CA sales tax dips, tax burden rises

Good morning! It’s Friday. Let’s get down to business. 

“Four years ago, voters approved Proposition 30, which raised the income tax significantly on the wealthiest Californians and raised the sales tax a tiny bit on everyone,” Capital Public Radio recently recalled. “That quarter-of-a-cent increase equated to paying an additional $0.01 on a $4 coffee; $1 on a $400 television; and $100 on a $40,000 car.” 

But on Election Day 2016, that changed. “Voters extended Proposition 30’s income tax increases in [November’s] presidential election with Proposition 55 — but that initiative allowed the Prop. 30 sales tax hike to expire.”

The shift means California’s sales tax is the state’s only tax to be decreased this year, from 7.5 percent to 7.25 percent.

As the U-T reported, “Some local jurisdictions tack on their own assessments, so residents in certain areas will still pay more than the statewide rate.” In certain parts of the state, like the San Francisco Bay Area, voters allowed substantial increases. 

CalWatchdog has more. 

In other news:

• Health Care: “As Washington grapples with health care policy again, the head of the 185,000-member National Nurses United is turning her attention to a seemingly unlikely advocate for a single-payer system. ‘The one I’m counting on the most is Trump,’ RoseAnn DeMoro said. DeMoro, who serves as executive director of both the Oakland-based National Nurses United and the California Nurses Association, told POLITICO California on Thursday that she is ‘disgusted’ with Democrats like House Minority Leader Nancy Pelosi and believes that the president-elect may actually get action.” Politico has more. 

• Minimum wage: “San Diego is cracking down on several restaurants that city officials say are adding surcharges in misleading and illegal ways to help cover increased labor costs from the minimum wage hike that took effect Jan. 1.” The San Diego Union-Tribune has more. 

• Budget: “But recent events in California and the nation suggest the fiscal proposal Brown unveils next week could be his most circumspect to date, even after voters in November approved billions of dollars in additional taxes,” reports the Los Angeles Times. 

• Obamacare: “House Majority Leader Kevin McCarthy has written to Gov. Jerry Brown and the leaders of other states soliciting their input for replacing Obamacare.” The Sacramento Bee has more. 

Legislature:

• Back on Monday. 

Gov. Brown:

• On vacation in Hawaii until Sunday, according to The Sacramento Bee. 

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Assembly Bill 464: Transaction and use taxes: maximum combined rate. Authored by Assemblyman Kevin Mullin, D-San Mateo, this bill would:

• Raise the local sales and use tax limit from 2 percent to 3 percent

Senate Bill 3: Minimum Wage: adjustment. Authored by state Senator Mark Leno, D-San Francisco, this bill would:

• Increase the minimum wage to $13 per hour by July 1, 2017
• Require annual increases beginning July 1, 2019

Senate Bill 32: California Global Warming Solutions Act of 2006: emissions limit. Authored by state Senator Fran Pavley, D-Agoura Hills, this bill would:

• Extend the provisions of Assembly Bill 32 (2006) until 2050
• Increases the GHG (Green House Gas) reduction to 40 percent of 1990 levels by 2030 and 80 percent below 1990 levels by 2050

Senate Bill 350: Clean Energy and Pollution Reduction Act of 2015. Authored by state Senator Kevin de León, D-Los Angeles, this bill would implement Governor Brown’s green energy plan (50-50-50) by mandating:

• 50 percent of all energy must come from select renewable sources by 2030
• 50 percent reduction in oil usage by vehicles by 2030
• 50 percent more energy efficiency in buildings by 2030

That potential 3 percent sales tax levied by cities and counties is in addition to the statewide 7.5 percent sales tax, which could result in a combined 10.5 percent tax in some areas of the state. Tax hikes require majority voter approval for general purpose levies and two-thirds approval for special purposes.

The average state and local combined sales tax in California is 8.5 percent, according to a recent report by the Legislative Analyst’s Office. The lowest rate of 7.5 percent predominates in rural counties, while the highest rates are in urban areas. Residents in eight cities in the Bay Area and Los Angeles County are currently paying a 10 percent sales tax because their counties have received exemptions from the 2 percent cap.

“AB464 is about local control and flexibility,” said the bill’s author Assemblyman Kevin Mullin, D-San Mateo, on the Assembly floor May 14. “It gives local voters the ability to raise revenue to fund important public services, including transportation, public safety and libraries. This bill is crucial, because if just one city in a county reaches the [2 percent] cap, then the entire county is precluded from having voters raise any additional taxes, hindering key transportation projects or attempts to enhance public safety.

“As a result, a flurry of legislation has been signed into law creating individual cap exceptions across the state. AB464 reduces the need for this one-off legislation by lifting the cap statewide. Please join me in granting voters the ability to raise sufficient revenue to fund public services locally in California.”

There was no debate on the bill, which passed along party lines 45-31. It’s supported by California’s counties and their transportation commissions along with government employee unions.

The California Taxpayers Association issued an opposition “floor alert” on the bill that was signed by numerous business and local taxpayer organizations. It states that “California already has the highest sales and use tax rate in the country,” and provides three arguments against raising the cap:

• Increases the cost of doing business. Businesses face a significant sales and use tax burden in California, and business purchases account for roughly 40 percent of all sales and use tax collected by state and local governments. California is one of the few states that requires businesses to pay sales and use tax on manufacturing and R&D equipment bought and used in the state, making California a very expensive state to operate in, particularly when the sales tax rate is 10 percent in some California cities.
• The sales and use tax is a regressive tax that impacts California’s most vulnerable residents, making it more difficult for them to budget and purchase everyday necessities. California’s economy is improving, resulting in improved revenue collections this year. Now is the wrong time to ask taxpayers, especially those that can least afford it, to spend more of their income to pay taxes.
• Raises the sales tax rate to 11 percent in some areas. [T]he Los Angeles Metropolitan Transit Authority imposes a 0.5 percent tax in excess of current limitations for all of Los Angeles County. This bill would authorize this district to increase its rate to 11 percent. This level of taxation is excessive, and exacerbates the problems described above.

The immediate beneficiaries of AB464 are Alameda, Contra Costa, Los Angeles and San Mateo counties, which have all reached the 2 percent limit, as well as Marin, San Diego and Sonoma counties, which are near the 2 percent limit, according to the Assembly’s legislative analysis.

California’s sales tax brought in $48 billion in 2013–14. About half of it goes to the state government’s general fund, making it the second largest general fund source after the income tax, which accounts for two-thirds. One percent of the sales tax goes to cities’ and counties’ general funds; the rest is aimed at specific programs such as public safety and transportation.

The statewide sales tax rate began at 2.5 percent in 1933. Although the tax rate has tripled since then and its revenue has increased at a 7.3 percent annual rate, the sales tax has actually decreased as a share of total state revenue. “In the 1950s, the sales tax accounted for the majority of General Fund revenue, while the personal income tax contributed less than one-fifth,” the LAO report said. “Since then, personal income tax revenue has grown rapidly due to growth in real incomes, the state’s progressive rate structure and increased capital gains.”

In 1969, cities and counties were granted the authorization to pass their own sales tax increases, mostly benefiting transportation improvements.

Although not nearly as volatile a revenue source as the income tax, revenue from the sales tax can vary significantly depending on the state of the economy. In 1974-75 sales tax revenue increased 22 percent, but in 2008-09 it declined 10 percent. Overall, however, adjusting for increased rate changes, inflation and population, sales tax revenue has remained roughly constant per capita since 1970–71, according to the LAO.

AB464 will next be considered by the Senate Rules 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.

Photo credit: 401kcalculator.org

With a big tax surplus flowing into state coffers, California shattered records last year with a historic haul dwarfing those of other large states around the country. This year, meanwhile, legislators planned still further increases.

“During the 2013-14 fiscal year that ended last June,” the Sacramento Bee reported, “California collected $138.1 billion in taxes of all kinds, 16 percent of all state taxes collected in the nation and more than the next two states, New York and Texas, combined.” The majority of the sum came from personal and corporate income taxes, according to the Bee.

Money maze

At first blush, California’s cash-in promised straightforward results. “Through the end of March, state general fund revenue was about $1.3 billion ahead of projections,” Jason Sisney, California’s chief deputy legislative analyst, told the San Francisco Chronicle. “April revenue is likely to add at least $1 billion more than projected.”

But thanks to the Golden State’s arcane fiscal requirements, revenue was set to be apportioned in counterintuitive ways:

“Under the state’s budget formulas, ‘virtually all or more than all of the additional revenue, relative to projections, may be required to go to schools and other statutory and budgetary commitments, such as the state’s rainy-day fund and debt payments,’ Sisney said. As a result, ‘The amount of extra state money available for other purposes could be little or nothing, and in some scenarios, reducing non-school spending on programs could be required.'”

Tax watchers, the Chronicle noted, paid special attention to a surge in taxes amassed through payroll withholding. In a report cited by the Chronicle, Standard & Poor’s called the increase “a sign that California’s economy is firing on all cylinders.” But that interpretation did not extend to the Golden State’s self-employed economy, since entrepreneurial taxpayers don’t have their taxes withheld in advance by an employer.

New hikes foreseen

Despite the influx of revenue, legislators have not been satisfied with tax rates. Assembly Bill 464, introduced by Assemblyman Kevin Mullin, D-South San Francisco, “would give local governments the power to add another 1 percent to the combined state-local sales tax rate with voter approval,” the Bee reported.

Senate Bill 16, meanwhile, introduced by state Sen. Jim Beall, D-San Jose, would hike several of California’s car-related taxes and fees. “The measure would increase the state gasoline tax by 10 cents per gallon, raise the state vehicle annual registration fee by $35, and levy a $100 per year surcharge on zero-emission vehicles that don’t use gasoline,” The Bond Buyer noted. “Beall’s plan also would phase in a 3.5 percent increase in state vehicle license fees over five years.”

On at least one issue where elected officials remain divided, the prospect of higher taxes has deepened. Although the push to legalize marijuana in California would presumably bring more tax revenue to Sacramento, Colorado’s uneven experience with the process has led to increasing reticence among Californians who don’t want to struggle with similar problems. As CalWatchdog noted previously, Coloradan legislators have divided over what to do with the excess tax revenue.

Up in smoke

The indirect tax consequences of legal marijuana could also mount. At a recent panel convened by the Northern Californian chapter of the ACLU, “Paul Gallegos, a former district attorney in the marijuana-growing heartland of Humboldt County, noted that a pot plant needs 6 gallons of water each day over its 150-day growing cycle,” according to ABC News. Amid California’s protracted drought, water rates and rationing penalties could be dramatically effected.

Finally, more comfortable on more familiar ground, some legislators have re-trained their attention on increasing taxes on tobacco products. State Sen. Richard Pan, D-San Francisco, “wants to raise California’s tobacco tax by $2 a pack, to bring in $1.5 billion a year for smoking prevention and smoking-related medical costs now borne by taxpayers through Medi-Cal, the state’s healthcare program for the poor,” the Los Angeles Times reported.

State Sen. Bob Hertzberg, D-Van Nuys, says the changing global economy requires a reevaluation of what’s considered subject to sales and use taxes. That’s why he’s introduced Senate Bill 8, a massive tax overhaul that, he contends, will help avoid “the state’s boom-and-bust tax structure.”

“During the past 60 years, California has moved from agriculture and a manufacturing-based economy to a services-based economy,” said Hertzberg, a former speaker of the State Assembly, who is considered one of the state’s most effective lawmakers. “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.”

“Something more,” he added, “something visionary, is needed.”

BOE member George Runner criticizes $10 billion tax on services

“Something visionary,” in Hertzberg’s view, is for state government to take “something more” from the state’s service workers. That means you’ll be paying “something more” every time you get a haircut, visit your accountant for tax help or call your lawyer.

Board of Equalization Member George Runner, who serves on the state board responsible for administering sales and use taxes, says Hertzberg’s plan is a massive tax increase masquerading as tax reform.

“Some California lawmakers want yet another $10 billion from the people,” said Runner, a former Republican state senator. “They want a broad tax on services. Everything from bank transactions to haircuts to movie tickets, and everything in between. This will not work.”

Runner says “California’s hard-working families cannot afford higher taxes,” a view that is supported by the state’s leading taxpayer organization.

“‘Tax reform’ which imposes a net tax increase of $10 billion isn’t tax reform at all,”
says Jon Coupal, president of the Howard Jarvis Taxpayers Association. “It is an insult to working Californians.”

Revenue for schools, local government

Hertzberg believes California needs a permanent solution to raise revenue when Proposition 30, a temporary sales and income tax increase of $7 billion passed by voters in 2012, begins to expire next year.

“We must once again provide Californians with the opportunity to thrive in the 21st century global economy beyond temporary solutions like Prop. 30,” he said.

SB8 would allocate:

• $3 billion to K-14 education, which would go toward rebuilding classrooms and saving for teachers pension fund demands;
• $2 billion to higher education, which would be split between the University of California and the California State University systems;
• $3 billion to local governments, which could go towards “additional public safety, parks, libraries or local development” but will be left to “local governments to best meet the specific needs of their particular communities”;
• $2 billion to low-income families in the form of a new earned income tax credit to “offset the burden of proposed sales and use tax on services”

It also opens the door to “altering” the corporate and personal income tax codes, possibly cutting their tax rates. However, in addition to providing few specifics, Hertzberg says those changes would be delayed.

“The latter provisions would be phased in when it is clear that new revenue from the service taxes is sufficient to replace revenue that would be lost by those changes — and is sufficient to provide low-income workers with an Earned Income Tax Credit,” Hertzberg wrote in a piece co-authored with Edward D. Kleinbard, a USC law professor, and Laura Tyson, a business school professor at the University of California, Berkeley and chair of the U.S. President’s Council of Economic Advisers.

Most small businesses won’t be spared

Unlike past attempts to tax services, Hertzberg has embraced an expansive tax base with limited exclusions for health care and education services as well as businesses with less than $100,000 in gross sales.

“Small businesses, like plumbing contractors, auto repair shops, and restaurants account for more than 90 percent of the state’s businesses and well over a third of all jobs,” Hertzberg said. “They are a key rung on the ladder of upward mobility.”

Yet, those small businesses are likely to be hit with the new sales tax on services. According to the U.S. Small Business Administration, the two most widely used size standards are “500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries.” Other industry specific size-standards are:

• Legal services — $11 million in average annual receipts;
• Accounting and related services — $20.5 million in average annual receipt;s
• Architectural services — $7.5 million in average annual receipts;
• Engineering, surveying and mapping services — $15 million in average annual receipts;
• Specialized design services – $7.5 million in average annual receipts.

According to a 2011 policy paper published by the California Budget Project, which generally favored expanding the sales tax to services, “[A]t the height of the Great Depression, policymakers feared taxing services, viewing it as a tax on labor that would discourage employment.”

SB8: Chance of passing?

What are the bill’s chances of advancing?

As with most other bills, the first hearing on SB8 has yet to be scheduled. CalWatchdog.com reached out to half a dozen Republican state lawmakers for their reaction to the $10 billion tax increase, several of whom had yet to read the bill. None was willing to comment.

“To be clear, this is not tax reform,” stressed Runner, the former GOP state lawmaker now at the state tax agency. “It is a massive tax increase.”

By Katy Grimes

Sacramento could become known as the little government town that could. As Sacramento officials fight to prevent the Sacramento Kings basketball team from being lost to Seattle, the public subsidy the officials are offering is looking ridiculous — and unsustainable.

With its historical, abiding inferiority complex, Sacramento has long suffered under the absurdity and indiscretion of city officials who claim an economic rebirth will only occur if hundreds of millions of taxpayer dollars are spent on a new sports arena. And they do this with blatant disregard of the voters’ unwillingness to spend public money on an arena or professional sports team.

If the competition to keep or get the Kings is about which city has the best public subsidies to curry favor with the NBA, Sacramento wins hands down over Seattle.

But as more details are bounced around in the Sacramento arena deal, it is becoming apparent Sacramento should lose in overtime.

Needling Sacramento

A story in the Seattle Times Tuesday confirmed just how far Sacramento will go to make the deal. “Take Sacramento’s $447 million arena plan. It was unveiled to the public and then passed by their City Council only three days later,” Times columnist Danny Westneat wrote.

“Can you imagine the reaction from the Seattle process factory if our mayor put forth a half-billion-dollar public-private partnership and wanted it approved in just three days?”

Westneat added, “But beyond the haste here’s what is in Sacramento’s arena plan. It’s 60 to 75 percent public subsidies, depending on who’s counting.”

Bowing to the masters

Senate President Pro Tem Darrell Steinberg, D-Sacramento, recently returned from a trip to New York City with Sacramento Mayor Kevin Johnson. They weren’t on a political junket, but went to the Big Apple to convince the National Basketball Association to allow Sacramento to keep the Kings.

Seattle, a city of 620,000, has 3.5 million in its metro area. Sacramento, on the other hand, has 470,000 city residents, with 2.5 million in the metro area.

The little government city that could…

Instead of getting down to the business of repairing Sacramento’s economy, along with its deep potholes, failing sewer system and diminished city services, Mayor Johnson, together with a team of city council members, has kept his eye on the basketball — at the expense of city business.

Sacramento City Councilman Kevin McCarty has been a vocal opponent of the arena deals, primarily because of what he says is an unsustainable public contribution. I called and emailed him to discuss his opposition, but he did not call back.

In a Sacramento Bee story, McCarty called the subsidy “overly generous” and warned it could “bring the city enormous misfortune if arena revenue doesn’t pan out as projected…. The risk outweighs the rewards.”

Show me the money

The Sacramento arena would not be getting so much attention if the arena deal was a purely private sector arrangement. In fact, private funding probably would bring it wide support in the region.

City of Sacramento officials claim the deal calls for $258 million of public taxpayer subsidy. A private investment group will contribute $189 million to the arena construction, and would be responsible for all capital improvements.

According to public policy watchdog group Eye on Sacramento, the deal actually calls for an additional $75 million of public subsidies that have not been counted by the city, or included in the city’s numbers.

Add this additional $75 million to the subsidy pot, along with Sacramento County’s public contribution, and the subsidy amounts not to a 53 percent public subsidy as city officials keep repeating, but is closer to a 75 percent public subsidy of a future sports arena.

Additionally, according to Powell, city officials would also receive control of a luxury suite in the new arena, and preferential VIP parking, “a perk that would cost taxpayers a total of $8 million, according to the findings of a noted sports facility economist.”

This is what’s known as padding a public subsidy, and creating a perk for city government staff.

Nuts and bolts, and luxury suites

To accomplish the development of the new arena and subsidy structure, the city plans to form a nonprofit corporation, which would own the parking lots and buildings. The nonprofit would issue bonds to finance the arena.

According to the city, the bonds would be repaid through city hotel taxes and other taxes and fees.

In a recent story, the Sacramento Business Journal explained where the rest of the city’s contribution would come from:

* Sacramento’s parking infrastructure fund: $1.5 million

* A rebate on sales taxes generated by the arena construction: $1 million

* Funds set aside for downtown development from the city’s share of proceeds from sale of the Sheraton Grand Sacramento: $5 million.

* Land transfers to the arena investors: $38 million. This would include 100 acres the city owns near the current arena in the city’s Natomas area.

But when the numbers are crunched, it appears Sacramento could have to dip into the general fund to make the payments on the bonds.

Hiding the numbers

Powell said that, as the deal was bounced by Sacramento officials only days before the city council vote, the city has been disguising the real numbers.  Parking revenues and the 12 percent hotel tax revenues are just not going to be enough to service this debt. That means the recently passed Measure U sales tax money likely will be tapped to service the arena bonds.

Measure U was sold to voters as a “temporary” half-cent sales tax proposed “to restore and protect City services,” according to the City of Sacramento. The sales tax measure was passed by voters, 64-36, in November 2012.

History repeats itself

After Sacramento Voters soundly defeated 2006 ballot Measures Q and R, which would have raised sales taxes to fund a sports arena, then-Sacramento County Supervisor Roger Dickinson continued to push like crazy to build an arena.

A back room deal was put together by Dickinson (now in 2013 a Democratic member of the state Assembly) and Steinberg. They hurried Measures Q and R onto the ballot, leaving voters only a few days to vote on the measures, which were missing crucial information in ballot explanations used by voters. Dickinson continued withholding the information until two courts overruled him. Steinberg and Dickinson also tried to get the measures passed by 50 percent simple majority vote instead of the two-thirds vote required for tax measures.

Voters killed the measures anyway.

Westneat is apparently floored at the audacity of Sacramento city officials. “But what’s most revealing is the public non-reaction in Sacramento,” he wrote. “One group, called Eye on Sacramento, called out the luxury suite as a sort of bribe — ‘one of the dirty little details of the arena deal.’ It got all of five paragraphs in the local paper and no obvious public blowback.”

“This is no normal business,” Westneat said. “It’s a cartel. And one thing we know from bitter experience is the NBA cartel likes its host cities a little desperate.”

By John Seiler

The big news in California the past week was not the mayor’s race in Los Angeles. It was the defeat in that election of the half-cent tax increase, Measure A, by 55 percent to 45 percent

Just a week ago, polls showed the tax winning. People seemed to be supporting increasing the city sales-tax rate to 9.5 percent, which would have been close the tops in the state, supposedly to pay for increased public safety. By contrast, neighboring Orange County gouges at 8 percent.

Instead, voters seemed to understand that the money would go to bloated city pensions. That the city should reform pensions and cut waste instead of hitting the taxpayers again.

And it comes just months after L.A. County voters defeated Measure J, a half-cent tax for transportation, 66 percent to 34 percent.

So voters in one of the most liberal, pro-tax, Democratic Party areas in the country defeated taxes that would have added one cent to their sales tax, raising it to 10 percent.

Maybe there’s a little hope California is not as much Taxifornia as was feared.

By Chris Reed

It’s not just money from Proposition 30’s sales-tax and income-tax hikes that is being used to provide for teacher pay raises and to allow continuation of “step” pay policies that give teachers raises most years just for time on the job and to maintain “column” pay policies that give teachers raises for meaningless accumulation of graduation school credits.

It turns out that the other tax-hiking measure that won approval in 2012 — Proposition 39 — is also a vehicle to that end. The measure blocked multistate corporations from getting to pick where they paid their taxes on revenue generated in California. It is expected to yield about an extra $1 billion a year to the state treasury. It’s long been anticipated that some of the money would be used to increase energy efficiency in school districts.

But instead of distributing the money to schools with the most needs, Gov. Jerry Brown is instead proposing to base its distribution on “Average Daily Attendance,” the same basic method that is used to determine how much money the state gives school districts — and to do so with relatively little oversight. Districts, which stand to get $2.6 billion over the next five years, would basically self-report on their compliance.

This has already triggered complaints from early sponsors of Proposition 39 and criticism from the Legislative Analyst’s Office. Both say that spending should be targeted.

A clandestine way to divert money to teacher compensation

But this is even more of a scam than is understood. The problem isn’t just that the spending isn’t prioritized to get the money to where energy efficiency is the biggest concern. It’s that the language of Brown’s proposal appears to allow districts to spend their Prop. 39 funding on energy-related items in their operating budgets. This would free up more funds for employee compensation, which consume more than 90 percent of the regular budget in many districts.

School districts have been caught lying about attendance, stealing school lunch money, and misusing billions in bond funds — all so as to free up money to keep the automatic raises going to teachers. Diverting Prop. 39 funds would be a relatively minor sin on this front.

All of which brings me back to Reed’s Law, which I wrote about here last month. That law: Whether in the Legislature or in local school districts, the top priority is always freeing up or increasing revenue to allow tenured teachers to receive the automatic “step” raises that typically are provided for 15 of their first 20 years on the job — just for showing up.

Understand this, and California politics becomes demystified and uncomplicated.

Understand this, and it’s no surprise that a ballot measure that’s ostensibly about ending a tax loophole and promoting energy efficiency ends up being one more stealth measure to preserve automatic teacher raises.

The conventional wisdom about the California Teachers Association being a powerful player in Sacramento doesn’t come close to describing the truth. The CTA’s push to protect the pay and tenure of veteran teachers is so powerful, intense and unrelenting that it distorts policies in areas that seem to have little overlap with education.

I look forward to the day that “investigative journalist” Evan Halper points this out.

By John Seiler

Not only does Proposition 30 increase income taxes; it also boosts California sales taxes, already the highest among states, to an even higher level. The following chart shows state sales taxes.
And remember, a state like Tennessee, whose 7 percent sales tax is nearly has high as Taxifornia’s, doesn’t even have an income tax.

(Hat tap to Richard Rider, taxpayers’ best friend.)