THE LEONARD LETTER
A weekly electronic newsletter from
Bill Leonard, Member
State Board of Equalization
July 14, 2003

"We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems." -- John W. Gardner (1912- ) U.S. Secretary of Health, Education and Welfare 1965-1968

UNDER THE DOME

***Get Outta Here***

Last week I was invited to testify before the State Senate Committee on Fiscal Restructuring. The purpose of the hearings was to find solutions to the structural deficit. I encouraged the Legislature to adopt both a projected revenue number and a means of calculating the tax burden on the economy. Evidence shows that when the general fund expenditures exceed 6.2% of the state's total personal income, the state's economy suffers. In 2000-01, general fund expenditures rose to 7.1 percent of personal income. Moreover, those states that are above average with respect to taxes are also the states whose economies lag states with lower tax burdens. According to the latest numbers available, California's overall tax burden -- $11.35 per $100 of personal income -- is above the $11.04 average for the United States.

Findings such as these should be built into a measure adopted by the Legislature so that the coming year's revenues are formally approved and that the proportional tax burden of the state budget is understood. The multi-billion dollar tax increases that are being discussed cannot be isolated in some economic vacuum away from the budget debate. These increases dramatically raise the tax burdens on all Californians, including all of its government agencies, thus making it more difficult to develop a long-range budget solution. Do legislators know how much the sales tax increases of this past January, the recent increase in worker compensation insurance taxes, the new tripling of the vehicle license taxes, and the announced increase in unemployment insurance taxes will further burden businesses? They should.

Other suggestions I made included:

1. Adoption of a flat (single-rate) income tax that taxes income only once and has a generous exemption to benefit lower income workers.
2. Avoiding an over-reliance on sales tax. The sales and use tax no longer mirrors the economy due to the number of services and other consumer expenditure and investment options that do not fall under the sales tax. The sales tax is the most regressive of all personal taxes. Any sales tax rate hike must be discounted as a revenue option because a great amount of the growth in consumer spending is discretionary.
3. Regular review of the administrative costs of all taxes by the legislature's budget subcommittees. The volume of smuggling and counterfeiting of tobacco products, for example, is overwhelming law enforcement and our tax collection authorities. The counterfeiters can produce tax stamps that are as good as the government makes. This situation cries out for a legislative remedy.
4. Produce economic impact reports for local government. Again, the state's decisions on taxes are not done in a vacuum. If the state hikes the sales taxes, that could hurt local governments' ability to renew their ½ cent sales tax dedicated to transportation projects. The legislature also must understand that workers' comp rates and unemployment insurance taxes impact local government services negatively.
5. Adoption of a constitutional amendment to limit spending in order to avoid the volatile swings in spending, to promote stability in government finances, and to give predictability of tax rates to taxpayers.

***More Bad Bills***

Last week I shared with you several of the bad bills that have taken up space on the legislative calendar while the state's finances flounder. Keep in mind that the Legislative Analyst's Office has estimated that it costs $18,000 to draft and introduce a bill through the legislative process. The list continues today:

A.B. 9 (Dymally, D-Compton) This bill would create an Institute of Charles R. Drew University of Medicine and Science with the goal of eliminating the health disparities among the residents of South Central Los Angeles. Two problems: 1) the Legislature cannot order the U.C. Regents, which sponsors Drew University, to do anything, and 2) the state is running a $38 billion and counting deficit. This passed the Assembly 48-28, and received a 9-2 vote in the Senate Health and Human Service Committee last week.

A.B. 153 (Calderon, D-Montebello) This would allow certain legal and illegal immigrants to receive financial aid at UC and Cal State schools. It passed the Assembly on a 45-29 vote.

A.B. 331 (Kehoe, D-San Diego) This measure would waive the one-week waiting period for the collection of unemployment insurance benefits for anyone involved in a labor dispute. By providing striking employees with immediate benefits, one incentive to resolve the dispute is removed. The bill passed the Assembly 47-32 and is now awaiting a Senate hearing.

A.B. 76 (Corbett, D-San Leandro) This bill would expand an employer's liability to an employee for harassment caused by, for example, a client, customer or other third part, despite the employer's lack of managerial control over such a person. The bill passed the Assembly on a 50-27 vote and is currently in the Senate Committee on Labor & Industrial Relations.

***State Vendors Get Filing Extension***

Since a budget was not adopted by the June 30 deadline, the state may be unable to pay its vendors. Consequently, many vendors will be unable to file their upcoming sales tax returns or make their payment in a timely manner.

The Board may grant extensions for filing and paying sales tax returns to vendors caught in this situation. You may use form BOE-468, Request for Extension of Time in Which to File a Tax Return, which is available through the Board's website: http://www.boe.ca.gov/pdf/boe468.pdf and through the Board's faxback service 800-400-7115.

If your request is approved, you will be granted an extension to file your tax return or prepayment. The extension period will expire on the last day of the month in which a budget is adopted, or one month from the due date of the return or prepayment, whichever comes later. If you file and pay within the extension period you will not be liable for penalties. Requests for an extension must be postmarked before the end of extension period.

MISCELLANY

***Marines: (Please) Stand Down***

Not having served as a U.S. Marine I lack the experience to know just how well the Corps teaches the history of this honored branch of our military. So in response to numerous emails from Marines, I am compelled to admit that the dates section of last week's issue did not tell the whole story. I neglected to mention that July 11, 1798 marked the formal re-establishment of the Marine Corps after the Revolutionary War --- not the date of the Corp's founding. It turns out that every Marine knows that the founding of the Marine Corps occurred on November 10, 1775.

To those Marines who encircled me this week, please suppress your fire in recognition of my humble clarification. And thank you for serving your country!

***Three More Words to Know***

Each week, the Leonard Letter features a few of the words from a list of 100 words that some educators say every high school student should know. The full list may be viewed at http://www.houghtonmifflinbooks.com/booksellers/press_release/100words/.

16. Deleterious (adj.)-- Having a harmful effect: The absence of a state budget will begin to have a deleterious effect on people who provides services to or receive services from the state soon.

17. Diffident (adj.) -- Marked by a lack of self-confidence; shy, timid: Proponents of the Recall Governor Davis campaign are anything but diffident; in fact, their confidence and energy seems to grow daily.

18. Enervate (tr.v.) - To weaken or destroy the strength or vitality of: To paraphrase Chief Justice Marshall - the power to tax is the power to enervate.

BOE AND LEGISLATIVE DATES

July 18 --- Legislature's summer recess begins upon adjournment only if Budget Bill is passed.

August 6 --- BoE meets in Sacramento.

August 18 --- Legislature reconvenes.

NOTABLE DATES/ HISTORY

July 14, 1771 --- Mission San Antonio de Padua founded in California.

July 14, 1798 --- First direct federal tax on the states (dwellings, land and slaves)

July 15, 1971 --- President Nixon announces he will visit China.

July 15, 1991 --- U.S. troops leave Northern Iraq

July 16, 1769 --- Father Serra founds Mission San Diego, first California mission

July 17, 1861 --- Congress authorizes paper money.

July 17, 1955 --- Disneyland opens in Anaheim.

July 17, 1980 --- Ronald Reagan accepts Republican nomination for President

July 18, 64 --- Great Fire of Rome begins.

July 19, 1985 --- Christa McAuliffe selected as first schoolteacher to fly in Space Shuttle.

July 20, 1868 --- First use of tax stamps on cigarettes.

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 to: Bill.Leonard@boe.ca.gov