Do Four Budget-Related Tax Law Changes Save $335 million?

The package of budget-related measures the Democratic majority Legislature sent to Gov. Jerry Brown March 17 contains a bill lawmakers say “includes changes that result in $335 million of budget solutions.”

That much savings appears elusive, at least from reading the analysis of the bill, SB 86.

At the conclusion of the five-page analysis, which guided lawmakers in understanding the bill’s contents, appears this paragraph:

“The total combined fiscal impact of all the provisions in this bill results in additional general fund revenues of $280 million in 2010-11 and $56.5 million in 2011-12.”

Added together, the total is $336.5 million, slightly higher than the savings claimed by lawmakers but in the current fiscal environment it’s probably prudent to err on the side of caution.

The Senate bill and an identical Assembly measure, AB 110, make four changes in California tax law.

One change affects payers of use tax, which is levied on out-of-state purchases and mail order or Internet purchases.

If a retailer doesn’t charge the use tax the buyer can pay it directly to the Board of Equalization or pay it on their tax return.

There is a line on state tax forms for this very purpose known, without surprise, as the “Use Tax line.”

Under SB 86 — and AB 110 – a filer can either put in the actual amount of use tax due or use a “Look-up” table the board is ordered to create that estimates how much use tax is due based on the taxpayer’s adjusted gross income.

The analysis says this will save $10 million in the budget year, which begins July 1. Of that $6.5 million are savings in the state’s cash-strapped general fund.

Additionally, the two bills narrow the generosity of the state’s Child and Dependant Care Expense Tax Credit which grants a credit of $3,000 per child or $6,000 for two or more.

As a taxpayer’s income increases, the credit becomes less generous and is not available to taxpayers with income over $100,000.

However, at the moment, if a filer owes less in taxes than the amount of the credit, the difference is refunded to them.

The bills end the refundable aspect of the credit starting with the current tax year.

This will save $70 during the fiscal year beginning July 1 and a like amount in subsequent fiscal years.

The Franchise Tax Board is also directed to create a Financial Institutions Records Match System, which would allow the board to compare the records of tax scofflaws with customer records provided by banks and the like.

Currently, the board gets Form 1099s from taxpayers but 1099s are only cut when a taxpayer earns interest from some account.

Also, the information isn’t current – 2010 filed in April 2011 – which means the taxpayer could have closed the account before the board gets it hands on the money.

Under the legislation, the board would receive current information on all accounts.

“The use of timely financial data will reduce current collection process inefficiencies due to levies being issued based on outdated account information,” the board said in a statement.

According to the analysis, this new system is similar to the Financial Institution Data Match program mandated by the federal government for use in collecting delinquent child support payments.

The board says the system is not yet up and running.

When it is, banks and other financial institutions doing business in the state will be required to perform the matches but the state will pay them for their costs.

Even with the search cost reimbursement, the analysis says the system will generate $10 million in savings in the current fiscal year and an additional $30 million in the fiscal year beginning July 1.

Adding total general fund savings from these three changes yields a sum of $116.5 million during this and the following fiscal year.

In theory, the remainder of the savings claimed by lawmakers must come from the fourth item in the bill, which is the only one without an individual savings estimate.

While not disclosed in the legislative analysis, Brown’s Department of Finance contends this fourth change will generate $270 million this year but cost the state $50 the following year.

Using the Brown administration’s numbers makes the figures at the bottom of the analysis work: $280 million in total savings from the bill this year and $106.5 million in savings less $50 million in costs for a total of $56.5 million in savings for the fiscal year beginning July 1.

Basically, the fourth provision offers a three-month tax amnesty running from August 1 through October 31 for corporate and income taxpayers who avoided paying their full share of taxes due through the use of what are called Abusive Tax Avoidance Transactions.

These transactions take various forms but are all aimed at one thing: reducing tax liability.

The board doesn’t appear to be quite as sanguine as the Brown administration about the savings generated by this amnesty although a far more broadly based 2004 tax amnesty program yielded $1.3 billion in collections.

The liabilities of some of the taxpayers affected by the new amnesty are known because the board is currently auditing them or they are protesting or appealing board rulings against them are currently auditing them.

Also eligible for amnesty is an unknown number of tax avoiders.

In its answers to questions about the new amnesty program, the board said this:

“We do not have hard figures about the number of taxpayers meeting these criteria but it would be fairly small compared to California’s total taxpayer population. Say, in the thousands – as opposed to tens or hundreds of thousands.”

The Brown administration’s savings estimates must assume this “fairly small” group of affected taxpayers engaged in some fairly big Abusive Tax Avoidance Transactions.

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