TBEC Review / flickr

Restrictive new anti-tobacco ordinances are spreading across the San Francisco Bay Area like a cigarette-sparked wildfire. Northern California cities already have some of the toughest anti-smoking laws in the nation, but a raft of new laws and proposals take aim at “flavored” tobacco products such as menthol cigarettes and fruity mini-cigars.

Health officials argue that these flavored products are particularly appealing to teens, and that their bans are designed to keep young people from picking up an unquestionably dangerous habit. They also argue that the purveyors of menthol cigarettes, for example, target minority communities, and lead to ongoing health problems there.

The ordinances, however, share one trait that has advocates for tobacco “harm reduction” concerned. They make no distinction between combustible tobacco products – i.e., cigarettes, cigarillos, pipe tobacco and cigars – and smokeless products such as e-cigarettes and snus (Swedish-style spit-less tobacco that one places on one’s upper lip).

Tobacco “harm reduction” is a public health strategy designed to reduce the harmful effects of cigarette smoking by encouraging smokers to switch to far-less dangerous – not safe, but less dangerous – types of tobacco-related products. For instance, Public Health England, the United Kingdom’s main public-health agency, argues that vaping is 95 percent safer than cigarette smoking and therefore is a potentially beneficial alternative to smoking.

“About 40 percent of former and current adult smokers predict that removing their ability to choose flavors would make them less likely to remain abstinent or attempt to quit,” wrote Carrie Wade, the R Street Institute’s director of harm-reduction policy, in a recent Washington Examiner column. “While the vast majority of quit attempts are of the ‘cold turkey’ variety, e-cigarettes beat out both nicotine replacement therapies like the patch or nicotine gum and prescribed drugs like Chantix and Zyban.”

Vape liquids are not actually tobacco but mostly contain nicotine. They almost always are flavored. Many adult e-cigarette users prefer vaping with flavored liquids than vaping with those that have a tobacco flavor. These local bans on flavors, by the way, follow a recent statewide law that taxes vaping liquids at the same rate as cigarettes. The California Board of Equalization is currently working out the details of that taxation edict.

Wade described the essence of tobacco harm-reduction policy: make it easier for smokers to switch to smoking alternatives that cause fewer health-related problems. It might be ideal, health-wise if every smoker simply went “cold turkey,” but that’s not likely to happen, so harm-reduction advocates see vaping as a reasonable alternative. They see efforts to limit access to liquids and to boost taxes on them as policies that work against this harm-reduction approach.

Even California’s official Tobacco Education and Research Oversight Committee explained, in a public meeting earlier this year, that insufficient numbers of smokers participate in medically approved nicotine-replacement therapies. The committee, however, made no effort to distinguish between degrees of harm, and one member depicted vaping as just another form of smoking. In Bay Area cities and elsewhere, public-health officials argue that vaping is still dangerous – and they argue (despite contrary evidence) that it serves as a gateway for teens to actual smoking.

As a result of the new rules, it will become increasingly difficult for nicotine-addicted northern Californians to purchase and use vaping products. That’s particularly true as neighboring counties and cities embrace similar bans. Supporters of these bans admit that it is one of their goals to have such ordinances spread from one community to another, thus making it more difficult for people to simply go to a neighboring city to grab some vape juice.

Some proposals have become law, such as one in the Marin County city of Novato. Others are under consideration. The Contra Costa County Board of Supervisors is now considering a ban after one of its committees recently approved a new proposal. Likewise, officials in San Francisco and Oakland have also introduced flavor bans.

San Francisco Supervisor Malia Cohen’s public statements focus on the sale of mentholated tobacco products. She explains that 80 percent of African-American smokers use menthol products. Nevertheless, her proposal includes all flavored tobacco, which includes vaping liquids. Oakland Councilmember Annie Campbell Washington, who led a 2016 campaign to increase soda taxes in the city, has introduced a similar measure that includes vapor products in the flavoring ban.

Novato’s ordinance, which goes into effect January 2018, requires that all residential leases in the city include a clause calling it a “material breach of the agreement for tenant or any other person subject to the control of the tenant … to violate any law regulating smoking while anywhere on the property.” In other words, tenants can be evicted from their apartments not only if caught smoking – but if they or their guests are caught vaping.

The Contra Costa County health department justifies its proposal by stating that e-cigarettes contain nicotine, which is addictive, and includes various chemicals known to cause cancer and lung problems. But harm-reduction advocates don’t claim that vaping is totally safe, only that it is far safer than cigarette smoking.

Given the political bent of Bay Area cities and counties, it seems likely that most if not all of these proposals will eventually become law. The question remains whether in their zeal to improve the public’s health, these officials are embracing policies that will make actual smoking-related health improvements that much harder to attain.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Created to make California’s tax system work better, the Board of Equalization has found itself under a cloud of radical criticism, plunging it into a moment of extraordinary crisis. 

“At a chaotic budget hearing for an agency that collects a third of California’s taxes, two lawmakers said late Wednesday they don’t believe the Board of Equalization can be trusted to fix the accounting deficiencies and misuse of public resources that a recent audit described,” the Sacramento Bee reported. 

“I have no faith in the organization to adopt practices,” railed Assemblyman Phil Ting, D-San Francisco, who chairs the Assembly Budget Committee, according to the Bee. “You can adopt all the policies you wish. But I have zero faith that you will practice your polices because you have not demonstrated that.” His remarks, the paper added, “came at a meeting in which the Board of Equalization’s executive director refused to answer questions because he said he feared a lawsuit, Ting asked five state employees whether they leaked a copy of a critical audit to The Sacramento Bee and Ting read an anonymous email that accused the agency’s top lawyer of misleading him during the hearing.”

Official sanction

The heated controversy came to a head this month in the wake of a devastating state administrative report showing bad accounting of nearly $50 million in funds. “Citing a review that found widespread mismanagement at the state Board of Equalization, State Controller Betty T. Yee […] called for stripping the panel of responsibilities for tax administration and audit and compliance functions so it can focus on handling taxpayer appeals,” the Los Angeles Times explained. “Yee’s proposal came in response to an evaluation by the state Department of Finance that found board officials were improperly redirecting resources and employees to pet projects in their districts.”

According to the investigation, conducted by the department’s Office of State Audits and Evaluations, “concluded the elected tax board members are violating the California Budget Act, which requires that they get approval from the Department of Finance and notify lawmakers before they move revenue-generating staff such as auditors to other duties,” Bloomberg BNA reported. “The tax board also doesn’t keep track of staff hours or calculate the amount of lost revenue resulting from employees being redirected.”

“The violations skew the required information the board must provide to lawmakers under the Budget Act each year about costs and lost revenue collections due to those reassignments, the auditor said. Without accurate information about staffing, the Legislature can’t assess the effectiveness of the SBOE’s existing compliance efforts or be sure the tax agency’s cost-benefit ratios are accurate, the audit said.”

A tightening circle

The Board has weathered sharp criticism before, especially in recent years. But this time, few if any outside the Board itself have offered much of a defense. “In the 1990s, Gov. Pete Wilson, facing budget deficits, sought to merge the board with the Franchise Tax Board,” as the Fresno Bee editorial board noted. “Gov. Arnold Schwarzenegger took office in 2003 promising to blow up the boxes, and took aim at the tax boards. And yet the Board of Equalization survives because many legislators, thinking about the next election, hesitate to abolish an office that pays $142,577 a year.” 

For the Board, today’s trouble began in earnest two years ago, when heightened scrutiny from Sacramento began to close in. “Although the board was dinged in November 2015 when an audit by Yee’s office found that it mistakenly sent $47.8 million in sales tax revenue to the state’s general fund, the Finance Department’s newest audit revealed that the board has done little since then to stanch the bleeding,” Courthouse News observed. “The board is still struggling with its accounting, having revised its proposed allocation adjustment 11 times to correct for errors and omissions,” the site added. 

Testifying at a recent hearing of the Assembly Committee on Privacy and Consumer Protection and Select Committee on Cybersecurity, Howle said 73 of the 77 agencies she reviewed had inadequate or worse safeguards against hacking. Her three biggest concerns: the state’s court system, the Board of Equalization and the California Public Utilities Commission.

Howle’s remarks were countered by a representative of the Brown administration. The state Department of Technology’s chief information security officer, Michele Robinson, said Howle had exaggerated the state’s problems.

But lawmakers didn’t appear to accept Robinson’s defense of the state’s efforts. Assemblywoman Jacqui Irwin, D-Thousand Oaks, told Sacramento TV station KCRA after the hearing that she considered Howle’s warnings “very disturbing. …  We have 160 departments that are holding your private information. So Social Security numbers, addresses, medical information — yes, there is a risk for the typical Californian.”

Here is the key summary of Howle’s 2015 audit:

In the past few years, retailers, financial institutions, and government agencies have increasingly fallen victim to cyber attacks. Most recently, in June 2015 the federal Office of Personnel Management announced that a cybersecurity intrusion had potentially exposed the personal information of approximately 20 million current and former federal employees and other individuals. Given the size of California’s economy and the value of its information, the state presents a prime target for similar information security breaches. Its government agencies maintain an extensive range of confidential and sensitive data, including Social Security numbers, health records, and income tax information. If unauthorized parties were to gain access to this information, the costs both to the state and to the individuals involved could be enormous. However, despite the need to safeguard the state’s information systems, our review found that many state entities have weaknesses in their controls over information security. These weaknesses leave some of the state’s sensitive data vulnerable to unauthorized use, disclosure, or disruption.

But Howle didn’t just offer this general conclusion. She also specifically criticized the Brown administration:

Despite the pervasiveness and seriousness of the issues we identified, the technology department has failed to take sufficient action to ensure that reporting entities address these deficiencies. In fact, until our audit, it was not aware that many reporting entities had not complied with its requirements. To determine whether reporting entities have met the security standards, the technology department relies on a self-certification form it developed that the reporting entities must submit each year. However, the poor design of this form may have contributed to many reporting entities incorrectly reporting that they were in full compliance with the security standards when they were not. Specifically, we received complete survey responses from 41 reporting entities that self-certified to the technology department that they were in compliance with all of the security standards in 2014. However, when these 41 reporting entities responded to our detailed survey questions related to specific security standards, 37 indicated that they had not achieved full compliance in 2014. … The technology department was unaware of vulnerabilities in these reporting entities’ information security controls; thus, it did nothing to help remediate those deficiencies.

According to KCRA, a state task force created last year could turn in the first draft of a state government cybersecurity initiative this month.

The Howle audit knocking the state government’s failure to worry enough about hackers was one of six harsh reports she issued in a three-month span last summer, as CalWatchdog reported. Perhaps the most alarming report found that the state did a poor job tracking mentally ill gun owners, despite a previous 2013 audit that warned about the shortcomings of the state’s efforts.

AB567 “would allow the Board of Equalization and the local county assessor to disclose that a legal entity change in ownership statement has been filed or that the BOE has determined that the property requires a reassessment under legal entity change in ownership law,” said Gipson on his website.

Currently the BOE is prohibited from providing change in property ownership information to the public, according to the bill’s legislative analysis.

That’s despite the fact that “in recent years, media reports of the disparate consequences of reassessing property owned by legal entities and property owned by individuals have resulted in an increasing number of inquiries from the public whether specific sales, mergers, acquisitions, and buyouts reported by media trigger the reassessment of a legal entity’s real estate holdings,” the analysis said.

The bill also allows the disclosure if the change in ownership filing was prompted by the Franchise Tax Board based on information collected from the taxpayer’s state income tax return.

The analysis by Oksana Jaffee said that the disclosure would be “very limited”:

It does not require a disclosure of any factual information reported on the taxpayer’s state income tax return, such as the amount of gross receipts or sales, gross profit, the amount of credit carryovers, income subject to apportionment, or the amount of each individual credit claimed on the tax return.

 

Furthermore, no actual information reported on a CIO [change in ownership] statement, other than the fact that the statement has been filed, may be disclosed to the public. Detailed financial information reported in the state income tax return or CIO statement will remain confidential.

Currently it’s difficult to find out about a change in property ownership because “discovery relies heavily on self-reporting, which does not always result in 100 percent compliance,” the analysis said. It quotes the BOE’s analysis that “delayed transparency undermines the public trust in the current property tax system as it applies to legal entity changes in ownerships and fuels the perception that laws are inequitable and should be changed.”

Jaffee’s analysis concludes with an argument for AB567:

Transfers of real property are recorded and are already public information. Thus, it is unclear why a disclosure of the mere fact of filing a CIO statement by a legal entity, or the fact that the filing was prompted by the information collected by the FTB, would undermine public trust or should remain confidential.

Gipson made his case for the bill on the Assembly floor May 28:

AB567 will increase accountability in assessed property values by allowing the State Board of Equalization to provide timely and basic information to the public. Right now the county assessors are required to make public reassessed property values on the assessed role.

 

However, when a business files paperwork to trigger reassessment, the State Board of Equalization is required to keep information confidential – I want to underscore confidential – even though this information will eventually be made public by current law today.

 

As a result, when the public calls upon the State Board of Equalization to ask about specific sales or merger, the State Board of Equalization cannot provide any information. AB567 will allow the State Board of Equalization to disclose only the necessary paperwork as filed and triggered by the reassessment.

 

What will be shared by AB567 is actually less than what is required to be disclosed by the county assessor’s office today. This modest bill will improve communication between the public and the State Board of Equalization, and help ensure our tax laws are fairly applied to the public’s benefit.

Assemblyman Phil Ting, D-San Francisco, also spoke in favor of the bill:

As a former assessor I dealt with this issue very specifically. Often times when there are changes of ownerships that happen, they are reported on your tax returns, which obviously are delayed for a year. That information is then transferred from the Franchise Tax Board to the BOE, and doesn’t get to the county assessor, it could be, for almost two years.

 

So that information, which is actually public information necessary for us to make sure that assessments are done properly, aren’t getting to the county assessors in a timely fashion. This will help increase transparency, help speed it up. It does not impact privacy at all. This is public information and it will just get to the right source at the right time.

But Republicans who spoke against the bill don’t consider it so benign. Assemblyman Travis Allen, R-Huntington Beach said:

Very simply, according to the author, the purpose of the bill is to allow anyone who believes that a possible change in ownership has occurred to call the Board of Equalization and inquire about the ownership of a property. And after the BOE receives the inquiry and finds that this entity has not filed a certain form, the BOE can then request that entity to file the form and then evaluate whether or not a change in ownership has occurred.

 

I know that sounds a little complex. But essentially what that means is that anybody can call up the BOE and potentially harass a business. And the reason they would be doing this is potentially to get them to pay higher taxes. This opens itself to potential abuse. The implementation could cause problems in California.

Assemblyman Donald Wagner, R-Irvine, agrees that AB567 will open up businesses to harassment:

You get to go and say to the BOE, “Hey, I think there was change in ownership in this business.” Maybe that business is a competitor of yours. Maybe that business has got some information that would otherwise appear on these forms that you’d like to dig into and find out about maybe for your own competitive purposes, maybe for nefarious purposes, maybe for purposes of harassing the business.

 

You don’t even need a good faith belief to make the allegation, as I understand the bill as it is in print, to require the form to be filed. So now your competitor is filing forms with the BOE, public forms with the BOE. The board is now tasked with evaluating whether or not there’s been a change in ownership when perhaps there’s been absolutely no underlying transaction whatsoever.

 

Why do this? You do this to harass other businesses, you do this maybe because you’re trolling for a lawsuit. You do this for all sorts of reasons that, rightly as the law exists today, you can’t do. So there’s no evidence in the hearing that I sat through that this is a great big problem and lots of businesses are escaping change of ownership filing requirements.

 

Every small business in the state has had enough of our forms. This is one more form from what is merely a fishing expedition and absolutely no explanation of the problem we are trying to solve. Let’s not go there. This is an easy no vote.

The bill passed 47-29 along party lines in the Assembly and will next be considered by the Senate. The California Taxpayers Association and a coalition of business groups sent an opposition letter to the Senate Governance and Finance Committee on June 1. It states:

There is no valid reason to begin violating taxpayers’ fundamental protection of keeping their tax information confidential. The bill would deteriorate taxpayer privacy by allowing confidential tax information to be released to the public; and would allow the information to be released without tax officials first making a proper determination regarding a property owner’s taxes.

 

This bill would not promote “transparency,” because no public interest would be served by allowing tax officials to release confidential tax information regarding changes in ownership. In fact, an erosion of trust would occur, as the public is acutely aware that tax agencies currently must safeguard their tax information, and this bill would break that trust.

 

Oftentimes, no change-in-ownership statement is filed because no change in ownership occurred. In these cases, what purpose is served in disclosing to the public that no form was filed?

 

More and more tax information that should remain confidential is indiscriminately made available to the public. The benefits to be derived from such disclosures are speculative at best, and do not warrant taking the risk of inaccuracies or other adverse consequences that may undermine public confidence in the tax system.

The bill will next be considered by the Senate Rules Committee for assignment to a policy committee.

Photo credit: 401kcalculator.org

Placing a tax on business services in California has the potential to raise an additional $122.6 billion annually for state and local governments, according to a recent Board of Equalization study. A services tax could become a reality if Senate Bill 8 is approved by the Legislature and signed by Gov. Jerry Brown.

Although SB8 has yet to be considered by a policy committee, legislators are keen to see increased funding and stabilized revenue for state programs, while leaders in California’s $1.45 trillion services industry are panicking and threatening to leave the state. The BOE is concerned about the major bureaucratic expansion needed to administer the new tax.

The bill, dubbed the “Upward Mobility Act” by its author Sen. Bob Hertzberg, D-Van Nuys, is actually intended to increase tax revenue by only $10 billion. It proposes to dispense $3 billion of that to K-14 education, $3 billion to local governments, $2 billion to higher education and $2 billion to earned income tax credits for low-income residents.

In addition, the bill states that it “would enhance the state’s business climate, create jobs, and incentivize entrepreneurship by evaluating the current corporate income tax to determine whether it is meeting its intended purpose while at the same time linking changes to a more reasonable minimum wage.”

The bill exempts health care and education services as well as businesses with less than $100,000 in annual gross sales. The services tax would not replace the state sales tax, which brought in $48 billion in 2013-14 — equivalent to $1,300 for each California resident, according to the Legislative Analyst’s Office.

According to the bill, a services tax is needed to keep up with the changing nature of the California economy, and provide a better balance and less volatility in government revenue:

“Over the past 60 years, California has moved from an agriculture- and manufacturing-based economy to a services-based economy,” the bill said. “As a result, state tax revenues have become less reliant on revenues derived from the Sales and Use Tax on goods and more reliant on revenues derived from the Personal Income Tax.

“In 1950, the Sales and Use Tax comprised 61 percent of all state revenues; today, it accounts for about 30 percent. The Personal Income Tax accounted for 12 percent of total state revenues in 1950; today, it accounts for more than 60 percent.

“Moreover, California’s General Fund tax collections are heavily dependent on the earnings of its top earners. This has led to dramatic revenue swings year over year … [which] have led to the suffering of California’s residents.

“Essential services, such as health care and child care for low-income families, were cut at a time when they were needed most. In addition, the state cut billions of dollars to education, including adult vocational and literacy education, which could have helped low-income families recover from the recession.

“Relying on the wealthiest taxpayers to support California’s needs is outdated and dangerous fiscal policy. Not only does it increase the uncertainty of tax collections, but there is evidence that California’s high tax rates may be driving high income earners out of the state, which only deepens revenue shortfalls.”

Business services comprise 80 percent of the economy today, according to the bill. Exempting them creates inequities; for example, taxing the purchase of TurboTax software but not taxing H&R Block.

The bill seeks to make three changes to the tax code:

• Broaden the tax base by imposing a sales tax on services to increase revenues.
• Enhance the state’s business climate and incentivize entrepreneurship and business creation by evaluating the corporate income tax to determine whether it is meeting its intended purposes, including whether it is borne equitably among California’s businesses and what impact it has on the business climate, while at the same time linking changes to a more reasonable minimum wage.
• Examine the impacts of lowering and simplifying the personal income tax while maintaining progressivity. The measure’s goal is to reduce personal income tax rates for low-and middle-class-income households so that families earning $100,000 pay only $1,000. The revenue reductions would phase in when new revenues replace revisions to the personal income tax and corporate tax.

The Board of Equalization was asked by the Senate Governance and Finance Committee, which Hertzberg chairs, to analyze the services tax. On April 14, BOE staff issued its $122.6 billion revenue estimate along with a fact sheet listing numerous concerns about the implementation of the tax. Those concerns include:

• The BOE’s operations will be significantly impacted. The BOE currently has over 1 million registered taxpayers who report sales tax on tangible personal property sales. Extending a broad-based tax on service providers’ sales could add millions of additional taxpayers — the largest expansion of BOE’s scope and role since sales and use tax was first established in the 1930s.
• Extensive outreach and taxpayer educational efforts would be necessary. A broad-based tax on services would require mass notification, educational efforts and outreach services in a short period of time.
• Adequate lead time is critical. [A] 12-month lead time would NOT provide sufficient time to prepare for and administer a broad-based tax.
• Definitions of taxable and nontaxable services must be clear and comprehensive.
• A tax on certain services provided to or by interstate businesses raises uncertainties in determining the portion of the service performed in California, and any proposed legislation should sufficiently address this issue. For example, what portion of the charges for a national advertising campaign would be subject to a proposed tax in California?
• Different tax rate on sales of services and sales of goods adds complexity.
• The financial impact on service providers who would be required to register and report sales tax cannot be minimized. It would be necessary for service providers to maintain point-of-sale systems, or similar software, to account for and properly remit sales tax. The cost for such systems would cause significant hardship in many cases.
• As significant consumers of services, all levels of government would be impacted by a tax on services.
• Potential for referendum or repeal. If a tax on services is suspended or ultimately repealed, the state may not recover costs associated with the expansion. Four states — Florida, Massachusetts, Maryland and Michigan — all enacted and then later repealed a tax on services.
• “A sales tax on services would dramatically grow the state’s multi-billion dollar underground economy, requiring greater investments of time and resources to combat it by the BOE and other state and local government agencies.”

At the BOE’s April 28 meeting, several board members expanded on those concerns. Board member Diane Harkey said she’s concerned about trying to enforce the tax on small businesses. “I for one don’t want the BOE to once again be hunting down all the little guys to try to eke a few dollars out of them,” Harkey said.

“So I’m not real pleased with this. I think it’s going down a path that, unless we totally overhaul all taxes in the state, this probably doesn’t work. And I think we’ll build up a ton of opposition. I do appreciate your study. But in reality, the take would not be that [much] in real terms. I think we’d be gathering sufficiently less.”

Business leaders have expressed their concerns to Harkey.

“They were very panicked about this bill,” she said. “[One] industry representative said, ‘We’re planning expansion here and … we’re not going to go forward if this is going to happen. People watch California. And, you know, this academic discussion we’re having could very dramatically affect capital investment.”

Board member George Runner is concerned that the BOE might have to quadruple its staffing to 20,000 employees to deal with an additional 2.5 million businesses paying the services tax. But, he said, the BOE analysis is a good starting point for a discussion of the impacts of the tax.

“I look at this as just base information,” said Runner. “And then it’s going to be up to the legislators down the street to figure out how to narrow the bill. I think, as Sen. Hertzberg has said, he’s got some thoughts in his head in regards to what [services] he’s going to include and exclude.

“And I think the next discussion that’s going to take place is who’s in and who’s out. I’ve heard from lots of folks in the industries in terms of who are concerned about it, feeling like this gives them something, some real meat for them to deal with it.”

Board member Jerome Horton said he hopes legislators will not focus on taxes simply as revenue generators.

“If you look at what I believe the initial purpose that the founding fathers had when it came to taxation, was to modify the behavior,” he said. “If the behavior that we want in California is to create jobs, if the behavior that we want is to address poverty and those things in our society, I believe we can find a consensus in order to be able to fund that.

“Part of the challenge, I think, is there’s folks who fundamentally believe that the money isn’t spent right, and the return on the investment isn’t there.”

Those folks include the California Taxpayers Association, whose fiscal policy director, Therese Twomey, has dissected the idea of taxing services.

“In addition to problems related to competitive disadvantages, job loss and tax administration, taxes on services raise a host of other concerns, including increasing costs for government, disproportionately impacting small businesses, tax pyramiding, etc.,” she said in a CalTax newsletter.

Hertzberg responded to the BOE analysis in a press release.

“This landmark study confirms that California’s economy has undergone a revolution,” he said. “Eighty percent of California’s economy is now providing services, not goods, and most of these services are untaxed, making California more dependent on personal income taxes, which fluctuate year to year. It is that dependence on an unstable revenue source — not high taxes — that threatens our state’s economy.”

He noted that the BOE estimate overstates the revenue expected from his bill because the estimate includes education and health-care services, which the bill excludes. “Details about SB8 will continue to unfold during the year; its first policy hearing has not yet been set,” he said.

Hertzberg commented on the study results, “California’s economy has changed from one that had been dominated by making goods to today where 80 percent is producing services.”

Hertzberg’s plan, Senate Bill 8, would tax services as part of a restructuring plan and raise an additional $10 billion in tax revenue.

In response to the study, Board of Equalization Vice-Chair George Runner said,  “I’d consider a broader sales tax only if it’s part of revenue neutral tax reform, such as abolishing California’s income tax and the Franchise Tax Board, along with other taxes that destroy jobs. … The last thing overtaxed Californians need is another tax.”

Runner opposes Hertzberg’s proposal.

There will be plenty of time to get into the debate over service taxes. However, it should be noted that the $122.6 billion the service tax could supposedly raise is not only larger than the current General Fund budget of $113 billion, but almost $10 billion larger. In other words, a tax on services as outlined in the study could replace the General Fund revenues and get the additional $10 billion that Hertzberg is looking for while eliminating the income tax, state sales tax and corporate tax.

Hertzberg’s proposal would not attach a service tax to all the items delineated in the BOE study, pointing out education and health care as tax-free services.

If not all services are taxed the door would be open for other services and industries to seek exemptions from the tax — a potential field day for the state’s lobbyists.

Sacramento – The California State Board of Equalization (BOE) will consider lowering the excise tax rate for gasoline by $0.075 for Fiscal Year (FY) 2015-16 during its February 24, 2015 meeting in Culver City.

Since 2010, the “fuel tax swap” law has required the Board to adjust this tax rate by March 1st of each year. If adopted, between July 1, 2015 and June 30, 2016, the excise tax rate on gasoline will be $0.285 per gallon. The current excise tax rate of $0.36 is in effect until June 30, 2015.

The excise tax on gasoline pays for public road improvements and mass transit. In FY 13-14, the BOE collected nearly $5.8 billion for the Motor Vehicle Fuel Account, Transportation Tax Fund. Sales tax funds a variety of state and local programs.

If the tax cut happens, it could offset the cap-and-tax trade increase that went into effect on Jan. 1.

Although there were warnings the cap-and-trade tax increase could be as much as 75 cents a gallon, it’s turning out to be more like 10 cents.

So if the BOE follows through, it will counteract most of that.

As of today, according to GasBuddy.com, California has the country’s second highest average gas price, at $2.80 per gallon. Highest is Hawaii, at $3.02.

Lowest is Utah, at $1.92, followed by Idaho, $1.93; Montana, $1.97; and Wyoming, $1.99 — all Western neighbors. Although Nevada is fairly high, at $2.44.

Big competitor Texas is $2.10.

Adding to the complications, Gov. Jerry Brown’s 2014-15 budget would pay for a five-year study on the building, rather than remodel the known problems, or move the BOE out. Some say the governor doesn’t want to incur any new debt, which is understandable. But this problem is not getting any better by sitting… and molding.

In October, the DGS sent out a “request for information” for a study on where BOE employees could move. The BOE said it needs between and 750,000 and 800,000 square feet of office space to house all of its employees. BOE employees are currently in five different locations.

There is no telling when this will be resolved. It’s a mess, and a perfect example of an unnecessarily complicated government bureaucracy, which cannot even figure out how to fix the existing BOE building, or move employees elsewhere. Dickinson’s office said he will keep on trying.

Assemblyman Roger Dickinson, D-Sacramento, has introduced a measure to ban online sales of all tobacco products, including cigarettes, cigars and e-cigarettes. Dickinson says the bill, Assembly Bill 1500, would help state regulators combat teen smoking.

“Although great progress has been made to curb teen smoking, the use of e-cigarettes and the internet availability of tobacco products pose a serious risk,” Dickinson said in a press release. “AB1500 will make it impossible for young people to order e-cigarettes or other tobacco products online thereby safeguarding them from the dangers of smoking.”

Although Dickinson has made teen smoking central to his media pitch, the real battle over AB1500 is over the dollars and cents at stake in online cigarette sales. Unsurprisingly, state tax collectors are anxiously hoping new regulations will boost state coffers.

Online sales result in tax ‘breakage’

Dickinson’s bill, which blocks a segment of the online marketplace, is expected to generate $24 million in tax revenue for the state. At first blush, that might sound a bit counterintuitive: How could a bill that bans commerce generate more revenue for the state?

Smokers who buy tobacco products online won’t quit smoking. Consequently, the ban is expected to redirect online sales to brick and mortar stores. With online transactions, there’s more tax “breakage,” sales and use tax that is either never charged or collected.

“By requiring purchases at brick-and-mortar retailers, it will ensure that tax revenue is collected,” said Taryn Kinney, Dickinson’s communications director. “The purpose of the bill is aimed at limiting access to tobacco products for teenagers but the additional tax revenue is an added benefit.”

The state Board of Equalization, which administers the state’s sales and use tax laws, has yet to take a position on the bill but acknowledges the difficulty in tracking e-commerce.

“The BOE has no formal revenue estimate for eCigarette sales,” said Venus Stromberg, a spokeswoman for the Board of Equalization. “Since there is no excise tax on these products, and no licensing requirements, BOE does not track these purchases.”

Although the Board of Equalization doesn’t track online purchases, it has implemented a program, the Cigarette and Tobacco Product Internet Program, to pursue use tax from consumers that purchase tobacco products from out-of-state Internet retailers. Federal laws also assist the state with this program.

“Currently, federal laws such as the Jenkins Act and PACT Act assist with tax collection by requiring out-of-state sellers to submit reports to each state’s tax agency of their cigarette and certain tobacco sales made to residents,” Stromberg said.

State taxes on cigarettes are hefty

With nearly a dollar of taxes on each pack of cigarettes, state tax collectors have reason to track down online sales. Of the 87 cents in taxes per pack of cigarettes, the Board of Equalization says that 50 cents goes towards programs that  “encourage proper childhood  development, including the  development of professional and  parental education and training,  informed selection of childcare,  development and education of  childcare providers, and research  into the best practices and  standards for all programs and  services relating to early childhood  development.”

The remaining tax funds are distributed with 25 cents for tobacco-related health education programs and disease research; 10 cents for the state’s  General Fund; and two cents for the Breast Cancer Research Fund.

“With proper outreach to consumers, eCigarette purchases would be redirected to brick and mortar stores in CA where there is oversight with regard to compliance with the tax laws,” said Stromberg, a Board of Equalization spokeswoman.

Unique tax issues behind retailers vs. onlight fight

Online sales of tobacco products, just like all e-commerce, pose unique tax issues. Right now, the amount of taxes owed to the government is the same for online sales and brick and mortar transactions. The difference lies with the reporting and collection obligations. Retailers collect sales taxes at the point of sale, whereas with online sales, consumers are obliged to report use taxes.

Earlier this year, U.S. Sen. Lamar Alexander, R-Tenn.,  vowed to reintroduce legislation that would allow states to require online retailers to collect sales taxes. Known as the Marketplace Fairness Act, the bill would switch the tax obligation from consumers to online retailers. It is backed by some business groups that represent brick and mortar retailers.

Critics of the Marketplace Fairness Act say the legislation would force small online businesses to adhere to thousands of tax regulations.

“For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities,” the Wall Street Journal cautioned in an editorial against the bill. “New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.”

In California, online retailers have largely given into the online tax push. In 2012, Amazon, the world’s largest online retailer, cut a deal with Gov. Jerry Brown to begin collecting sales tax on transactions involving California residents.

Dickinson’s bill once again makes California a leader in the effort to restrict online commerce. His spokesperson says it’s justified to treat tobacco products differently from other products and impose an outright ban on online sales.

“Tobacco products should be treated differently because each day in the United States, nearly 4,000 under 18 smoke their first cigarette, and an estimated 1,000 youth in that age group become new daily cigarette smokers,” said Kinney, Dickinson’s communications director.  “The Internet is currently the only way a minor can purchase tobacco products in California that does not require age verification.”

Thus far, the industry isn’t weighing in on the issue. The Cigar Association of America, Inc. declined to comment for this story.

Harkey and Wyland are both running for the Orange County/San Diego County/Inland Empire Board of Equalization seat now held by Michelle Steel that is a good bet to remain in GOP hands. It has a slight Republican registration edge. Also expected to run are three Orange County pols: Democratic state Sen. Lou Correa and former GOP state lawmakers Tom Harman and Van Tran.

But the key to understanding Harkey's suit isn't her pending political fight with Wyland. It's her thin-skinnedness, if that's a word. Let's look at some of her dealings with the media that reflect her perception of a world in which she is an unjustly put-upon heroine:

'Totally unfair and extremely biased'

This is from O.C. Register political reporter Martin Wisckol's blog of Oct. 19, 2007:…

“Diane Harkey left me a phone message today (that was Oct. 17), saying the blog was singling her out and posting unflattering photos. You can see the two photos I’ve used of her here.

“I’m not that unphotogenic,” she said. “I think it’s totally unfair and extremely biased.”

Then came Martin's story of March 17, 2009, which showed Harkey had been misleading and inconsistent in describing her involvement with her husband's troubled financial firm.

Victim of 'slander'? Or trapped in denial?

At that time, I interviewed Harkey, who at that point represented a big chunk of northwest San Diego County, for a Union-Tribune editorial that was published March 22, 2009. Here's part of the editorial; the image is from an extensive website on the Harkey scandal:

 “… Her husband, Dan Harkey, runs Point Center Financial, an Aliso Viejo company that lends investors' money to land developers. It is the target of a Securities and Exchange Commission probe. It is also facing a lawsuit from 53 investors who say Dan Harkey used their money for dubious loans – and to fund his wife's rapid rise in Orange County politics. Campaign disclosure firms show Diane Harkey has spent $2.1 million in personal funds since 2004.

“However, the suit presents no evidence for the alleged diversion of money. An aide to Diane Harkey told The Orange County Register last month that the campaign funds came entirely from the wealth she had accumulated in a 30-year banking career. Both Harkeys said she had never worked for Point Center. …

“But a follow-up Register report said Diane Harkey had been listed as a Point Center official in state documents and in campaign disclosure forms for two political donations to other GOP candidates. Harkey's own 'statement of economic interests' said she received more than $100,000 in annual income from a rental property that happens to be Point Center's headquarters. She also appears to be backing away from her claim that she didn't use her husband's money for political purposes.

professional writing service

“Plainly, this matter deserves coverage. Yet in a phone interview, Harkey told us our questions amounted to 'slander'; that news accounts of the mess were all 'libel' written by journalists determined to 'massacre' her family; and that she was the victim of a sexist double-standard.

“Given the holes in her initial story, this is a startling approach for Harkey to take. … If she wants to clear her name, step one is to get out of the denial stage of her grief.”

Routine budget questions an 'unbelievable grilling'

I wrote more about Harkey in a March 23, 2009, blog item for the Union-Tribune:

“How is it possible Harkey managed to get elected to any job, much less the Assembly? She has no conception of her role; of the proper role of the media; or of her responsibilities to the media. I have another example to offer.

“Last fall, the U-T editorial board met with nearly two dozen candidates for state Assembly and Senate seats. I asked every last one how they would balance the state budget and was ready with follow-up questions seeking specifics if they offered vague answers or it's-that-simple Ross Perot-style sophistry. Guess who thought that amounted to unfair treatment? You got it.

“Last week, after I had an unproductive phone interview with her, I wrote Harkey to say I needed to get fuller answers so I could understand her position. Part of her response was to harken back to the candidate interviews: '… you have a personal bias in my case. I recall the unbelievable grilling you gave me when I interviewed with your editorial board.'

“I asked the same questions of everyone, with the same follow-ups to all the evaders. To Diane Harkey, it was an 'unbelievable grilling.'

“Here's the kicker: The U-T ended up endorsing her, and I wrote the editorial! Despite my 'bias'!

“South O.C. and Oceanside, you have my condolences. There doesn't seem to be much of a learning curve on display with your Assembly rep.”

Incumbent Steel probably regrets Harkey endorsement

Four years later, that still seems true. It's just strange for Harkey to think her scandal isn't fair game for her political rivals; that the amazingly personal details in her lawsuit against Wyland will play well; and not to realize that her lawsuit has put a vast spotlight on Wyland's remarks that might otherwise have been largely ignored.

Michelle Steel, the incumbent, also may be regretting endorsing Harkey on Sept. 5.