Taxable Talk

Let’s assume you are the President of Acme, a business that makes all sorts of things. Your major customer suffers a financial reversal, and your sales are going to go down by 40%. Do you continue to spend at the same rate as before, or do you cut spending (likely cutting salaries across your company, too)? Of course you cut back — you can’t print money.

Let’s move to California. Citizens of the Bronze Golden State have been suffering financially for the last several years. That’s caused a marked decrease in revenue. Meanwhile, while some spending cut have been made, the sacred cow of personnel (and benefits thereto) have only slightly been touched. A quick perusal of benefits available to public employees in California show that almost all participate in defined benefit pension plans (rather than 401(k) type plans that those in private industry partake in).

Meanwhile, the state has one of the worst business climates in the country. If I can expand in (say) Nevada or Arizona rather than California, and that will help my bottom line, why won’t I? Senate President Pro Tem Darrell Steinberg says he’s looking to cut duplicative regulations (which is good), but it’s only a starting step. The reality is that deep and substantive cuts need to be made in the bureaucracy: Entire organizations should be eliminated or merged together to cut costs and help business.

Governor Jerry Brown, to his credit, is proposing eliminating redevelopment agencies throughout the state. That’s a good starting point. (I should mention that I expect lawsuits to be filed, and it’s likely the battle for cutting these agencies will take years. Still, you have to start somewhere.) State agencies should also be on the list. An obvious starting point is to merge the Board of Equalization (the agency manages all California taxes except income taxes and the Franchise Tax Board (the FTB manages income taxes). Sure, that would take legislation (possibly even a state constitutional amendment), but there’s no reason for two agencies.

Here’s a list of California state agencies. I challenge you to read through the entire list and not find ten agencies that should be either eliminated or merged into each other. (Yes, I realize that somewhere state law mandated these agencies come into existence. Well, nothing prevents the legislature from writing a new law (or constitutional amendment) to end these agencies.)

Here’s my list:

1. Board of Equalization / Franchise Tax Board (Merge)
2. Binational Border Health, California Office of (Elimination)
3. Boating and Waterways, California Dept. of / Boating and Waterways Commission, California (Merge)
4. Coastal Commission, California / Coastal Conservancy, State (Merge)
5. Consumer Affairs, Dept. of / Consumer Services Agency, State and (Merge)
6. Cool California (Elimination)
7. Corrections & Rehabilitation, Dept. of / Corrections Standards Authority (Merge)
8. Cyber Safety for Children (Elimination)
9. Apprenticeship Council / Apprenticeship Standards, Division of (Merge)
10. Arts Council (Elimination)

Government should be limited, and it should be focused. Yes, it’s a good idea for cyber safety for children, but that’s a parental responsibility not a responsibility for the state. I like museums, but it’s not the responsibility of the state to promote arts. Under the US constitution, the federal government is responsible for commerce with foreign governments, not individual states. It might be nice to have binational border health, but that’s clearly a federal responsibility. Cool California is an agency set up to battle Global Warming. Ignoring the fact that the theory of global warming is dubious, the laws of thermodynamics can’t be changed by a state; the idea that California can change the world’s climate is ridiculous. Finally, the merges within state organizations should be obvious.

And I only looked at the agencies in the A-C tab (and I likely missed some state agencies that should be eliminated or merged in the A-C tab). There are plenty of others in D-G, H-L, M-R, and S-Z.

I realize that this will be painful for California and for those who work are at these agencies. However, the residents of California have been the ones impacted by financial issues while the state blithely marches on using mainly accounting gimmicks. If Governor Brown and the legislature start proposing massive merging and elimination of state agencies, then I’ll know we’re no longer looking at the same old song and dance.

That said, I doubt real change is forthcoming.

I felt this important enough to update while relaxing in the Bahamas. (It helps that the sun is gone under a bank of clouds.) Anyway, from Spidell comes word that California is not going to conform to the exclusion of medical insurance premiums for non-dependent adult children. You must impute the cost of such insurance add it to state (California) wages.

However, the FTB has yet to provide guidance on how to do this, and it will likely be at least another week before such guidance is issued. Meanwhile, the deadline for releasing W-2s to employees is in 23 days.

If you are a California employer and offer such insurance for your employees, make sure your payroll processing company is aware of this issue and that a recalculation for your W-2s may be necessary.

I now return to my scheduled vacation.

My mother is a writer. My father was a writer. I’m the co-author of three books. My whole family are voracious readers. Yet I failed reading comprehension 101 when I looked at a set of instructions for a California tax form.

So I read the following: “You must pay 100% of the amount you owe by April 15, 2011, to avoid interest and underpayment penalties.” Well, I thought the FTB didn’t realize that the deadline for federal tax returns was three days later. Woe on me, as I might have been wiser if I read the whole paragraph:

You must pay 100% of the amount you owe by April 15, 2011, to avoid interest and underpayment penalties. Due to the federal Emancipation Day holiday on April 15, 2011, tax returns and payments received on April 18, 2011, will be considered timely. [Emphasis Added.]

My thanks to Susan Maples of the FTB for letting me know of my error.

Jerry Brown will soon (again) be California’s governor. When he became governor in the 1970s, California was in excellent financial shape. When Jerry Brown becomes governor again on January 3rd, California will face something like a $25 to $30 billion budget deficit.

Over the last several years, California’s budget has been balanced only through accounting gimmicks. The reality is that California has been operating with a large budget deficit since the early 2000s. Jerry Brown has stated that Californians will be faced with a choice between service cuts and tax increases likely in another special election. During current Governor Schwarzenegger’s term, there were two special elections dealing with taxes. Additionally, taxes were on the general election ballot on various occasions. What is interesting to note is that, in all cases tax increases were voted down by the electorate. I have no doubt that the electorate will continue to vote down any tax increases. So what should Jerry Brown do?

Well, here’s what I would do:

First, everyone in California politics needs to recognize that California’s business climate is dreadful. The Tax Foundation ranks it just about on the bottom of all fifty states. Yes, California has some advantages (Silicon Valley, a wonderful climate, etc.) but tax policy is definitely not one of those. Tax increases are not the answer.

For the short-term, revenues will be whatever they are. Call that number x. Why not take that dollar amount, and match it to the prior budget with that amount of revenue? Yes that’s simplistic, and it would require cutting of programs and bureaucracies, but it’s the simplest solution to painful problems.

The reality is that California desperately needs tax cuts to attract business. Until that happens, California will continue to lurch from budget crisis to budget crisis.

Not only has the BOE updated their list, but California’s Franchise Tax Board has updated its list of the top 250 delinquent in income tax. It took just $290,965 to make this list, but leading the way are Halsey and Shannon Minor of San Francisco. The Minors are shown as owing $13,120,479.

There aren’t as many celebrities on the list as in the past, though one Pamela Anderson is shown owing $493,145. Also shown on the list is Ronald Isley; he owes $303,411.

The total owed by these 250 taxpayers (which does include some business entities) is $140,515,958.

The headline is apropos for the 111th Congress which likely won’t act on much of the budget, the extension of the Bush Tax Cuts, or the Estate Tax before the 111th Congress mercifully fades into oblivion. It will be difficult if not impossible for the 112th Congress to be worse than its predecessor.

However, that’s not what I’m writing about this evening. Rather, I’m writing about California. Steven Greenhut penned a superb op-ed that appeared in yesterday’s Orange County Register. Mr. Greenhut’s key point is stated almost at the beginning of the piece (though you should read the entire piece):

I think of my beloved California in the same light. What a great state, but it remains on a collision course with reality. We can’t keep spending money we don’t have, punishing those who pay the bills and ignoring the advice of truth tellers.

The problem is that Democrats in Sacramento appear completely clueless regarding basic economics. There solution to almost every problem is to increase taxes. Voters want it both ways, too: They want great services but don’t you dare increase our taxes. The major liberal-leaning newspapers write about eliminating Proposition 13 (at least as to how it applies to businesses, though they would prefer it vanish completely).

There’s a harsh reality that must be faced sooner or later by the Golden State: You can’t spend your way out of economic trouble. Those wonderful pensions will need to be cut with an axe, not massaged with a hand eraser. Remember those wonderful bureaucratic agencies you set up to regulate everything; you won’t just cut a regulation here or there but entire agencies will need to be cut. That’s the only solution to the problem.

Well, I guess there is another solution that would work in an alternate universe: Force all businesses to leave the state by increasing taxes to such a point that anyone who can leave does. Given what many Democratic legislators are saying in Sacramento, it appears they’re in that alternate universe.

California used to be rather infamous about how quick it would seize unclaimed property. While the speed of seizing the funds has slowed down, there’s still millions and millions of dollars in Sacramento that belong to you. If you’ve ever resided in California (or had funds in California), you can check and see if you have any money in Sacramento that should really be in your pocket.

There’s an online database for the Unclaimed Property Office of the State Controller. Just enter your name and see if something comes up. If you do have something there, you will need to complete a form and send proof but you will get your money back if you do so.

Hat Tip: The Tax Foundation