Taxable Talk

Assemblywoman Wilma Chan (D-Alameda) introduced AB6. This would increase the state’s top income tax rates by 0.7%. Most Californians would pay 10% income tax rates under this bill, up from 9.3%. This bill does require a 2/3 vote, and passage and signing by the Governator is most unlikely. But that this bill was even introduced tells one what the Democrats think.

Today’s Orange County Register editorializes on a brain drain [registration required]: the high cost of doing business in the Golden State has led corporate planners to locate elsewhere.

I wrote last week that liberals would like California to increase taxes to businesses. A good friend of mine chided me on my “anti-liberalism.” Actually, I believe that many of the programs that liberals love are good; rather, these programs should never be run by the government.

Government cannot and should not be the end-all for everyone. If liberals had their way, corporations would pay 20% state income taxes (or more) to fund their programs. California’s liberals need to learn basic economics. If you increase the price of a good through taxes, the demand goes down.

That’s what syndicated columnist Thomas Elias suggests in today’s Pasadena Star-News. That’s not how Mr. Elias puts it; rather, he states that increasing property taxes on businesses is the “obvious solution” to California’s budget problems.

It’s not.

The obvious solution is to cut the size of the state budget, to decrease government programs across-the-board, and change the mentality from the government as welfare state to government is the last resort. Our money does much better in our pockets (the taxpayers) than in the government’s.

According to the Tax Foundation’s business climate survey, California ranks 38th of the 50 states. Another survey ranks California 46 of the 50 states and the District of Columbia for small businesses.

What happens if property taxes increase? Rents increase. Business profits decrease. Other tax collections (income tax, payroll tax) decrease. Eventually, fewer businesses are in California, and the cycle continues.

So let’s increase property taxes and improve Nevada’s (and Arizona’s, Oregon’s, etc.) business climates.

This evening I attended continuing education (required for professional tax preparers) and heard about changes in California tax law. As I was reading the material, I thought there was a typographical error on one item:

“Seventy-five percent of punitive damage awards adjudicated by June 30, 2006 (filed after August 15, 2004) must be paid to the state.”

My first thought in reading this is that California passed a law enacting a 75% tax on damages and I never heard a word about this, even from the trial lawyers? Then I asked myself how many lawsuits filed after August 15, 2004 will be resolved through a court judgment by June 30, 2006? The answer is easy: 0. The court system in California is so backed up it takes, on average, five years for a case to reach trial.

So why was this provision passed as part of last year’s budget? As I found tonight, it was the only item that the Governor and the legislature agreed to on the first go round of eliminating the $8 Billion deficit. On paper this provision added $450 Million in revenues to the state. Of course, all parties knew that this was just a budgeting trick, and that no revenues would ever come through this tax. I wonder what other similar items are out there — but I probably don’t want to know.

For those who didn’t file, or those that California thinks didn’t file, there is a tax amnesty underway. To accountants’ dismay, the filing period is concurrent with the tax season (February 1st – March 31st). An excellent article on the amnesty is available here.

If you receive a letter from the Franchise Tax Board, don’t throw it away! This means that they think they didn’t receive a filing (or there is some other situation). Contact your tax professional immediately.

We strongly recommend that you keep your tax filings forever. Although California’s statute of limitations is four years (the IRS’s is three years), California does not have a statute of limitations on debt collection.

I’ll be writing more about California’s amnesty program in the near future.

Health Savings Accounts (HSAs) are an excellent vehicle for saving money on health care and have tax advantages for your Federal tax returns. But California has yet to conform and, based on last year’s experience, probably won’t.

According to this article in the San Francisco Chronicle, State Senator Abel Maldonado has reintroduced legislation so that California conforms to Federal law. We’ll hope that the bill passes (you can follow the progress here), but we’re not holding our breath.