Even Tax Breaks are Torture for California Businesses

tax signCalifornia has a terrible reputation of being unfriendly to business, but that’s just because some people don’t have a sense of humor.

If you love comedy, check out the website of the Governor’s Office of Business and Economic Development (GO-Biz) at www.business.ca.gov.

There you’ll find all the incentives, programs and helpful information that the state of California has created to help businesses grow and stay in California. There’s not much, but brevity is the soul of wit.

The state offers advice on “Setting up a Facility,” under the category of “Start a Business.” Here, in its entirety, is the section titled, “Acquiring Office Manufacturing Equipment”:

“Office furnishings can be rented or bought through businesses that deal primarily with office occupants. These companies are easy to locate through local telephone Yellow Pages under ‘office furniture and equipment, dealers or rental.’ Companies that sell telephone and computer systems, copy, fax and mail machines and other technical equipment can also be located through the Yellow Pages. Companies selling other office supplies such as pens, paper, tape and staples can be found through the Yellow Pages listed under ‘office supplies’ or ‘stationers,’ or through catalog sales.”

Daunted by the task of shopping for office furnishings? The state suggests a business incubator program.

It doesn’t have one, unfortunately. But “universities, cities or counties, ethnic or industry associations, or private companies” run business incubators, and “generally they offer an individual office, cubicle or at least a desk for the businessperson.”

Let’s just pray they have a copy of the Yellow Pages.

The bureaucrats at the Department of Business Friendliness don’t just sit around all day fielding inquiries on where to buy fax machines. They also administer the California Competes Tax Credit, a program that allows businesses to plead for the chance to keep a little more of the money they earned.

During the current fiscal year, these tax credits will total about $200 million statewide, which is probably less than we’re spending on the latest new watercolors of the bullet train. Those paintings should be hanging in the Louvre for what they’ve cost us.

So, how does a business qualify for the California Competes tax credit and how much money can it save on taxes?

There doesn’t seem to be a clear answer. “Tax credit agreements will be negotiated,” the website states.

The negotiating is done by the governor’s appointees at GO-Biz, then approved by the California Competes Tax Credit Committee.

The CCTC committee is made up of the state treasurer, the director of the Department of Finance, the director of GO-Biz, one person appointed by the Assembly Speaker, and one person appointed by the Senate Rules Committee.

They meet several times a year to consider applications, and the minutes of their meetings are fun reading if you’re a fan of the Inquisition.

One after another, company representatives are brought before the committee to be grilled about their application for a tax credit.

The questions are harsh. Why are your wages so low? Do you provide health benefits? What does your company do? Why do you need this money? What are you doing to get more women on the production floor? Do you have a training program? Will you hire through an employment agency? What is your outreach plan to achieve a diverse workforce?

This kind of thing caused the committee to get a visit from the legal counsel for California Competes, who explained at their meeting last November that under the law, “the sole function of the committee is to approve or reject the agreements” recommended by GO-Biz.

The lawyer said the committee has no authority to collect demographic data, like race and gender, about an applicant’s workforce. The committee also has no authority to require the applicant to collect and turn over that demographic data, and no authority to “promulgate regulations” about diverse work forces.

But that didn’t sit well with the political appointee from the Assembly, who hired an attorney independently and insisted that the intent of the legislature was to use the California Competes tax credits to pursue other “underlying goals.” The interrogations will continue, the committee member made clear, because even if there’s no legal authority for action, “Simply asking the questions sends a message.”

That’s a statement that could give all the old Russians living in the Fairfax District a nasty flashback.

And this is the business incentive program. Imagine if it was the penalty phase.

This piece was originally published by the L.A. Daily News.

The Ever Shrinking Homeowners Exemption

During the holidays, most Californians are focused on their homes.  This is the time when homeowners – and renters too – are decorating and extending hospitality to friends and neighbors.  But heavy taxes and fees imposed on homes by the Grinches in government make it hard for Californians to hang on to their homes .

Homeowners, who work hard to pay for and maintain a house, pay property taxes that often do not fund property related services. These revenues go into local government coffers and can be spent for any purpose.  To pay for services to property, like sewer, water and refuse collection, the homeowner pays extra through fees, assessments and other charges added to the property tax bill. Additionally, homeowners throughout California are also hit hard with bonds.  Virtually all bonds for schools that must be repaid by property owners pass due to Proposition 39 that reduced the two-thirds voter approval requirement to 55 percent.

Even now, there are lawmaker Scrooges in Sacramento who want to make it even easier to load up your property tax bill even more. They argue that because of Proposition 13’s low property tax rate, they should be allowed to squeeze more from average homeowners by making it much easier to increase local taxes.  They ignore the fact that while the property tax rate may be lower than in many states, because the median price of a California home now stands at about $450,000, while nationally it is at $208,000, what the homeowner actually pays is comparatively high.  (California is in the top third of states in per capita property tax collections).

One of the few benefits to homeowners in California – besides Prop 13 – is the Homeowners Exemption.  This exemption simply lowers the taxable value of a primary residence by $7,000, which translates into a paltry $70 reduction in a homeowner’s tax liability.  Not only is the amount of tax savings negligible, the Homeowners Exemption hasn’t been adjusted since 1972.  If the exemption had been allowed to keep up with inflation, today it would be way higher – at least $35,000 for a saving of $350.  And if inflation were based on the increase in California housing costs, it would be even higher still.

The 1972 bill — SB 90 authored by Democratic Senator Ralph Dills and signed by Republican Governor Ronald Reagan — that established this homeowners exemption amount, also included a renters tax credit that allowed the renter to deduct from $25 to $45 from their income tax.  Here, too, state government has been a piker.  Today, the income tax credit sits at $60 for single renter or $120 for head of household or married couple filing jointly.  While at least here there has been a modest increase, it does not come close to keeping up with inflation.  Had it been indexed for the CPI, the $25 credit of 1972 would be $140 today.

It’s past time for our political elites to acknowledge the high cost of owning and maintaining a home as well as the sky high rents in many communities, by addressing these human concerns with an increase in the Homeowners Exemption and the Renters Tax Credit.

The tax-and-spend lobby in the Legislature and all those who receive a check from the taxpayers will say that they cannot afford any loss of revenue.  They will confirm the old saying that taking a dollar from a bureaucrat is like taking a piece of raw meat from a hyena, a lot of shrieking ensues. But with the Sacramento politicians bragging about the increase in state revenues that is billions ahead of projections and has resulted in a surplus, they can afford to leave a few bucks in taxpayers’ and renters’ pockets, money that can improve the quality of life for average Californians, money that, when spent, will help to stimulate the economy.

It is long past time to provide some well-deserved relief to those who are struggling to keep a roof over their heads while trying to keep up with constant additions to their property tax bills, as well as to those straining to pay escalating rents.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

This piece was originally publish by HJTA.org

Hurray for Hollywood Tax Credits?

Is California’s political establishment trying to crush the Golden State’s economy and punish Hollywood movie moguls? That’s one interpretation of Governor Jerry Brown’s decision to sign a $330 million movie tax credit into law, but only if you take seriously the argument that tax increases—as opposed to tax credits—have driven the so-called California Renaissance. Recall how Brown, legislative leaders, and prominent columnists lauded voters’ approval of Proposition 30, which significantly raised sales and income taxes two years ago. The best businesses, they said, don’t mind California’s high tax burden so long as the weather stays nice. But if that’s so, then why the giveaway to Tinsel Town?

The Film and Television Job Creation and Retention Act more than triples the current $100 million-a-year movie tax credit for five years beginning in fiscal year 2015–16. The new law allows studios to use the credits for television pilots and eliminates a lottery system for selecting beneficiaries. It also removes the existing credit’s cap of $75 million on production budgets, according to a state senate analysis.

The California Teachers Association opposed the bill for self-interested reasons: the union doesn’t want any money potentially taken away from public schools, which currently eat up more than 40 percent of the state’s general fund. Despite the CTA’s opposition, the legislation enjoyed broad bipartisan support. Republicans usually argue that tax credits are much less important than a more favorable overall tax climate, but they agreed to these special credits, just as they supported tax credits for a proposed Tesla electric-car battery plant, which wound up going to Nevada. More unusual was the support from the otherwise tax-credit-averse Democrats. “This legislation will keep the cameras rolling in California and strengthen our position as the entertainment capital of the world,” claimed Kevin de Leon, a Los Angeles Democrat and new leader of the state senate. Governor Brown, who had criticized the credit in the past, said at the bill signing that SB 1839 “helps thousands of Californians—from stage hands and set designers to electricians and delivery drivers.” At least Democrats are tacitly recognizing the value of lower taxes—even if only for a handpicked industry that happens to support them.

But politicians’ assertions notwithstanding, the nonpartisan Legislative Analyst’s Office in April released a report questioning the effectiveness of the existing tax credit. The LAO argued that studies promoting the credit’s economic benefit “vastly overstate” its advantages: “A return of $0.65 in state tax (excluding unemployment insurance) revenue for each $1 in tax credits may or may not be a good return compared with other state programs. However, it is incomplete—and, arguably, not accurate—to claim that the tax credit program pays for itself.”

Tax-credit supporters point to the loss of 16,000 California film-industry jobs over an eight-year period and blame other states, such as New York, for offering large subsidies that are supposedly stealing away movie productions. Just because other states lavish subsidies on movie companies doesn’t make it a great economic idea. “The state government in New York has dished out well over $2.5 billion in film industry tax incentives since their program began in 2004,” noted Christopher Thornberg, founder of Beacon Economics in Los Angeles. “And for that payout, New York has ‘stolen’ a total of roughly 10,000 jobs from California . . . Do that math! New York has paid $250,000 for each new job.”

The LAO pointed out another flaw in the case for Hollywood giveaways: “Other industries—such as manufacturing or software development—also could become the target of aggressive state subsidies. If this were to occur, would California also provide subsidies to retain these businesses? Doing so could be prohibitively expensive. Instead of approaching economic policy on an industry-by-industry basis, the Legislature may take actions that encourage all businesses to stay or relocate to California, such as broad-based tax reductions or regulatory changes.”

Unfortunately, a political party addicted to taxing and regulating happens to control California’s legislature. It’s funny how Democrats can rationalize tax hikes on the one hand and tax credits on the other. Pulitzer Prize-winning writer David Cay Johnston mocked claims that higher taxes destroy jobs: “Some research into tax rates indicates that high tax rates have the opposite effect: People may work harder, trying to make more money to achieve a desired after-tax income and may slough off if tax rates are lowered.” In other words, high tax rates aren’t detrimental to the California economy—they may even be the cause of its recent growth.

Johnston’s pro-tax argument is popular in Sacramento. Recently, Senator Hannah-Beth Jackson, a Santa Barbara Democrat, argued in support of a bill that would base corporate tax rates on CEO compensation—with higher rates imposed on companies that pay executives more. Yet Jackson joined her colleagues (only two voted no in both houses) in supporting the Hollywood tax credits.

Tellingly, policymakers have been unwilling to consider less costly ways to encourage film production in the state. None of the discussions surrounding SB 1839, for instance, pointed to the pernicious effect of Hollywood’s union-dominated work rules. Think of the TMZ, or Thirty-Mile Zone, the radius the various movie and TV unions use to determine per diem rates and driving distances for crew members. Nor did any of the bill’s sponsors have a word to say about the creative accounting Hollywood studios employ to show profits and losses.

So even as they peddle the fiction that California is booming because of high tax rates, legislators feel compelled to subsidize one of the state’s signature industries. Maybe they should have raised taxes on Hollywood instead. After all, it would be good for the economy: the higher taxes would make the studios work harder.

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