THE LEONARD LETTER
A weekly electronic newsletter from
Bill Leonard, Member
State Board of Equalization
July 21, 2003

"The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty."

Eugene McCarthy (1916- ) Democrat nominee for President, 1968

UNDER THE DOME

***Silver State's Golden Glow***

Nevada made big news last week: first with its State Supreme Court ruling that the Legislature could raise taxes by a simple majority rather than the constitutionally mandated two-thirds, and second with a federal court ruling in response to a counter-suit that halted the $800 million in tax increases the Legislature imposed by that simple majority vote. Since then there has been speculation that what has happened in the Silver State could be prelude to the Golden State's next round of the budget bout. Our Superintendent of Schools has announced that he may use a similar argument to get California's Supreme Court to intervene in the budget crisis. The Nevada case revolved around the state's inability to pay schools without an approved state budget. For Superintendent O'Connell to think the same legal argument will work here is short-sighted. As Assembly Republican Leader Dave Cox has pointed out, California schools are funded through a continuous appropriation so even without a budget in place, schools continue to receive much of their funding. Mr. Cox also says, "Furthermore, unlike Nevada, California has a constitutional mandate for education funding, known as Proposition 98. Given these two solid facts, it is highly unlikely that the California Supreme Court will intervene in a manner similar to Nevada's."

The problem with California's budget is not that a two-thirds vote is required to pass it or raise taxes. The problem is the inability of this Governor and Legislature to stop spending. If California had stuck to the Gann spending limit, we would not be in the mess we are today, and if we want to stay out of such messes in the future, we must recommit to such spending limits. That is necessary because, as the Wall Street Journal editorial page noted, "[W]ithout some kind of discipline, politicians will always have a hard time saying no to intense spending lobbies."

***No New Taxes: Are South Dakotans Smarter Than Us?***

Last week I wrote about testifying before a Senate subcommittee on fiscal restructuring. 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, as it did after the 2000-01 spending plan that was around 7.1% of the state's total personal income. I also mentioned that the latest data I was aware of showed that California's overall tax burden is above average for the United States. This Legislative Analyst's Office data covered through 1998. I have since been given a more recent analysis and the situation is even worse than I thought.

The Tax Foundation's David Hoffman analyzed Census Bureau data that shows that California's rate of tax growth has been greater than the growth in personal income for some time. In one year alone, 2000-01, Californians increased the share of their personal income they give to government by nearly 8% (7.93%), but California's personal income only rose 4.53% during the same period, giving California a one-year tax growth rate over personal income that was seventh highest in the nation. Clearly, if you want to blame tax cuts for our current deficit, you are barking up the wrong tree. According to the data, California's ten-year ranking for tax revenue growth (between FY '91-'01) was 5.38 percent, where incomes only rose 3.23 percent during the same period. This ten year discrepancy in growth between revenue and income was the sixth worst in the nation. California taxes its citizens more egregiously than almost all the other states no matter how the numbers are juggled: In FY 2001, California's revenue collection was $2,614 per capita -- again, sixth highest in the nation, yet we have the worst deficit any state has ever seen.

In South Dakota on the other hand, state government lives on a measly $1,289 in revenue per capita, the lowest in America. You might thing they would be in terrible shape given this "revenue problem". Not even. South Dakota plans to end FY 2003-'04 with a surplus. They too had a deficit, but through some fund shifting and the money they had in reserves (remember those?), the Republican governor of the state delivered a balanced budget that includes a healthy reserve without raising taxes. This should really prove that those revenuers (liberal Democrats) who whine and whine about delivering a responsible budget in California need to get serious. The example of South Dakota also exposes the hollowness of the superior attitude some on the left lord over our Midwestern brethren -- specifically those states, like South Dakota, that went for Bush.

***Signs of the Recovery***

Last week's announcement by the National Bureau of Economic Research that the recession ended in November 2001, and since then the national economy has been slowly expanding, is welcome news. Although the possibility exists that unemployment could still go up, partly because the average productivity per worker is still on the rise, the Board of Equalization announced that preliminary statewide calculations for first quarter 2003 taxable sales shows a slight increase of almost one percent over the actual figures one year ago.

California's Taxable Sales (millions)

1st Qtr. 2002: 100,957
1st Qtr. 2003: 101,747 (est.)

This is a sign the economy is hanging in there, but barely. This is not the time to burden California with more taxes and expensive regulations. Memo to the Legislature: Take heed, lest we fall.

ISSUE FOCUS

***An Internet Tax Nightmare Begins***

For those who believe that taxing Internet sales is the way to restore the integrity of state budgets, a new regulation that took effect this week may be instructive. The measure asks U.S. merchants to pay the European Union's (EU) equivalent of a sales tax on digital downloads. As the article in Small Business Computing (http://www.smallbusinesscomputing.com/news/article.php/2230491) notes, "[W]ord hasn't gotten out to a whole bunch of e-tailers, while a lot more are asking, "How's the EU gonna find me to collect?"

The new rule was designed to put EU e-tailers on even playing ground. Under previous rules, a buyer in the EU would be likely to choose to download from a U.S. business because that business was not subject to EU' s Value Added Tax(VAT). EU merchants also had to charge the VAT on sales, while e-tailers outside the EU did not.

The new rule covers paid downloads and is based on the buyer's location rather than the seller's. The problem is that e-tailers may not know a buyer's location and, furthermore, do not believe they are beholden to EU taxes. The Small Business Computing article quotes Matthew Feldman, the CEO of Versaly Games, saying, " Not only is it difficult for us to gather that info, it's going to be impossible for the EU to police U.S. companies," he said.

The Internet is simply not like traditional retailers and cannot be treated as such. If they can avoid a tax, they will. It is human nature. Such nature may pose challenges for funding government in decades to come, but ignoring this reality puts us at greater economic risk.

MISCELLANY

*** A Humbling Moment ***

I was honored last week to have been one of 18 nominees for the Business Press's Inland Empire Leader of Distinction Award for the public sector, and humbled to be one of the three finalists. My thanks to Jerry & Ann Atkinson of Center Chevrolet in San Bernardino for their generosity in seeking such recognition on my behalf. The luncheon event highlighted the outstanding contributions made by dozens on people in the private, public and nonprofit sectors, as well as giving awards for innovation and lifetime achievement. The winner in the public category was Dean R. Stordahl, the Director of the VA Loma Linda Healthcare System, formerly known as Jerry Pettis Veterans Hospital. I worked for Congressman Pettis years ago and know that Director Stordahl has done an outstanding job honoring the Congressman's legacy and wishes to see excellent care given to those who have served this nation.

***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/.

19. Enfranchise(tr.v.) --- to endow with rights of citizenship, especially the right to vote: California voters have been enfranchised with the powers of initiative, referendum and recall, the latter of which they are now exercising with vigor.

20. Epiphany (n.pl.) --- a sudden manifestation of the essence or meaning of something: A few Democrats have had epiphanies that high workers' comp rates and increasing unemployment insurance premiums are driving businesses out of the state.

21. Equinox (n.) --- either of two times of the year when the sun crosses the plane of the earth's equator and a day and night are of equal length, about March 21st and September 22nd: If the stalemate continues, California may experience a budgetary equinox this year-the length of time without a budget may equal the time with one.

BOE AND LEGISLATIVE DATES

August 6 --- BoE meets in Sacramento.

August 18 --- Legislature reconvenes.

August 29 --- Last day for fiscal committee to meet and report out bills to the floor.

September 10 & 11 --- BoE meets in Culver City.

NOTABLE DATES/ HISTORY

July 21, 1846 --- Mormons found first English settlement in California (San Joaquin Valley)

July 21, 1861 --- Bull Run, the first major battle of Civil War, ends in Confederate victory

July 22, 1942 --- Gasoline rationing begins in U.S. during WWII

July 23, 1914 --- Austria-Hungary issues ultimatum to Serbia leading to WWI

July 24, 1925 --- Scopes guilty of teaching evolution in a Tennessee high school, fine $100 plus costs

July 25, 1947 --- U.S. Air Force, Navy and War Department combine to form the U.S. Department of Defense

July 26, 1775 --- Benjamin Franklin becomes first Postmaster General

July 26, 1945 --- Churchill resigns as Britain's Prime Minister

July 27, 1974 --- House Judiciary Committee votes 27-11 to recommend impeachment of President Nixon

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