FLASHREPORT

I was struck by an excellent column by Timm Herdt of the Ventura Star.  He posed a very insightful question, "Are efforts to better collect taxes that are already owed the political equivalent of actually raising taxes, or are they designed to ensure fairness for those who are already paying their full share?"  I say the answer is they are tax increases, but so small as to be inconsequential.  Fairness is pursuing individuals who falsify their tax returns and purposely do not pay.  Raising other people's taxes is not fairness.

Herdt focuses on several issues, like the proposed "Amazon tax" that would require internet retailers with affiliates in California to collect sales tax on behalf of the state for sales that they do not make.  Another is a proposal to assess penalties on high-income taxpayers who are denied eligibility for certain tax credits.  Under the bill (SBX8 32), those who unsuccessfully claim credits that defy "reasonable basis" in an "excessive amount" - both undefined terms - face a 20% penalty of the amount claimed, if the taxpayer makes over $250,000 a year.  At the same time, the bill would allow people who short-sell their homes to have the difference between their loan balance and sale amount not count as income.  According to the legislative analysis, even with the higher penalty for rich people, the proposal is a net revenue loser.

The common element between these is the majority Democrats identify people they do not like and then go after them.  They know the electorate is angry and think if they can project that anger onto others they will get a break with public opinion.   That is leadership of a certain kind, but not what is needed to balance the budget.

The Amazon tax is hyped as a way to close the tax gap and make fairer the tax treatment of California retailers.  Both goals are unattainable with this approach.  The BoE already collects 96% of the overall sales and use tax due.  The Board brings in around $44 billion in sales tax collections every year.   The Amazon proposal is estimated to bring in only $107 million a year more, or two-tenths of one percent.  This estimate assumes Amazon does not fire their California associates, as they did to their New York affiliates when New York passed the same law.  Amazon simply hired new associates in New Jersey.  New York ended up with no new revenue and more people without jobs.  There are a lot of under-employed people in Nevada who would happily service California consumers.  As I have stated many times, the way to mitigate the Amazon tax inequity is to lower the sales tax enough so the difference between shipping to California and paying sales tax is more equal. 

The voters want the Legislature to get serious.  Legislator approval rating is diving.  The proposals highlighted here neither increase fairness for other taxpayers, nor bring in anywhere close to the revenue needed to close the deficit.  These proposals are tinkering on the margins in ways that have no practical effect but appeal on an emotional level to some.  That is not "getting it done."

Here is a link to a relevant news story.

On Thursday the California Senate passed a bill, ABX8 8 that will make internet retailers with affiliates in California collect sales tax on behalf of the state.  The bill is now in the Assembly for a vote on concurrence.  Many good points were raised in the debate.  I completely agree with the Democrats that there is a great inequity between internet retailers who sell without collecting sales tax and California retailers who have to collect the tax.  However, this is a fight that cannot be won because of the nature of the internet.  

When Jeff Bezos was thinking about establishing Amazon back in the '90s, his first thought was to set up on an Indian reservation.  Bezos is a wonderful, mad genius, and his sophistication has only increased.   When New York passed this same mandate on Amazon last year, Amazon immediately fired all of its affiliates in New York and signed up new ones in a neighboring state.  You can call it radical, but it is a great business decision that is in the best interest of Amazon shareholders.  Some say the answer is a national sales tax program, but that misses the mark as well.  Consider that Google is rumored to be designing floating islands for their servers to be positioned offshore so they are not answerable to any government.  If Google does not do this, someone else will.  Or, a very wise government, say Iceland, will invite these companies to place their servers on their soil, tax-free.  Such a decision would reap a huge windfall in property and employment taxes.

There only solution is this: either lower the sales tax rate so that it is about equal to the average cost of shipping from an internet retailer, or do away with the sales tax completely.  It is an old, unfair tax that no longer reflects the economy and there is nothing government can do about it.

Some highlights from the debate can be seen here:
http://www.youtube.com/watch?v=blNaJemmREg

In the face of the state's perpetual budget crisis, some Californians are beginning to regret their votes in favor of the $9.9 billion high-speed rail bond last year. Even though proponents of the train have now admitted the bond was only a down payment on the actual cost to build the system, the numbers that were projected are changing—and all in the wrong direction. 

The business plan released by the train's advocates last month show the dramatic differences in what the voters were told and what reality is. For example, the price of a ticket from San Francisco to Los Angeles is now projected at $105, up from the previous $55 estimate.  That new number changed the ridership predictions: now 41 million annual riders by 2035, down from last year's prediction of 55 million passengers by 2030. The cost for building the train system has also grown.  The proponents had been thinking $33.6 billion (2008 dollars) but have revised upward to $42.6 billion.  Recently, the Obama administration announced $2.25 billion in funding for the project. Proponents said federal money would be used to close the gap between the voter-approved bond and the ultimate cost, but this is a drop in the bucket and still will not work.

You can read the plan for yourself here:
http://www.cahighspeedrail.ca.gov/library.asp?p=8200

This is the train to nowhere and California could really use that $9.9 billion for more immediate, important and better projects.

As far as the "jobs, jobs, jobs" mantra, we can spend with borrowed money, which is not popular with voters, or we can look at what is right in front of our noses.  To stop the hemorrhaging of jobs, the obvious thing for government to do is lower the cost of labor by cutting back on payroll taxes paid by employers and workers.

I plugged in data for an imaginary California worker making $45,000 a year who is single with no deductions and here is how it breaks out:

Gross pay (per month):           $3,750
Federal income tax:              $543
FICA (social security):          $232.50
Medicare:                        $54.38

So already out of a gross pay of $3,750, this hypothetical Californian has over $829 taken out by the federal government before he gets a dime.  But we need to add California's payroll taxes.

California has four State payroll taxes which are administered by the Employment Development Department (EDD). They are Unemployment Insurance and Employment Training Tax, which are employer contributions, and State Disability Insurance (SDI) and Personal Income Tax (PIT), which are withheld from employees' wages.

So if we add another $41.25 withheld for SDI, along with $159.98 for state income tax withholding, the worker is left with just $2,720 out of a gross pay of $3,750.  It boggles my mind that workers are not rising up in protest.  Think of all the people who are scrimping to save $20 here and there to make ends meet.  Imagine what a temporary holiday from withholding taxes would do compared to various stimulus programs tried so far.  I find it obvious that allowing workers to keep the money they make would relieve a lot of angst and provide major stimulus to the economy.

This has a direct effect on the cost of labor. If payroll taxes were not so high, employees could get higher take home pay at less cost to the employer.  So employers could afford to hire more people while increasing take-home pay for all workers.

As far as withholding taxes employers pay, already mentioned are Unemployment Insurance and Employment Training tax.  Add to that workers' compensation expenses which vary but add significant cost for employers.

I am urging a temporary suspension of these payroll taxes.  But going forward, Republicans should begin a dialogue with workers in this country.

It is clear the voters are engaged and angry.  I say one thing they pine for is more humility from elected representatives.  The atmosphere calls out for political leaders who are well grounded in reality.  Independents who are coming back to the GOP are doing so because the Democrats are topping the collective baloney meter.  America considers itself under assault by those who hold the reins of power and they are rallying to the idea that the whole enterprise of government is a cancerous lesion that hurts more than it helps.

I suggest Republicans engage the angry voters by modifying their rhetoric to be more humble and to acknowledge that America's greatness is entirely owed to the freedom of its citizens.  I cringe when I hear electeds of either party say that government needs to create jobs.  Even the imperial, "we must create jobs" does not sit well.  Why?  Because the voters know that elected officials do not create any jobs except government jobs.  When elected officials, all of whom have a job, engage in the claim they are the font and source of jobs it is off-putting to people who do not have a job.  Face it: if the government could, indeed, create jobs, then there would be no unemployment. Recycling tax dollars around and around to stimulate the economy is not only making voters cynical, it is making them hopping mad. 

The public understands the source of our nation's wealth comes entirely from the wonderful mechanism of voluntary exchange of good and services, not from politicians.   Government can help by providing for public safety, essential infrastructure, a court system, and upholding certain inalienable rights, like private property, self defense, etc.  But pretty much everything else government does distorts the market away from the voluntary actions of individual consumers.  This distortion results in fewer goods and services at higher prices.  Health care is a good example.  The more that government piles on mandates and increases its role, the more health insurance premiums go up and up.  In contrast, the eye surgery procedure, Lasik, which is not covered by insurance or government subsidy, gets less and less expensive and the quality has gone up by leaps and bounds.  When consumers are directly tied to the price of a good or service, they are more discriminating about it, and the result is they get more of it, the quality improves, and it gets less expensive.  If only our health care system had as little interference as Apple Computer enjoys, health care consumers would likely be as pleased as they are with their iPhones.   It is the absence of state interference in the voluntary actions of consumers that is the key to a growing, dynamic economy across the board.

After listening to a clip (thanks www.calcliptv.com ) of the hearing on Assemblyman Logue's bill to suspend the state's Anti-Global Warming Act (AB 32) until the economy is better, I am convinced that there is no more perfect issue for politicians than global warming. Strike that --than global climate change.  Now strike that -- than man-induced global climate change.  Unlike early childhood education programs where you have to wait 13 years to measure if they worked or not, with the man-induced global climate change issue you will have to wait a century or two to know who was right.  No politician voting today will ever be held accountable for being wrong on this issue.

It is really a faith-based issue.  One side places their faith in the principle that man has caused a terrible problem that the planet is unable to accommodate, and that man must fix it.  The other side places their faith in a planet that has absorbed planet-wide catastrophes in the past and will continue to do so in the future. Science is being used by both sides to justify conclusions, but in reality legislators' positions are more of an indication on where they place their faith than in any number of data sets by climatologists. 

Not only will we never know who is right, but, like all faith-based issues, this becomes emotional very quickly.  To the trucker whose truck is sidelined because he does not have the new climate approved motor it is an issue of his ability to support his family versus keeping a few pounds of carbon dioxide out of the air.  People will make sacrifices based on faith, but those who are demanding those sacrifices of others have an extra burden to make sure that the sacrifices are worthwhile.  Logue's common sense bill simply asks that those sacrifices be postponed until the economy is better able to handle them.

The video is here:
http://www.youtube.com/watch?v=1FO8-LBPMhg&feature=player_embedded

I am so grateful to Senators Feinstein and Boxer for quickly attacking Governor's Schwarzenegger's plan to get increased federal aid.  They killed it; it is dead.  My concern was that the entire special session on the budget would be spent wasting time asking our federal representatives for help.  Now that will not be necessary.  The Governor proposed a Plan B if the federal aid did not appear, and it is now time to implement Plan B.  It entails a great dismantling of the welfare state and would actually balance the state's budget by real, permanent cuts in spending.

Feinstein and Boxer declared that California made its own troubles while totally ignoring their own poor immigration policy and the numerous federal mandates they created.  I would be curious to know what they think the California trouble is.  Do they support cutting excessive spending?  Or do they think that California taxes are not yet high enough?

In any event, thanks for such a speedy response so that the Governor can now focus on cutting spending.

I looked over the state Legislative Analyst's recent report about the fiscal outlook for next year.  I certainly was not expecting any good news, but I at least expected a realistic view of the dire situation the state is in.  I was stunned by what I saw.  The LAO is projecting a 14.5% increase in expenditures next year over this year.  Go ahead, read that sentence again: he is saying the state will spend 14.5% MORE money next year than this year. 

In part that is because many of the sneaky "savings" games the Governor and Legislature have played will expire.  No more borrowing from cities, stealing from redevelopment agencies, or shifting state employees' December payday into the next calendar year.  At the same time, federal stimulus money will expire and our state's debt service will soar.

http://www.lao.ca.gov/2009/bud/fiscal_outlook/fiscal_outlook_111809.aspx

To put this into perspective, consider these figures distilled in a recent issue of Political Pulse: In 1990-91 the state spent $1,350 per person.  By the current fiscal year, that was up to $2,644 per person.  Have you seen double the benefit from the state since 1990?  Political Pulse says that if the state had limited its spending in those years to the average Consumer Price Index and population growth, our current surplus would be in the neighborhood of $15 billion. Instead, that figure represents just a portion of our deficit.

I came across some other numbers that help explain how such an insane situation developed.  According to my estimates, only about 34% of California residents pay income taxes. So if you look at your neighbors on either side of you, only one of you actually paid into the state coffers via income tax.  Unbelievably, there are 4.4 million MORE people registered to vote than people who paid income taxes.  Now, not all of those registered actually cast ballots, but it provides insight into the dynamic that is crippling our state.  When there are more takers than givers, the system cannot work and California's system is not working in many, many ways. 

Some people look at these numbers and facts and lament that there is nothing to do but wait for the inevitable collapse of the state.  But that is not only extremely unlikely, it is irresponsible. It is as irresponsible for an individual who cannot pay his current bills to run up all his credit cards figuring that he will "just" declare bankruptcy and be done with it, sticking someone else with his bills.  We know that debt service has first call, then education, on all state funds, but to continue to accrue debt is reckless because that debt will be paid even if we shut down every state spending program.  We simply must cut spending and programming and services or whatever you want to call the outflow of money.  We must stop the budget smoke-and-mirrors that allow one year to look okay while pushing the pain into the next fiscal year.  Cut first, cut now.

http://foxandhoundsdaily.com/blog/joe-mathews/5991-the-default-walters-and-skelton

I have seen many cases over the years like the one before the Board of Equalization last week.  A CEO of a small business had an accountant on staff who had embezzled money.  In this case, the embezzlement included sales tax money collected from customers that was laundered into the pocket of the accountant rather than paid to the State of California.  The accountant was eventually imprisoned, but that still left the tax liability.  Under the law, the interest on sales tax proceeds starts the moment the return is due.   If the embezzlement goes on for years, that is a lot of interest, on top of the tax dollars and penalties.  In the case before us, the accountant set up a phony shipping company and directed the sales tax money to that company and called the expense "shipping.  CEOs and other corporate officers need to have a higher level of awareness than was exhibited in this case.  Under the law, other corporate officers cannot simply blame the accountant and not have to pay the interest, penalties and tax.  I am willing to sponsor a bill that gives the Board more flexibility when the interest clock should start so the Board can make a judgment as to when the CEO should have known taxes were not being paid.   But my point is that CEOs should have controls in place so that such extensive fraud does not go unnoticed, and their lack of controls is not a legitimate excuse if the fraud occurred over a long period.

The Legislature is working on legislation to make California eligible - and hopefully competitive - for federal "Race to the Top" grant funding worth up to $750 million for California. 
 
SB5X 1 by Senator Gloria Romero (D- East Los Angeles) is the bill that I, education reformers, and the Governor support, but it is sitting in limbo in the Assembly Education Committee.  The California Teachers Association is opposed to it.  The Romero bill contains many genuine reform elements that deserve support and applause.  It permits pupil education data to be used for teacher and administrator evaluation and employment decisions; removes the statutory cap on the number of charter schools in California; creates the "Open Enrollment Act" permitting pupils in specified low-performing schools to transfer to other schools within or outside their district; requires intervention in the 5% of California schools that are identified as the most persistently low-performing; allows the creation of alternative teacher credential programs for science, technology, engineering, math and career technical educators; allows 50% of the parents of children in specified low-performing schools to sign a petition requiring the school to adopt one of five federally prescribed alternative governance structures, and; requires the State Board of Education to amend California's reading, writing, and mathematic academic content standards to be in accord with upcoming federal standards, while specifying that those new standards must not reduce the rigor of California's current standards.
 
The bill supported by the California Teachers Association, and other establishment entities, is AB5X 8 (Brownley, D - Santa Monica).  That bill passed the Assembly and is set to be heard in the Senate Appropriations Committee on Thursday.  The Governor has threatened to veto it.  If the bill gets to him in its present form, he should.
 
The Brownley bill would allow parents to request a reform strategy at a failing school, but only if 50% of all parents vote for it at a public hearing.  The bill does not require the school board to hold the meeting at the school.  The bill also mandates the adoption of new audit requirements for charter schools without any input from representatives of the charter school community, but gives those most hostile to charter schools input into the new audit guidelines.  There are also new guidelines for granting charters under the guise of raising their accountability to that of traditional schools, but these would actually bring charters down to a lower level by allowing low-performing charters to continue operating.  The charter school community, through EdVoice, supports closing low-performing charter schools, not putting them on the same life-support the state provides low-performing traditional schools.  EdVoice believes this will kill innovation and improvement in charter schools.  As far as the idea of raising standards in charter schools generally, the Brownley bill ignores the simple truth that charters schools are already held to a higher standard than public schools because they are subject to voluntary enrollment.  Traditional schools have compulsory enrollment, but like the East Germans, many of their schools are so bad they need a wall to keep their kids in.  The bill does contain some good innovations about merit pay for teachers but then subjects these innovations to collective bargaining agreements, meaning they will never be implemented because the unions oppose them.  And finally, while the Romero bill mandates that California's standards stay high regardless of the new federal Common Core State Standards Initiative, this bill would mandate California adopt the new standards even if they are lower than what California has today.
 
I urge the Senate to take action in the Appropriations Committee to move Senator Romero's bill, amend Brownley's AB5X 8, or start from scratch.