THE LEONARD LETTER
A weekly electronic newsletter
from Bill Leonard, Member
State Board of Equalization
June 2, 2003

“Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” -- Ronald Reagan (1986)

UNDER THE DOME

***Davis Breeds Conflict and Alienation***

Sacramento Bee’s columnist Dan Weintraub produced an Internet-only piece last week that is hard to top as an anecdote about the Governor’s character. Weintraub related that at an editorial meeting at the Bee’s offices on May 20, Davis opened it by taking a personal shot at Weintraub for a column he did last January. The thrust of the piece is still as valid today as it was then --- perhaps even more so --- that Davis overstates projected spending in order to take credit for spending cuts that do not exist. Weintraub said that Davis also implored the editorial staff to join him in beating up legislators of both parties to get them to vote for his budget, which ignores the structural deficit that has plagued us for three years.

Weintraub wrote, “His feeble attempt to make me look bad in front of my colleagues left me wondering if that’s how he handles his negotiations with legislators. I know if he had asked for my vote after that petty display, I wouldn’t have given him the time of day.”

I commend Weintraub’s Sacramento Insider web log. It is hard to find on the Bee site --you can find it here: http://www.sacbee.com/static/weblogs/insider/

***Citizens’ Budget is Worth a Look***

The Reason foundation has done an impressive job of putting together a budget proposal that wipes out both the current year and structural deficit without raising taxes. One of the things I really like about this work is the way Reason frames the problem. Instead of proposing the solution as a choice between massive tax increases on the one hand or massive cuts in vital services on the other, Reason instead wants us to think of improving the business climate in California and improving the efficiency of state services using techniques that other states have already implemented to save money. Looked at this way, the problem can be construed as a possible “win-win” rather than a competition between two unsavory choices. The plan also offers line-by-line suggestions for balancing the budget – for this alone it is an impressive body of work.

Another thing I like about this work is the way it backs up each section with easy to understand “factoids”. For instance, in the section on state spending, the problem is illustrated by these facts: Between the budget years 1998-99 and 2002-03, state revenues increased 26%, while state spending increased 45%. Since the Governor imposed his “hiring freeze” on state workers in March 2002, 37,000 new workers have been hired by California government.

I think this report should be taken seriously and is deserving of being part of the discussion. You can see it online at: http://www.rppi.org/citizensbudget.pdf

INSIDE THE BOE

***What Power Crisis?***

In the middle of a Board meeting last week, we lost power in the headquarters building for the second time in two weeks. The culprit I am told was a bad transformer that governed our grid in downtown Sacramento. However, our utility also admitted that we had a Stage 1 power alert because of unexpected high temperatures. This is somewhat ominous since we had only two of these alerts last year. I now find myself making contingency plans with my staff for working without power this summer.

Coincidentally, last week was also the first time that the state has ever assessed privately owned electric generating plants. For those who wanted the state to take over the property tax assessment of power stations in order to punish them, they will be disappointed by the results.

What is really needed are incentives to build more electric generation facilities. The high peak of consumption this summer could go as high as 50,000 MW, while the total California Energy Commission rating of the active stations is only around 20,000 MW, at full capacity. This does not count nuclear, hydro, alternative, and the power that we import from other states --- but the mainstay of our power supply is still our natural gas fired plants and for this reason the situation is worrisome.

***No Prop 13 Protection for State Assessed Properties***

The BOE staff last week presented the proposed property tax values for 437 state- assessed companies including its railroad, electrical, gas, pipeline, and telephone utilities. They looked at both the replacement costs for the property and the income earned at the business. While never exactly the same, it is expected in most appraisals of property that replacement value and income value will be close. But in the material we were presented there were values given that were up to 1,000% different. This should be an obvious sign that something is wrong with the appraisal. The staff data showed on one hand that all of the company's property could be replaced for $21 million but that the income stream produced by the company shows a value of the company at over $100 million. Property taxes should reflect the value of the property. Income taxes should reflect the income of the company.

You can see the mistake that was made. By equating the business with only its property the appraisers ignored the value contributed by employees and management to the value of the company. They also ignored the business plan that made the company so successful relative to the property it owned. If another company bought this property there is no guarantee that they would make this amount of money because they would not have the same employees. By proposing higher property taxes on companies that have outstanding employees is the kind of anti-job bias that California is famous for.

Nevertheless the Board approved these values and favored a blend of appraisals that generated a higher property number. This was the sort of scheme that was outlawed by Proposition 13 for all county assessed properties --- but in a great oversight, Proposition 13 protections do not apply to those properties assessed by the state. Every company hit by these unmerited higher taxes should appeal.

*** The Importance of Keeping Proper Records ***

In one case last week, a business owner found herself in arrears after running a fairly complicated business out of her checking account and kept no other records. Many of the items did not seem business-related. Small businesses may need to keep better accounting records if I am going to be able to help them with tax disputes. Too often, persons come before the Board of Equalization and ask for my help--- but do not provide me with enough supporting evidence. Some small businesses keep their personal and their business funds commingled in the same bank accounts. Others treat their business account as if it were another personal account, using it to pay for obvious non-business items. Word to the wise: In order to avoid the tax auditor -- keep good business records.

MISCELLANY

-- The Employment Development Department paid out $6 billion in benefits in 2002 to 3 million people.

-- At the BOE, 35% of revenue recovered during audits is from Use Tax.

***A Simple Lesson about Tax Cuts ***

The following was sent to me by a reader. If anyone knows the author, I will happily give attribution in the next issue.

Tax Cuts - A Simple Lesson in Economics

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing
The fifth would pay $1
The sixth would pay $3
The seventh $7
The eighth $12
The ninth $18
The tenth man (the richest) would pay $59.

The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner decided to reduce the cost of the meal by $20 because they were such good customers. So now dinner for the ten only cost $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. How could the six paying customers divvy up the $20 windfall so that everyone would get his "fair share?" The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being "paid" to eat their meal.

So the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2 instead of $3 (33% savings)
The seventh now paid $5 instead of $7 (28% savings)
The eighth now paid $9 instead of $12 (25% savings)
The ninth now paid $14 instead of $18 (22% savings)
The tenth now paid $49 instead $59 (16% savings)

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth. "But he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than me!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!" The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered they did not have enough money between all of them for even half of the bill!

And that is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

BOE AND LEGISLATIVE DATES

June 6 --- Last day for bills to pass their house of origin.

June 10, 11 --- Board of Equalization meets in Culver City.

June 15 --- Budget bill must be passed by midnight.

June 25, 26 --- Board of Equalization meets in Sacramento

NOTABLE DATES/ HISTORY

June 2, 1835 --- P.T. Barnum & his circus began 1st tour of US.

June 2, 1924 --- US citizenship was granted to all American Indians.

June 3, 1770 --- Mission San Carlos Borromeo de Carmelo founded in California.

June 3, 1989 --- Troops in China shot and killed hundreds of students demonstrating for democracy in Tiananmen Square, Beijing.

June 5, 1661 --- Isaac Newton admitted as a student to Trinity College, Cambridge.

June 5, 1945 --- USA, UK, USSR, and France declared supreme authority over Germany.

June 5, 1977 --- 1st personal computer, the Apple II, went on sale.

June 6, 1944 --- D-Day: 150,000 Allied Expeditionary Force landed in Normandy, France

June 6, 1967 --- 6-day war between Israel & Arab neighbors began.

June 6, 1978 --- Proposition 13 cut California property taxes 57%.

GENERAL TAX INFORMATION

For answers to your general tax questions, call the Board of Equalization information center. Customer service representatives are available to help you from 8:00 a.m. to 5:00 p.m. Pacific time, Monday through Friday (except state holidays).

Toll-free number: 800-400-7115

TDD service for the hearing impaired
TDD phones: 800-735-2929
Voice phones: 800-735-2922

HOW TO CONTACT ME

Bill Leonard
Board of Equalization
450 N Street, MIC: 78
Suite 2337
Sacramento, CA 95814
Telephone: (916) 445-2181
Fax: (916) 327-4003

Email: Bill.Leonard@boe.ca.gov