual Consolidation of Tax Agencies Held in Committee. AB 833 (Harkey),
requiring a feasibility study of consolidation of tax agency websites, and to consolidate tax
agency forms if a need exists, was held on the Senate Appropriation Committee’s
suspense file August 30, and likely will not move this year. The committee estimated that
it would cost approximately $10 million to consolidate the agency’s tax forms on a single
online website.
Committee Holds Oil Spill Fee Increase. AB 881 (Chesbro), increasing the oil spill
prevention fee from 6.5 cents per barrel of crude oil to 7 cents per barrel, was held on the
Senate Appropriations Committee’s suspense file August 30. Under current law, the fee
will drop to 5 cents in 2015.
Low-Income Housing Tax Credit Measure Advances. AB 952 (Atkins), allowing the
state Tax Credit Allocation Committee to allocate state low-income housing tax credits to
housing projects in federally designated areas in specified circumstances, was approved
by the Senate Appropriations Committee on August 30 with a 7-0 vote.
September 6, 2013
9
Assessments on the Dairy Industry Don’t Mooove Forward. AB 1038 (Pan),
imposing an assessment on the dairy industry to fund formation of a task force to study
the future of the industry, was held on the Senate Appropriations Committee’s suspense
file August 30.
Measure Exempting Armed Forces From CEQA Filing Fees Marches in Place. AB
1060 (Fox), exempting the U.S. armed forces from paying filing fees associated with the
California Environmental Quality Act, was placed on the Senate Appropriations
Committee’s suspense file August 30.
Enterprise Zone Energy Management Measure Held on Suspense. AB 1079
(Bradford), relating to enterprise zone energy management plans, was held on the Senate
Appropriations Committee’s suspense file August 30.
Proposal to Revive Redevelopment Appears Dead. AB 1080 (Alejo), authorizing
local governmental entities to establish a new governmental entity that effectively would
bring back and restore the functions of redevelopment agencies, was placed on the
Senate Appropriations Committee’s suspense file August 30. In a letter to the committee,
CalTax wrote: “AB 1080 is inconsistent with Governor Brown’s efforts to eliminate taxincrement financing through redevelopment agencies.” Governor Brown last year vetoed a
number of measures related to local entities using tax-increment financing, noting:
“Expanding the scope of infrastructure financing districts is premature.” Given the
Senate’s schedule for the remainder of session, it is unlikely that this bill will come off the
committee’s suspense file.
Infrastructure Investment Planning Measure Held in Committee. AB 1081
(Medina), requiring the governor’s budget to incorporate a five-year infrastructure plan,
and to include recommendations on projects in need of public funding, was placed on the
Senate Appropriations Committee’s suspense file August 30.
Agricultural Fee and Tax Measure Clears Senate With Bipartisan Support. AB
1132 (Eggman),increasing the livestock drug license application fee, the license renewal
fee, and a penalty fee, and extending an inspection tonnage tax, was approved by the
Senate with a 36-0 vote September 3.
Partial Penalty Relief for Nonqualified Deferred Compensation Distributions
Advances. AB 1173 (Bocanegra), reducing the penalty rate for California tax on
nonqualified deferred compensation distributions from 20 percent to 5 percent, was
approved by the Senate Appropriations Committee on August 30 with a 7-0 vote. CalTax
supports the bill, noting that no other state imposes such an onerous penalty for IRC
Section 409A violations.
Committee Puts Telecommunications Lifeline Surcharge Measure on Hold. AB
1407 (Bradford), placing a cap on the maximum surcharge the California Public Utilities
Commission may impose to fund the “Lifeline” program, which provides landline telephone
services to low-income households, was held on the Senate Appropriations Committee’s
suspense file August 30.
Retroactive Film Credit Boost Sent to Suspense. AB 1413 (Assembly Revenue and
Taxation Committee), allowing the state’s film tax credit, for taxable years beginning on
September 6, 2013
10
or after January 1, 2011, to reduce regular tax below the tentative minimum tax, and
making findings related to the public purpose served by this provision, was placed on the
Senate Appropriations Committee’s suspense file August 30.
Committee Approves Measure Reviving Redevelopment Agencies Under New
Name. SB 1 (Steinberg), allowing local governments to establish a “sustainable
communities investment authority” to finance specified activities within a “sustainable
communities investment area,” was approved by the Assembly Appropriations Committee
on August 30 with a 12-5 vote.
Extension of Vehicle Surcharges and Fees Gets Green Light From Committee. SB
11 (Pavley), extending numerous surcharges and fees on vehicle registration, boat
registration, and tire sales to fund programs intended to reduce air emissions from
existing vehicles and to develop cleaner alternative vehicle fuels, was approved by the
Assembly Appropriations Committee on August 30 with a 12-4 vote.
Committee Holds Personal Income Tax Exclusion for Forgiven Mortgage Debt. SB
30 (Calderon), conforming to the federal extension that provides a personal income tax
exclusion for forgiven residential mortgage debt, was placed on the Senate Appropriations
Committee’s suspense file August 30.
The American Taxpayer Relief Act of 2012 extended the federal exclusion through 2013.
Because California does not automatically conform, California’s exclusion is available only
through 2012. Unless the Legislature extends the relief provisions, an individual who loses
a principal residence to foreclosure in 2013 must rely on other cancellation of debt
provisions, such as bankruptcy and insolvency, to obtain relief. (CalTax: Taxpayers often
don’t recognize all their state and federal tax differences when preparing their tax returns.
This is known as de facto conformity. The FTB may or may not catch these mistakes.)
Cutler Fix Approved by Committee. SB 209 (Lieu), the legislative “fix” in response to
the Second District Court of Appeal’s 2012 decision in Frank Cutler v. Franchise Tax
Board, was approved by the Assembly Appropriations Committee on August 30 with a 170 vote. The legislation would partially reinstate the income exclusion and deferral
provisions for gain from the sale or exchange of QSBS, as defined, for taxable years
beginning on or after January 1, 2008, and before January 1, 2013.
Bill Authorizing Sharing of Tax Information Approved, After Authorization for
Third-Party Vendors Is Removed. SB 211 (Hernandez), extending the sunset date,
from December 31, 2013, to January 1, 2019, of a program that authorizes the reciprocal
sharing of tax information between the Franchise Tax Board and city tax officials, was
approved by the Assembly Appropriations Committee on August 30 with a 12-4 vote.
However, the committee first removed CalTax-opposed provisions that would have
included “agents,” or third-party vendors, as people authorized to receive confidential tax
information from the FTB. CalTax opposed releasing confidential FTB data to private
businesses, and testified that this would be a serious breach of taxpayer confidentiality.
Hospital “Quality Assurance Fee” Approved by Committee. SB 239 (Hernandez),
revising and extending a “hospital quality assurance fee,” was approved by the Assembly
Appropriations Committee on August 30 with a 16-0 vote.
September 6, 2013
11
Committee Gives King-Size Vote to Mattress Tax Measure. SB 254 (Hancock),
proposing a mattress tax, and exempting mattresses manufactured by prisons and
purchased by the state, was approved by the Assembly Appropriations Committee on
August 30 with a 15-1 vote.
Panel Approves Tax Credit for Contributions to State’s College Fund. SB 284 (de
León), allowing a personal income tax credit, for taxable years beginning on or after
January 1, 2014, and before January 1, 2017, based on the taxpayer’s contribution to a
newly established College Access Tax Credit Fund that will be used to award Cal Grants,
among other things, was approved by the Assembly Appropriations Committee on August
30 with a 16-1 vote. The bill is linked to SB 285 (de León), and will become operative
only if that bill is enacted.
Special Insurance Assessments Clear Assembly. SB 476 (Steinberg), revising
current law that imposes on an insurer various special purpose assessments under an
insurance policy issued in this state by the insurer, was approved by the Assembly on
September 4 by a vote of 75-1. According to the author, “The bill is intended to ensure a
continuous and reliable source of funding for the various consumer protection programs
funded by the assessments, especially for the local district attorneys who obtain grants
from these programs.”
Tax Preparer Registration Measure Goes to Governor. SB 484 (Wyland), revising
the composition of the California Tax Education Council (currently a 501(c)(3) nonprofit
that pays Advocation Inc. more than $500,000 annually for “management services”),
cutting out smaller tax professional organizations, and authorizes CTEC to deny, suspend
or revoke a tax preparer registration for specified violations (the Franchise Tax Board
currently identifies violators and gets paid about $185,000 to $215,000 annually by
CTEC), and making other related changes to the Tax Preparers Law, was approved by the
Assembly on September 3 with a 59-14 vote. The bill now goes to the governor.
Tax Check-Off for Donations for the Arts Clears Legislature. SB 571 (Liu), allowing
taxpayers to make a contribution to the Keep Arts in Schools Fund on their income tax
return, passed both houses of the Legislature this week. The Assembly voted 74-1 on
September 3, and the Senate voted 35-2 on September 4 to approve Assembly
amendments to the bill. The check-off bill now goes to the governor.
Assembly Approves Study of Internet Consolidation of Tax Agencies. SB 582
(Knight), requiring the Franchise Tax Board, the State Board of Equalization and the
Employment Development Department to conduct a feasibility study on the development
of a single Internet site that virtually consolidates the three agencies, passed the
Assembly on a 77-0 vote September 4. The bill now goes to the Senate.
International Trade Strategies Measure Sent to Suspense. SB 592 (Lieu), requiring
the Governor’s Office to submit to the Legislature no later than April 2014 a strategy for
promoting trade at California’s ports, was placed on the Assembly Appropriations
Committee’s suspense file August 30.
Bill Appropriating Cap-and-Trade Revenue for Disadvantaged Communities Goes
to Suspense. SB 605 (Lara), appropriating up to $125 million in cap-and-trade revenue
for programs to benefit low-income communities, was placed on the Assembly
September 6, 2013
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Appropriations Committee’s suspense file August 30. Legislation chaptered in 2012 (SB
535, de León) requires a minimum of 25 percent of cap-and-trade revenue to be
allocated to low-income communities. The committee’s analysis questioned if SB 605’s
appropriation would count toward SB 535’s requirement.
Committee Holds Bill Relating to Information Provided in Environmental Impact
Reports. SB 633 (Pavley), providing that information in an environmental impact report
is complete, regardless of whether new information becomes available at a later date that
could not have been known at the time of the report, was placed on the Assembly
Appropriations Committee’s suspense file August 30.
Property Tax Changes Go to Governor. SB 825 (Senate Governance and Finance
Committee), making a variety of property tax law changes supported by the California
Association of County Treasurer-Tax Collectors and the California Assessors’ Association,
was approved by the Senate on September 3 with a 37-0 vote, and now goes to the
governor.
PUBLIC EMPLOYEE PENSIONS:
Governor Proposes Exempting Some Workers From Recent
Pension Reforms to Avoid Losing Federal Funds
On September 4, Governor Jerry Brown proposed legislation (AB 1222, Bloom) to exempt
unionized public transportation workers from his recent pension reforms, as part of a deal
to keep the federal government from withholding transportation funds from California.
The San Diego Union-Tribune on September 4 described the legislation as a compromise
with the Obama administration “that would keep $1.6 billion in federal transit dollars
flowing into California in return for temporarily exempting unionized public transportation
workers from being forced to contribute more to their pensions.”
The U.S. Department of Labor has threatened to cut off transit grants because California
allegedly violated federal law by including transportation workers in its 2012 public
employee pension changes.
The legislation proposed by the governor would exempt for one year thousands of transit
workers from the pension law while the courts decide whether the state acted legally. The
bill also would set aside up to $26 million to help transit agencies cover any immediate
grant losses.
A Department of Labor spokesman signaled that federal dollars will continue to flow as
long as the legislation becomes law.
Governor Brown said: “Federal transit money creates jobs, and this legislation keeps
those funds flowing while allowing the state to defend in court our landmark pension
reforms.”
September 6, 2013
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NEW WINE IN OLD BOTTLES:
Recently Amended Legislation of Interest
Tax and Fee Issues
Community Development Financial Institution Tax Credit. AB 32 (John Pérez),
proposing to increase the aggregate cap on the community development financial
institution tax credit from $10 million to $50 million, was amended September 3 to
authorize the state insurance commissioner to adopt, amend or repeal regulations to
implement the credit. The amendments also deem the initial regulations to be emergency
regulations, as specified. This is a majority-vote bill.
Omnibus Trailer Bill/Cleanup to Governor’s Economic Development Plan. AB 106
(Skinner), formerly a budget spot bill, was amended September 5 to, among other things:
•
Allow a sales and use tax credit for qualified equipment in former enterprise zones
and targeted tax areas, if the qualified equipment is purchased prior to repeal of
the credit and placed into service prior to January 1, 2015. Previously, equipment
that was purchased before the repeal of the credit, but was not placed into service
before the repeal date, was ineligible for the credit.
•
Modify the criteria for how the state Department of Finance will determine the
geographic areas that would be eligible for a hiring credit. It is unknown at this time
how these changes will affect eligible areas.
•
Designate the director of the Governor’s Office of Business and Economic
Development (GO-Biz) as the chair of the newly created California Competes Tax
Credit Committee. This committee will determine which applicants will be awarded
tax credits for investment in California. Additionally, the legislation provides that
lawmakers cannot serve on the committee.
These provisions are similar to those included in SB 100 (Senate Budget and Fiscal
Review Committee). This is a majority-vote bill.
Parcel Tax Proposal Removed From Bill. AB 418 (Mullin), which had provisions
allowing the San Mateo County Association of Governments to impose a parcel tax, was
amended September 5, in a gut-and-amend maneuver, to remove all provisions relating
to parcel taxes. The bill now requires the transfer, as a loan, $30,000,000 from the
Vehicle Inspection and Repair Fund to the Air Quality Improvement Fund. The bill would
appropriate to the California Air Resources Board $30,000,000 from the Air Quality
Improvement Fund for the Clean Vehicle Rebate Project and the Hybrid and Zero-Emission
Truck and Bus Voucher Incentive Project. This is a majority-vote bill.
New Proposition 26 Definitions. AB 483 (Ting), defining terms in Proposition 26 that
already are defined in the state constitution so that more levies and charges would be
exempt from Proposition 26, was amended September 4. The amendments add an intent
section and to provide that a local tax may not require voter approval if a specific benefit
is provided to taxpayers, even if an indirect benefit to a non-payor occurs incidentally and
September 6, 2013
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without cost to the payor as a consequence of providing the specific benefit to the payor.
This is a two-thirds-vote bill.
Investigating the Underground Economy. AB 576 (Manuel Pérez), creating the
Revenue Recovery and Collaborative Enforcement Team to collaborate on fighting the
underground economy with regard to tax evasion, was amended September 3 to add the
Employment Development Department to the multiagency team. This is a majority-vote
bill.
Property Tax Allocation: Orange County. AB 701 (Quirk-Silva), previously relating to
economic development, was amended September 4, in a gut-and-amend maneuver, to
revise property tax allocations in Orange County. This is a majority-vote bill.
Cutler Fix: Exclusion and Deferral of Gains From Sales of Small Business Stock.
SB 209 (Lieu), providing a 38 percent income exclusion for gains from the sale of a
qualified small business stock from 2008 to 2013 (in response to the action of the
Franchise Tax Board to apply the Cutler court decision retroactively), was amended
September 4 to prohibit imposition of penalties and interest on amount owed by taxpayers
due to the retroactive application. This is a two-thirds-vote bill.
Authorization for FTB to Give Confidential Tax Information to Private Businesses
Deleted. SB 211 (Hernandez), a Franchise Tax Board-sponsored bill to allow local
government to access confidential tax information, was amended September 3 to delete
provisions that would have allowed private businesses to access FTB’s confidential tax
information. This is a majority-vote bill.
Proposed Mattress Tax. SB 254 (Hancock), imposing a new mattress tax, was
amended September 4 to ensure that the impact of Article XIII C of the California
Constitution is addressed for local governments participating in the program. This is a
two-thirds-vote bill.
Increase in Rental Listing Service Fee. SB 269 (Hill), relating to prepaid rental listing
services, was amended August 30 to increase the fee for an application for a license as a
prepaid rental listing service from $100 to $125, and to increase the fee for each
additional location from $25 to $50. This is a two-thirds-vote bill.
Nonprofits Engaging in Political Activity: FTB Reports. SB 594 (Hill), relating to
political activities of nonprofit organizations, was amended September 4 to require a
reporting nonprofit organization that engages in campaign activity of specified amounts to
periodically disclose to the Franchise Tax Board, and post on its Internet site in a certain
manner, the identity and amount of each specific source or sources of funds it receives for
campaign activity, a description of the campaign activity, and the identity and amount of
payments the organization makes from the required separate bank account, as specified.
This bill authorizes the FTB to audit any reporting nonprofit organization, requires the FTB
to audit any reporting nonprofit organization that engages in campaign activity in excess
of $500,000 in a calendar year, and to issue a written audit. This is a majority-vote bill.
September 6, 2013
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Budget
Public Safety Performance Incentives. AB 84 (Assembly Budget Committee),
previously a budget spot bill, was amended September 5 to authorize each county to
establish a public safety performance fund and authorize the state to put up to $315
million each year into the fund. (CalTax: This is Senate President Pro Tempore Darrell
Steinberg’s answer to the governor’s plan to keep convicted felons in prison.) This is a
majority-vote bill.
Bond Fund Audits. AB 101 (Assembly Budget Committee), an 82-page budget trailer
bill relating to a large number of state programs, including education, was amended
August 30 to appropriate $136,000 to the Office of State Audits and Evaluations for the
costs of auditing Proposition 1D bond funds. This is a majority-vote bill.
WASTE, FRAUD & MISMANAGEMENT:
Your Tax Dollars at Work
Six Years After $1.2 Billion Approved for New Jails, None Have Been Completed.
In 2007, the Legislature and governor authorized $1.2 billion for jail construction, to
ensure that the state would not run out of space to lock up criminals. The Sacramento Bee
reports that the plan has yet to bear any fruit. “Six years after the state approved $1.2
billion for jails, not a single county has finished construction – and only five have started
building new cells,” the paper reported. “State and county budget woes during the
recession are partly to blame. … County officials, however, also cited a maze of
bureaucratic state hurdles that proved too difficult to navigate. ‘The red tape is
unbelievable,’ said Manuel Perez, Madera County’s corrections director.” (Source: The
Sacramento Bee, August 30.)
Fraudulent Medicare Claims Cost Taxpayers Billions Every Year. The federal
government estimates that Medicare fraud runs into the tens of billions of dollars
annually, and one veteran prosecutor says Southern California is a hotbed of fraudulent
activity.
“We’ve encountered numerous defendants who would never think to steal from any other
commercial business, but literally don’t see that much wrong from stealing from the
Medicare or Medi-Cal program,” Assistant U.S. Attorney Consuelo Woodhead said. “There
are many, many elderly people here, and there are many people on Medi-Cal, which is
California’s Medicaid program. Both of them are very vulnerable to fraud.”
The prosecutor said the taxpayers are likely to lose even more of their money to fraud
under the federal Affordable Care Act. “Fraudsters follow the money,” she said. “So
whenever or wherever more money is being spent, fraudsters will go there.” (Source:
Southern California Public Radio, September 2.)
Federal Judge Says Department of Veterans Affairs Misused Los Angeles Land. A
federal judge has ruled that the U.S. Department of Veterans Affairs has misused a 387acre piece of land in West Los Angeles that was intended to be used only for purposes of
providing healthcare, and instead has leased it for use as a baseball stadium, a private
elementary school, a hotel laundry and a film studio storage lot.
September 6, 2013
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U.S. District Judge S. James Otero said the department abused its discretion by leasing
land for purposes “totally divorced from the provision of healthcare.”
The American Civil Liberties Union of Southern California had sued on behalf of veterans
with post-traumatic stress disorder and brain injuries, arguing that the property should
have been used to house and help veterans. (Source: Los Angeles Times, August 29.)
POTPOURRI:
Symposia, Sightings, Salutes & Snafus
PwC Partner Bruce Daigh Dies in Motorcycle Accident. PricewaterhouseCoopers
Partner Bruce Daigh, a tax partner in the firm’s New York office, was killed September 4 in
a motorcycle accident while vacationing with friends in New Zealand. He was 57.
“Our thoughts and prayers are with his wife Nancy, his daughter Lauren, who is an
Advisory associate in our New York office, and his son Austin,” Partner Affairs Leader John
Carter said.
Mr. Daigh joined the Sacramento office of Price Waterhouse in 1979 and was admitted to
the partnership in 1989.
DeMaio Not Running for Mayor of San Diego. Former San Diego City Councilman Carl
DeMaio announced this week that he is moving forward with his campaign for Congress,
and will not run to fill the vacancy left by the resignation of Mayor Bob Filner, who
defeated Mr. DeMaio in last year’s mayoral election.
Mr. DeMaio’s decision leaves City Councilman Kevin Faulconer as the leading Republican in
the race for mayor. In a September 4 candidacy announcement, Mr. Faulconer said: “We
will bring back certainty for businesses ready to create jobs and economic growth. We will
eliminate bureaucratic waste so tax dollars are invested in public safety, parks, libraries
and improving our neighborhoods. And we will embrace technology and transparency to
enact real government accountability.”
Three major Democrats also have begun campaigning for mayor. First-term City
Councilman David Alvarez entered the race September 5, joining former City Attorney
Michael Aguirre and former Assemblyman Nathan Fletcher, a one-time Republican and
independent who recently registered as a Democrat. (Sources: San Diego Union-Tribune,
September 3 and September 5; Kevin Faulconer for Mayor news release, September 4.)
Siskiyou County to Pursue Secession; Fire Tax Among Reasons. Siskiyou County
apparently wants no part of California. On September 3, the Siskiyou County Board of
Supervisors voted 4-1 to pursue secession. The action seems to reflect public opinion, as
residents have criticized the state for overregulation, lack of representation, the fire tax,
and water rights.
Supervisor Brandon Criss cited the state’s use of 401 Water Quality Certifications not to
relicense the Klamath River dams. He also noted that the past two governors have not
visited the county.
September 6, 2013
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Supervisor Marcia Anderson said there is too much state regulation, and criticized
restrictions on Second Amendment rights. In reference to the transgender bathroom bill
that recently was signed into state law, Supervisor Michael Kobseff asked, “Are those guys
nuts down there?” He said not one contact has opposed the idea of secession.
Other northern counties will be asked to join the secession movement.
In 1941, there was a suggestion that Northern California and Southern Oregon counties
band together to form the state of Jefferson. World War II eclipsed the idea, but the idea
still is discussed. To split from California, Siskiyou County would need the approval of the
state Legislature and U.S. Congress. (Sources: Siskiyou Daily News, September 4;
Associated Press, September 4.)
Proponents File New Version of Initiative to Increase Medical Costs by
Increasing Cap on Pain-and-Suffering Damages. Sponsors of an initiative that seeks
to quadruple the maximum dollar amount a court can award for pain-and-suffering
damages caused by medical malpractice have introduced a new version of the measure
(13-0016, filed August 30). The new version has the same provisions as the earlier
version, which was filed in July.
In 1975, the Legislature and Governor Jerry Brown enacted the Medical Injury
Compensation Reform Act (MICRA), which capped pain-and-suffering damages at
$250,000. The initiative, supported by the Civil Justice Association of California, would
increase the cap to $1.1 million initially, with annual increases to adjust for inflation.
The initiative also would mandate drug and alcohol testing for physicians who work in
hospitals, would require doctors to use a state database to track patients’ prescription
drug histories, and would impose an annual “fee” on doctors to raise funds to pay for the
state’s cost of administering the new requirements.
The California Medical Association opposes the measure.
Restaurant Known as Hangout for Capitol Insiders Closes Its Doors. The Broiler, a
restaurant near the Capitol known as a hangout for legislators, legislative staff, journalists
and lobbyists, has served its last steak.
The Sacramento Bee’s food writer reported: “We arrived at the office … and heard the bad
news that the Broiler restaurant had unceremoniously closed sometime over the Labor
Day weekend. … Another iconic Sacramento restaurant has left the stage, along with its
‘Irish pub’ bar-lounge.”
The Broiler opened at J and 10th streets in 1950, and was popular with the political
crowd. It featured dim lighting and large booths – perfect for deal-making dinner
meetings – and what The Bee described as “old-school dinner dishes such a crab-andshrimp Louie, beef Wellington, steak Diane, Maine lobster and bacon-wrapped duck
breast.”
The restaurant was purchased by new owners in 1962 and 1985, and in 1999 the
restaurant moved to 1201 K Street. (Source: The Sacramento Bee, September 3.)
September 6, 2013
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WHO’S NEW IN STATE GOVERNMENT:
New Judge on the Orange County Superior Court
Judge, Orange County Superior Court: Timothy J. Stafford, a Democrat from Laguna
Niguel, was appointed by the governor to a judgeship in the Orange County Superior
Court. Mr. Stafford has been senior litigation partner at Wilson Harvey and Browndorf LLP
since 2013. He was an attorney and senior partner at Stafford and Associates from 1992
to 2012, and a partner at Stafford Ballog and Sullivan from 1986 to 1991. Mr. Stafford’s
long career as a lawyer began with the law firm of Ruston Nance McCormick and DiCaro in
1972. He fills a vacancy created by the retirement of Judge Richard W. Stanford Jr.
TAX TRIVIA:
If you go to a bar and order an “Income Tax,” what will be in the cocktail you receive
(assuming the bartender makes it according to the traditional recipe)?
(Answer on the last page.)
BLAST FROM THE PAST:
“Assemblyman William T. Bagley (R-San Rafael), Chairman of the State Assembly
Revenue and Taxation Committee, today announced the Committee will conduct a hearing
Tuesday, July 22, on Assembly Bill 1618 introduced by Bagley last week. The proposed
legislation would impose an excise tax on government-owned electric and gas utilities in
California and ‘would eliminate the discriminatory tax exemption now enjoyed by these
non-taxpaying utility businesses in California,’ Bagley said. AB 1618 would require
customers of the government agencies to pay ‘their fair share of the cost of California
state government, local government and the schools,’ he said. ‘It would equalize the
utility tax burden among customers of investor-owned and government-owned systems.’”
− News release from Assemblyman William T. Bagley, July 21, 1969
COMING UP:
Monday, September 9
LEGISLATIVE FLOOR SESSIONS
State Capitol, Sacramento
Subject: With the end of the 2013 legislative session approaching, both houses are
expected to hold lengthy floor sessions throughout the week. The schedule for the final
week of session typically changes frequently, and sessions may stretch into evening
hours. The official end of the 2013 legislative session is midnight on Friday, but legislative
leaders have indicated they may adjourn on Thursday. The Legislature is scheduled to
return to Sacramento on January 6 to begin the second half of the two-year session.
September 6, 2013
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SENATE BUDGET AND FISCAL REVIEW COMMITTEE HEARING
State Capitol, Room 4203, 11 a.m.
Bills on agenda:
•
AB 106 (Assembly Budget Committee), a budget trailer spot bill.
•
AB 108 (Assembly Budget Committee), omnibus trailer bill / cleanup to governor’s
economic development plan.
Tuesday, September 10
STATE BOARD OF EQUALIZATION MEETING
This meeting is being held in San Francisco during the finals of the America’s Cup yacht
race, at 505 Van Ness Avenue, in the auditorium, beginning at 10 a.m.
Agenda:
• Corporate and personal income tax appeals.
• Sales tax appeals.
• Adoption of lumber tax regulations relating to retailer reimbursement.
• Request for staff authorization to repeal and readopt a regulation on the property
tax assessment of petroleum refining properties.
• Approval to continue the sales tax exemption threshold in Regulation 6355 for coins
and bullion.
• Fire tax update.
• Hazardous substances tax and Occupational Lead Poising Program fee amount for
2014.
• Update on the BOE headquarters building and possible move.
• Staff-proposed 2014-15 budget change proposals:
o
Lumber tax: $684,000 for administration.
o
Tax gap II: $1,175,000 for outreach.
o
Intrusion detection and prevention: $852,000 to administer, maintain and
inspect network security solutions.
o
Managed care organization tax: $235,000 for administration.
The next issue of the CalTaxletter will be published September 13, 2013.
Tax Trivia Answer: The Income Tax Cocktail is composed of 1½ oz. dry gin, 2 teaspoons
of dry vermouth, 2 teaspoons of sweet vermouth, ½ oz. of orange juice and 2 dashes of
Angostura bitters.
September 6, 2013
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