Aerial view of Lake Shasta & dam with low water.

What’s more important: High-speed rail or water? Proponents of a proposed ballot measure would force voters to choose just that.

The measure would redirect $8 billion in unsold high-speed rail bonds and $2.7 billion from the 2014 water bond to fund new water storage projects, while restructuring the oversight of those projects and prioritizing water usage in the state Constitution — a move critics say will be confusing and prone to legal challenges.

Proponents of the measure are trying to capitalize on the unpopularity of the high-speed rail project and the popularity of the water bond to substantially boost the funding for water storage projects, which they say weren’t adequately funded by the 2014 bond.

“What this initiative does is pick up where (the water bond) left off and fully funds the other necessary projects that are widely accepted as needing to be done,” said Aubrey Bettencourt, the executive director of the California Water Alliance. “There’s no new projects listed in our initiative.”

A Hoover Institution poll late last year said that 53 percent of respondents would favor scrapping high-speed rail in favor of water storage projects, with just 31 percent against. The water bond passed with 67 percent of the vote.

Constitutional Amendment

The measure would also amend the state Constitution to prioritize the usage of water, making domestic usage the most important, then irrigation and then presumably environmental usage (which is not explicitly stated).

Bettencourt says the new language is necessary to straighten out ambiguity in the current law, where “the Legislature has created more than one first-priority use of water, leaving it to the courts to decide.”

But Tim Johnson, president and CEO of the California Rice Commission, says the proposed language “is extraordinarily unclear, very confusing,” and will likely end up in court. To illustrate, Johnson posed an ambiguous hypothetical situation: What happens when a farmer uses water to decompose straw, is that agricultural or environmental?

Power Shift

The new water agency would divert decision-making authority on these water storage projects away from gubernatorial appointees, as mandated in the water bond, to a nine-member panel elected by the water districts of the four regions with one at-large member, which would likely shift power to agricultural interests over environmentalists.

Johnson argues that the water bond water commission is set to allocate funds for storage projects around 2017 and a new structure would only delay the start of those projects.

“It’s a totally different standard and a totally different group of people to present it to,” said Johnson.

Johnson added that the measure is supported by just a few central valley “fat cats” who only want more water at the expense of everyone else. Bettencourt said there was broad coalition of supporters, with only a few larger farm interests and many small farmers.

Since the beginning of the year, the California Water Alliance’s initiative fund has received $321,000 from donors. Funding came from 16 donors, with an average contribution of $20,000. Four contributions were under $10,000 and one large donation of $50,000 was from a political action committee that’s received many small donations.

The measure is sponsored by Sen. Bob Huff, R-San Dimas, Board of Equalization member George Runner and the California Water Alliance.

An earlier version of this article incorrectly stated that there was no available campaign finance data for the measure’s proponents. We regret this error.

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.

Of course you should. And the dealer must refund you the money, or face fraud charges.

Not so the California government. If it takes from you a tax later found to be illegal, it doesn’t have to give back your money. No joke.

Board of Equalization Member George Runner is sponsoring legislation to end that and refund your money. According to his office:

“Two identical measures, AB 2510 (Wagner) and SB 1327 (Knight), would require the state to provide a full refund to all individuals who paid a tax later declared unconstitutional or illegal.”

Runner himself said:

“It is criminal that the State of California can keep money it illegally collects from its citizens. Anyone who in good faith pays what ends up being an illegal tax should get their money back. It’s as simple as that.”

It really is criminal, as he says. In fact, what’s needed is another law stipulating that, if the government takes a tax from you illegally, you don’t have to pay any taxes for the rest of your life. After all, private-sector crooks like Bernie Madoff get life in prison. Why not turn it around and help the government’s victims — for life?

By John Seiler

Call me Nostradamus. I have predicted numerous times on CalWatchDog.com that the Propsition 30 tax increase, combined with President Obama’s national tax increases, would drop tax collections from the rich. That has happened.

Board of Equalization Member George Runner just wrote:

“According to the Franchise Tax Board, the highest 1 percent of income earners will pay more than $2 billion less in 2013 than 2012. That’s not surprising. A recent survey found 75 percent of affluent Californians are planning actions to reduce their tax liabilities—and a quarter are considering moving out-of-state.”

The Prop. 30 tax increase was passed last November, retroactive to 2012. So rich folks got mugged. Most didn’t prepare. But for 2013, they know how hard they are going to be hit with that massive, 13.3 percent state top income tax rate; on top of the confiscatory 39.6 percent Obama federal rate. Total: 52.9 percent.

The rich have had time to take such precautions as sheltering income, or leaving. After Prop. 30 passed, I talked to several who said they were lighting out for Texas or another country. That’s what has happened.

Think of rich people you know.  And think of government tax agents you know, such as IRS people you talk to on the phone. Which is smarter? Case closed.

Remember how Obama and Brown insisted that the rich must “pay their fair share”? The rich agreed — by paying less.

Overall, for the total of all income groups, tax receipts are coming in at $2.1 billion less than last year, mainly the drop in what the wealthy pay.

Yet, the Legislature is going on another spending binge. Why? Basically, because Prop. 30 passed in November 2012, but the windfall of new retroactive tax cash has been collected in 2013. That won’t happen again. Meaning the Legislature well could have a couple of billion less to spend next year.

Here’s the full chart for all income groups from the Franchise Tax Board:

By Katy Grimes

While nearly every politician in America publicly decries the high cost of gasoline and fuel costs, most are also strangely silent about the soaring gas tax revenues that states are currently enjoying.

Californians always seem to pay the highest gas prices in the country. On top of record fuel prices, the state should be reporting how enriched it is by record gas tax collections.

Yet even with this record gas tax collection, Gov. Jerry Brown and state Democrats continue to claim that the state doesn’t have enough money and needs even more tax increases.

Having and eating your cake

Californians paid $8.3 billion to the state government in gas taxes last year. That’s the bad news.

The worse news is that the Tax Foundation just came out with a new report finding that Californians are not only overtaxed, we shoulder one of the highest tax burdens in the country. Should Brown’s Proposition 30 pass, increasing sales and income taxes, we easily slide into the number one spot for the highest taxed state in the nation.

“At a time when Californians could least afford it, our state and local tax burden was among the highest in the nation,” said former state Sen. George Runner, now an elected member of the state Board of Equalization. “This new report provides further proof that by every measure Californians are overtaxed.”

The Board of Equalization administers the motor vehicle fuel tax, diesel tax and 32 other tax and fee programs.

Adding to Californians’ overall tax burden, “Our latest numbers show that high gas prices resulted in a record windfall for government at the expense of California consumers,” Runner said. “It’s bad enough that California’s gas tax is among the highest in the nation. It’s even worse that gas taxes goes up whenever gas prices rise.”

California’s high taxes

California’s 2009 state and local tax burden of 11.8 percent of income is well above the national average of 9.8 percent. California’s top individual income tax rate is 10.3 percent. The corporate tax rate is an 8.84 percent flat rate. The state sales tax is 7.25 percent, with many counties adding onto that rate. And California collected $1,465 per capita in state and local property taxes in fiscal year 2009, according to the Tax Foundation.

The once-Golden State of opportunity and innovation now ranks 48th in the Tax Foundation’s State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Gas tax for gasbags

From July 1, 2011 through June 30, 2012, the Board of Equalization reported that it collected $6.9 billion in motor vehicle fuel taxes, up from $6.7 billion the prior year. Excise tax revenues accounted for $5.2 billion, while sales tax revenues accounted for $1.7 billion, Runner explained.

Over the same time period, the state collected $1.4 billion in diesel fuel taxes, up from $1.2 billion the prior year. Excise tax revenues accounted for $343 million, while sales tax revenues accounted for $1.1 billion.

California’s gasoline tax is 68.8 cents on every gallon of gasoline, and 77.1 cents on every gallon of diesel fuel, according to the American Petroleum Institute.

“What’s particularly concerning about these numbers is that they would have been even higher had the governor been successful in extending the higher sales tax,” said Runner.

Runner said that had Gov. Arnold Schwarzenegger’s 1 percent temporary sales tax increase from 2009 not expired on July 1, 2011, Californians would have paid an additional $96 million in diesel taxes last fiscal year.

Runner also explained that California’s 2010 fuel tax swap law would have required a larger motor vehicle fuel excise tax rate increase, costing Californians more than half a billion dollars extra in the 2012-13 fiscal year.

According to the BOE, these taxes and fees include:

* A federal excise tax of 18.4 cents per gallon;

* A state excise tax of 36.0 cents per gallon, up from 35.7 cents effective July 1;

* A sales tax averaging 3.12 percent when local taxes are included.

Runner said that it is important to note that the sales tax is calculated on the total price of the fuel sale including excise taxes, resulting in double taxation.

The breakdown for diesel is similar:

* The federal excise tax is 24.4 cents per gallon;

* The state excise tax is 10 cents per gallon, down from 13 cents effective July 1;

* The sales tax is 9.42 percent, up from 9.12 percent, plus applicable local taxes.

Race to the top tax bracket

“This is a race to the top, not in education, but in taxing. It shouldn’t take a genius to see how other states are doing it,” Runner said. “California’s economy is now full of man-made obstacles; that’s what caused the absolute devastation of this economic machine.”