Tax Mechanics

 

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 Tax Mechanics Columns, Co-Authored by ACCT Chairman  Ken  Hambrick and the 
 Executive Director of the Contra Costa Taxpayers' Association, Kris Hunt.

 These columns appeared in the Contra Costa Times during 2005 and early 2006, and 
 offer a practical background on tax issues that affect us all.  

 

 Articles in the Tax Mechanics Series (Click on Title to Read)

   1.  "Get the Tax Lowdown from Those in the Know" (05/28/05) -- An Introduction 
   2.  "Bonds Are Not Free" (06/11/05)
   3. 
"We Love Proposition 13 More Than We Hate It" (06/23/05)
   4.  "Taken for Taxes, A New Use for Eminent Domain?" (07/09/05)
   5.  "
The Art of Deception – Hidden Taxes for Us All" (07/23/05)
   6. 
"Taxing the Rich, or Who Really Pays Taxes?" (08/06/05)
   7.  "The Contra Costa Grand Jury -- Watching Out for You" (08/20/05) 
   8.  "
Urban Limit Line – Good Planning or Land Grab? (09/03/05)
   9. 
" 'Fees' Are Often Just a Tax by Another Name" (09/17/05) 
 10.  "
Devil Is in the Details on Property Tax Bill" (10/01/05)
 11. 
"
LAFCO’S Influence Is No Laughing Matter" (10/29/05)
 12.  "
Is Redevelopment a Blessing or a Curse?" (11/12/05)
 13.  "
Talking Taxes After the Leftovers Are Gone" (11/26/05) -- a Catalog of Taxes
 14.  "How Benefits Become Liabilities" (10/15/05)
 15. 
"
Will Income Tax Reform Ever Be In The Cards? (12/10/05)
 16.  "
The Tax Mechanics’ Letter to Santa Claus" (12/24/05)
 17.  "
New Year = new tax: are you surprised?" (01/07/06)
 18.  "
State of the state: Build now and pay later?" (01/26/06)
 
19.  "Unlike Your Taxes, We Will Be Going Away"  (02/04/06)

 

Get the Tax Lowdown from Those in the Know
(published May 28, 2005)

You’ve surely heard the old adage, “Death and taxes are inevitable.”  Most of the time this seems to be true.  It’s almost impossible to feel you have any control over what government does to or for you. How can one keep on top of what’s going on and how these various things impact you and your family?  There are so many hands in the cookie jar, like the County, its cities, school districts, park districts, BART, etc. all with their various taxes, fees, bonds, and other legislative actions. And then let’s not forget state and federal governments.   

This new column will be published bi- weekly.  The idea for this column is to be educational and bring you information on issues from a taxpayer’s perspective. It won’t be limited to taxes or fees but will include who spends your money and why. For example, what does a county government do as opposed to a city and how are both funded?  Where do your property taxes go?  Sales taxes?  Gas taxes?  Why do fees for the same service differ so much between government entities? The topics are endless.

In the county, we have encountered many myths about government and taxes that this column can help dispel. These include:

  • "Bonds are free." Politicians even joke about this one, but somehow no matter how much financial trouble we are in, the idea that we can pass more bonds is still brought up. The reality is that bonds are just like the mortgage on a home, you end up paying back the bonds with interest.
  • "Prop 13 is blamed most any time governments need money."  Is this really true?  Prop 13 certainly changed a lot of things in California , but has been in effect over 25 years.  Maybe it’s time to get beyond that excuse. 
  • "Businesses can always handle another tax (or fee)." The reality is, businesses don’t pay taxes, people do. Businesses must pass on the cost to the consumer or, when that’s not possible, cut back on purchases, salaries, staff or, in the worst cases, move out of state or go out of business.
  • "Make the developers pay."  Do the developers take this money out of their respective profits to pay for infrastructure, etc?  We haven’t run into any altruistic developers lately, so what’s the real story?
  • "Propositions do what they claim they will do." Think of the Indian gaming proposition that everyone was told would help poor tribes out in the hinterlands. Suddenly Nevada-type casinos are being planned for urban areas.
  • "Tax the rich – they can afford it!" Maybe they can afford it, but California cannot.  The data for the 2003 tax year shows that there were only 28,000 Californians who earned over $1 million dollars.  Those millionaires were only 1/5th of 1% of California taxpayers and yet they paid 24% of all income taxes. These “rich” taxpayers have feet and can bolt for places like the income-tax-free state of Nevada and take all of their tax revenue with them. ( Reno really is a nice place to live).

These and many other subjects will be dealt with in detail in future columns.  We hope you find what we write interesting and informative.  We’ll do our best to make this so.

You are invited to join us in exploring these subjects and others, suggesting questions and topics, or even as an author (subject to editing, of course) as we explore these taxing matters.   As someone said, “While death and taxes may be inevitable, being taxed to death is not.”  


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Bonds Are Not Free!  
(published June 11, 2005)

A Contra Costa State Assemblyman recently joked "Of course, we all know bonds are free.”  The audience laughed, but, truthfully, most citizens never think about how bonds are going to be paid off.  As a result, Californians have been passing bonds in record numbers even though the state is in the middle of a financial crisis.   

Political ads further the confusion. Perhaps you recall the ad that ran during last November’s election urging voters to pass the Children’s Hospital bonds and claiming this could be done "without raising taxes." This statement was correct and misleading at the same time. Over the 30-year life of these bonds, either the $1.5 billion (principal plus interest) must be cut from the State budget or taxes must be raised. Either way, there is a price to be paid.  

What are bonds?  Bonds are a useful way of financing projects that have a long  service life such as schools, roads, and  bridges that justify the 30-year repayment period. Bonds are offered by many government entities including the state, counties, school districts, BART, etc. Buyers of bonds are repaid for the value of the bond plus interest. As a rule of thumb, the total cost of a bond is about double its face value because of the interest.

Recently, bonds have been used to address short-term issues which could set  new and financially dangerous precedents. In March 2004, voters approved $15 billion in bonds to deal with the State’s budget problems. This did not make the problems go away – but it extended the time period to pay for the deficit. Another example of a different use of bonds was for the stem cell research bonds passed last November. The major portion of the bonds will fund research, rather than the construction of laboratory facilities. In this case, the issue is that we are financing day-to-day research expenses with long-term bonds with only the promise of long-term health and economic benefits.     

How are bonds paid for?  The answer is a confusing, "it depends."    

·        For bonds issued by local governments such as school districts or BART, the expense shows up as an assessment on your property tax bill.  

·        Pension obligation bonds such as those issued by Contra Costa County to cover employee retirement costs (these bonds don’t require a public vote) are paid from the General Fund. Repaying the bonds and interest reduces the money available for other County services.  

·        Other types of State bonds, such as revenue bonds, are used to finance capital projects and usually paid from the revenue generated by the project itself as in the case of a bridge toll.    

·        Most State bonds are general obligation bonds and the principal plus interest are paid out of the State’s General Fund. These payments reduce the funding  available for various State services. The result is that either services must be reduced or taxes increased.  

Possibly because of the confusion about the repayment of bonds, Californians have continued to approve bonds at both the State and local levels. Unfortunately bond payments are escalating and coming due when the State can least afford them. We have already run up a debt which will severely limit the State’s ability to respond to our long-term needs far into the future.     

The next time you see an ad or hear a politician promising that you can vote for a bond “without raising taxes” just remember bonds…are anything but "free."  


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We Love Proposition 13 More Than We Hate It
(published June 25, 2005)

Does this name seem familiar?  Probably not, but it’s the official name of Prop 13, California’s most controversial proposition.  It was passed by 65% of voters on June 6, 1978.  After 27 years, much of the history has been lost in the blame game often leveled at Prop 13. Why did the measure come about and what did it really change?   

Prior to the passage of Prop 13, local governments could raise property taxes annually to match whatever level funded their budgets.  This prompted a San Francisco legislative analyst to observe, “Before Prop 13 the Mayor had a relatively easy job.  You added up all your revenues and all your expenditures, then … you just socked it to the taxpayers.”  Obviously, there was little motivation for governmental efficiency.  

After years of tax increases during the real estate boom of the 1970’s, Prop. 13 was ripe for passage.  In one year property values increased over 28% and property tax increases followed right along. Some people were forced to sell their homes because they couldn’t keep up with their tax burden.  

So what did Prop 13 actually do?   

  • Property taxes were set at 1% of the assessed value at the time the property was acquired and annual increases in the assessed value were limited to 2%.  It allowed homeowners to know what their taxes would be and enable them to plan for the future.
  • It required a two-thirds vote for the Legislature to increase taxes and two-thirds for voters to approve local special taxes. 
  • Control of allocating property taxes shifted to the state Legislature. 

Another fallout of Prop 13 was changing California from relying mostly on property taxes to where sales tax is now the main source of revenue for cities (sales tax now exceeds property tax revenue statewide).   

Prop 13 did change California’s tax and political structure.  It was a serious solution to a serious problem created by the unlimited use of power by local governments to increase property taxes.  This was a citizen tax revolt – business was not in favor of the measure.   

There are now adults who weren’t even born when Prop 13 was passed.  They have grown up hearing strong opinions about Prop 13.  Let’s take a look at some of the commonly held beliefs surrounding it:  

  • Unequal taxation.  Fact: while neighbors may pay different amounts of property taxes, taxes for both can rise annually subject to the 2% limitation.  Every homeowner is protected by the 2% limitation.  Today’s higher taxpayer may well be tomorrow’s lower taxpayer as homes continue to be bought and sold.
  • Lower education funding.  Fact: education funding is larger on a per capita basis today, in constant dollars, than before Prop 13.
  • Less revenue available to government entities.  Fact: California collects the same 16% of personal income in taxes, fees and assessments as it did before Prop 13.  And it spends more per capita, in constant dollars, than it spent before 1978.

·        Business not paying fair share.  Fact: studies show that businesses and income producing properties pay two-thirds of total property taxes statewide, just like they did before Prop 13.

Houses are sold and reassessed regularly.  In 1995 only 22% of original 1978 tax base property in Contra Costa County still had the original owner.  Today that number is estimated to be about 10%.

We will continue to have a love/hate relationship with Prop 13 as long as there is a perceived unfairness of two homes with the same value having different property taxes. However, polls indicate that the majority of Californians want to leave it alone.  So maybe we love it more than we hate it.


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Taken for Taxes, A New Use of Eminent Domain?
(published July 9, 2005)  

In the United States, property rights have always been sacred.  Our home IS our castle.  Even our tax system is geared toward home ownership by allowing deductions for property taxes and mortgage interest.  Even though the Constitution recognized that there would be a need to take property for public use, it guaranteed just compensation for the property taken.  

Recently, the U.S. Supreme Court in the case of Kelo vs. City of New London turned that “public use” concept on its ear by allowing eminent domain to serve private developers and support the “public benefit” of increasing sales and property taxes.  

What is eminent domain? It’s the power of a government body to take private property for public uses even if the owner does not want to sell their property. Public agencies like cities and counties and quasi-public agencies such as airport authorities are able to use eminent domain in order to carry out their missions. For example, it would be virtually impossible to convince every owner in the path of a proposed freeway to sell their property.  That’s the type of public use that eminent domain was supposed to address.  

The Kelo decision allows local governments to take privately owned homes for “public use” and turn the property over to a private developer who could then build an office park, condos or even retail. No bridge, no road, no school - the “public benefit” would primarily be increased property and sales taxes.   

Closer to home, we in California are facing even more threatening eminent domain challenges:  

  • Senate Bill 521 (Torlakson) would add to the definition of “blight” the lack of high density within a quarter mile of a designated transit hub area, like a BART station.  Once an area is designated as “blighted,” redevelopment law makes eminent domain easier to impose.
  • In many areas, redevelopment districts are already taking property that is providing, and could continue to provide, low cost rents for businesses and apartment dwellers.  The readily affordable housing in some of these areas enables lower income people to enter the housing market.

The quest for more revenue is driving governments to make questionable land use/economic decisions. For example, Concord and Martinez were competing for a Costco because of the sales taxes generated by that high volume retailer.  

People might ask why someone would fight eminent domain when you get just compensation” for your property?  For some property owners, there is no adequate compensation in the form of money.  For example, they may have happy memories of planting a tree in their yard to celebrate the birth of a child and the watching both grow to maturity. This is something that you simply cannot replace. And then there is the issue of where would they move when forced to move?  On the financial side, selling a house and moving could, in California, bring a higher assessed value and therefore higher taxes.  

Since virtually all governmental bodies feel they are financially constrained, there has been a trend toward more creative and risky financing. The Kelo decision opens another opportunity for creative takings to generate additional revenue sources.  

After the Kelo decision was announced, politicians at all levels have rushed to assure us that there is no threat of taking away our homes. While many steps are involved in using eminent domain, citizens need to be extremely diligent in raising concerns against an entrenched bureaucracy that continues to propose laws that weaken individual property rights.  

Justice Clarence Thomas caught the essence of the issue when he wrote in his dissenting opinion in the Kelo case that “Though citizens are safe from the government in their homes, the homes themselves are not safe.”  Keep his wisdom in mind and be vigilant.


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 The Art of Deception – Hidden Taxes for Us All
(published July 23, 2005)

                          If you drive a car, I'll tax the street,
                          If you try to sit, I'll tax your seat.
                          If you get too cold I'll tax the heat,

                          If you take a walk, I'll tax your feet

The Beatles – Taxman  

The average family pays more in taxes today than for food, clothing and shelter combined.  Some sources claim as much as 57% of our income goes to taxes.  

Some taxes are well known or obvious, like income tax, sales tax, property tax and gasoline taxes.  But there are a lot that we’ll bet you don’t even know you’re paying.

Here are a few examples.  And, in many cases, we pay sales tax in addition which is paying taxes on a tax.  

For everyday life:

Telephone tax – We’re paying a tax that’s over a hundred years old on our landline phones.  Starting as a tax to support the Spanish American War, it’s still here.  

Cell phone tax – The taxman has to stay technologically current so we now have a tax on wireless communications.  In California, a tax of 19.2% is applied to our bills.  

Utility taxes – Turn on the water tap or flip on the light switch and these taxes kick in.  Even though not shown separately on our bills, we all pay them.  

Sin Taxes – Most of us know that liquor, beer and tobacco are all heavily taxed.  But do we realize how much? 72% of the cost of a bottle of liquor, 43% of a bottle of beer and cigarettes a huge 82%.  There’s an old adage, “If you don’t drink, smoke or drive a car you are a tax evader”.  

Insurance tax – Do you have a life insurance policy for the protection of your loved ones?  If you do, there’s an insurance tax imbedded in every premium payment you make.  

Electronic waste recycling – Buying a new computer or TV? Since September 2003, we’ve had to pay this State Environmental Fee.  But if we take a TV or computer to the dump they still charge us $25 - $40.

For the auto enthusiasts: 

Gas guzzler tax – If you are thinking of buying an SUV, you will pay this tax if the mileage delivered is less than 22.5 mpg as measured by the EPA. You won’t see it on the sticker; it’s added into the manufacture’s price, anywhere from $3000 to $7700.  

Tires – Buy a new set and you pay an excise tax which is not shown on the invoice.  And now we pay a disposal fee too.

For the sports fans:  

Jock tax – California started it in 1991, a form of income tax.  First athletes and now other entertainers are included too, even if they’re here only one day.  

Firearms tax – If you are in the market for a pistol or rifle, be prepared to pay an excise tax that isn’t disclosed to you.   

Bow and arrow tax – Not even Prince John would put an excise tax on the “tools of their trade” for Robin Hood and his Merry Men, but the Federal government shows no mercy to modern day archers.  And not to discriminate against other sports, the Feds have slapped a hidden tax on all kinds of fishing tackle.  

For travelers:  

Airplane tickets – Flying to see your grandmother?  If you think the ticket costs a lot, it’s because up to 40% is taxes.  

Hotel and car and rental taxes – Travelers must pay these taxes wherever they go. Voters pass these taxes easily because visitors. not residents, are taxed.  

And last but not least we have one for our health and well-being:  

Vaccine tax – Do you know we are paying a hidden tax when we get a flu shot?  Or when a child is vaccinated? Well we are, on these and lot’s of other vaccines.

In retrospect, now some 35 years later, The Beatles clearly knew what they were singing about.


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Taxing the Rich, or Who Really Pays Taxes?  
(published August 6, 2005)

“Tax the rich” is a favorite cry of those who want to raise taxes because it appeals to those who feel the rich either don’t pay their fair share of taxes or can afford to pay more. The opposite is true for tax cuts; many complain that the tax cuts go only to the wealthy.  You may be surprised to learn who pays income taxes, who doesn’t, and the potential consequences of raising taxes on the “rich” in our own state.     

Who pays Federal taxes?  

2002 IRS data shows that the top 1% of taxpayers paid 34% of the income taxes. If you expand that to include the top 5%, they paid 54% of all income taxes, and the top 10% paid 66%.  When taxes are cut, it is no surprise that they go to those who pay the most taxes.  

What do you consider “rich”? The top 10% Adjusted Gross Income (AGI = income before exemptions and standard/itemized deduction) begins at $92,663, which is not what most of us would consider to be “rich” in the Bay Area.  The lowest 50% of all taxpayers (an AGI of less than $29,000) paid just 3.5% of income taxes.  

Are there wealthy people who pay no income taxes? Absolutely. According to government figures, 5600 wealthy individuals and married couples paid no income taxes in 2002. However, they are a small minority of the 131 million filers. Presumably they and their tax advisors are following the thousands of pages of the tax code, IRS rulings, etc. that make taxes so frustrating to the average citizen.  

Reverse Taxation?  

For those at the other end of the tax-paying spectrum, the IRS has projected that for 2004, some 43 million income tax filers (out of an estimated 131 million returns) were not required to pay any income taxes. Of those non-paying filers, 53% will actually receive checks that total $42 billion in a form of what can be called reverse taxation.  

“Reverse Taxation” resulted from Congress passing two “refundable” tax credits that allow a taxpayer to receive the value of the credit even if they have no tax liability (normally tax credits just reduce the amount of the taxes due.) These two credits are the Earned Income Tax Credit (EITC) and the $1,000 per-child tax credit. The EITC is designed to aid the low-income workers who have a child who lives with them over half of the year.  This can yield generous refunds.  For example, an individual who qualifies for the EITC at the maximum adjusted gross income of  $34,458 and has two or more children, pays no taxes and will actually get a refund check for $4,600.  

What about California’s rich?  

Gone are the dot.com days when California’s tax receipts swelled during what proved to be a financial bubble. There are still efforts aimed at increasing taxes, particularly for those earning over a million dollars. In fact, last November, California voters passed an additional 1% tax on millionaires to expand mental health services. While such efforts have their appeal, there are consequences of raising taxes to the point that the wealthy leave the state. It should come as no surprise that so many sports figures and other celebrities reside in Nevada - a state that has no personal income taxes.  

The ranks of California’s millionaires have been reduced to a mere 28,000 from a dot.com high of around 44,000. While few in number (1/5 of 1% of California’s taxpayers), they pay 24% of all income taxes. Since one-half of the state’s General Fund budget comes from personal income taxes, it is easy to see why keeping these taxpayers in the state is critical.  

Taxes are a complex mix of financial and social objectives.  It is essential that both goals be kept in balance.  


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The Contra Costa Grand Jury – Watching Out for You
(published August 20, 2005)
 

Thanks to TV shows such as Law & Order, you’re probably familiar with the work of a Grand Jury (GJ) involving criminal matters.  In Contra Costa County we also have a civil GJ that investigates governmental bodies and acts as an unbiased citizen watchdog of their operations and activities.  This oversight can help save your tax dollars. 

It was Contra Costa’s County’s civil GJ that warned the County Board of Supervisors (BOS) about the financial problems with the County employee pension system. Had the BOS listened to them, the County might not be in the financial fix it now finds itself.    

The County GJ consists of 19 county residents.  Applicants are interviewed by judges, winnowed down to 30 finalists, with final selection being done by random drawing.  Jurors serve for a year.  A juror certainly doesn’t serve for the money; he/she receives only $15 per meeting and reimbursement for mileage while working many hours per week.  

The GJ is an independent body but is overseen by a Superior Court judge.  It investigates government agencies such as county, city, special districts, and certain non-profit corporations.  They investigate these entities to “ensure that their functions are performed in a lawful, economical and efficient manner. If an entity is reluctant to cooperate, the GJ can use its subpoena power.  Recent investigational topics have included the County Workers Compensation Program, redevelopment agencies, hospital districts (especially those without a hospital), foster care, county adoption process, and earthquake preparedness in schools.     

Topics for GJ investigations come from many sources, including letters from the public, newspaper articles, or personal knowledge of the jurors.  Some investigations are mandated by the California Penal Code such as the annual inspection of all jail facilities in the county.       

The GJ speaks only through its reports which are published throughout the year.  An agency on which a report is written is required by law to respond stating what it’s going to do, or not do, with the GJs recommendations.  However, there is nothing in the law that requires that agency to implement any of the recommendations of the GJ.  Unfortunately, the power of the GJ must come through publicizing its findings through the media and drawing public attention as it did in the case of the mounting County pension problems.  

In 2002, the GJ broke with tradition when members investigating the County’s pension system appeared before the BOS urging them not to pass the generous pension benefit increases they were contemplating.  The analysis by the GJ indicated that the pension system was already in financial trouble.  The BOS approved the enhanced benefits anyway.  Some members of the BOS made light of the GJs findings on the pension issue and even went so far as to ridicule GJ members saying they “didn’t understand county finance.”  

The GJ later published its report entitled “Under Funded Employee Benefits Threaten the County’s Financial Stability,” and stated, “By approving these increases, the Board of Supervisors is spending money it does not have.  It is adding to the horrendous amount of pension plan unfunded liabilities totaling more than $832 million without any idea of how to pay for it.”  Fortunately, the media picked up on the report and exposed the situation.  In the three years since, the GJ has been proven to have been right.  

The GJ provides a wealth of experience and knowledge at very little cost.  A GJ member remarked, while looking around the table at a jury meeting, “the County is getting a million dollars worth of talent for just pennies on the dollar.”  Contra Costa’s citizens can be grateful for the work of these watchdogs and should let our elected officials know what they think when worthwhile GJ recommendations are rejected.  

GJ reports and the responses from the agencies reviewed can be viewed at http://www.cc-courts.org/grandjury/.  They make very interesting reading. 


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Urban Limit Line – Good Planning or Land Grab?
(published September 3, 2005)
 

The Urban Limit Line (ULL) is currently a hot issue in Contra Costa County . Because this issue is so complex and not understood by most people, we decided to try simplify this issue as best we can.  

The ULL protects agricultural land and open space outside the line from urban development.  Land can only be developed as designated in the General Plan.  For example if land is designated for five acre Ranchettes, it can be built.  But the same land cannot be split into smaller sized building sites.  Land designated as agricultural can only be used that way.

The ULL started with voter approval of Measure C in 1990 (not the transportation sales tax measure).  The Board was motivated to put the Land Preservation Ordinance on the ballot in response to a very restrictive competing measure by a group of environmentalists.  The BOS measure won.  

While establishing the ULL, this ordinance requires, among other things, that not less than 65% of the land in the County is preserved for parks, open space, agriculture, wetlands, and other non-urban uses.  As of 2004, only 26.2% was developed.  

In 2000, the BOS shrunk the ULL drawing a new line that included 15,241 fewer acres (24 square miles) inside it.  The 1990 ordinance gave the BOS the authority to do this with a 4/5ths vote.  Changing what voters approved triggered a lot of the controversy we see today.  For example, Roddy Ranch near Antioch was inside the ULL approved in 1990, but the 2000 line put it outside.  Antioch has long planned to develop upscale housing on this property.  

Then along came Measure J, a renewal of the half-cent sales tax for transportation.  Approved by voters in 2004, its growth element requires a mutually agreeable ULL be established by April 2009 if cities want to get Measure J tax money for local street and road maintenance. For a countywide line, it must be approved by 75% of the cities representing 75% of the population and a 4/5ths vote by the BOS.  

If agreement can’t be reached among the county’s 19 cities and the BOS, which is highly unlikely, each city is free to propose a ULL for itself to be voted on by its residents.  Since the BOS appears to want to hold the present ULL, a number of cities, like Antioch , Brentwood and Pittsburg , have indicated the desire to have their voters consider a new line (recently Antioch ’s City Council put such an initiative on the November 8 ballot).  

In addition to the desire to get this money, part of the problem is a power struggle between the cities and the county (85% of the residents are in cities).  The cities believe in control of their own destiny rather than the BOS.  On the other hand, the BOS sees its responsibility, especially on growth management, to be countywide, except the BOS has no authority to establish a ULL for the cities.  

There are those that argue a ULL is a growth management tool, essential to mitigate “urban sprawl”, traffic congestion and preserve open space and agriculture.  There are others who argue it’s a “land grab” effectively preventing property owners from getting the most value for their land and contributing to high housing prices by restricting inventory of developable land.  

Whichever side you are on, you’ll hear a lot from both sides in the coming months.  One way or the other, you’ll be asked to vote on a new urban limit line.  It’s unlikely that there will be one countywide ULL, but rather several individual cities will develop their own voter approved lines.  The only sure thing is, new lines need to be established since no entity wants to lose out on Measure J’s money in 2009.  

We are sure they will all meet Measure J’s requirements and get the street and road maintenance money just as they have from the current transportation sales tax.

Our advice to you is read and study everything you can on the ULL issues.  By so doing you will be able to cast an informed yes or no when it’s time for your vote.  


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'Fees' Are Often Just a Tax by Another Name
(published September 17, 2005)

The “is it a tax or a fee?” issue came up again this week in Contra Costa during a discussion of a tax (or “fee” according to some) on cell phones to cover 911 emergency services. You wouldn’t think it would be that difficult to separate a “tax” from a “fee.”  

A fee, by definition, recovers the cost of providing a service to the service user or to pay costs of regulating specific industries or activities.  A tax provides benefits to the general public. This sounds straightforward, but in California a “fee” (unless property-related) can be directly approved by a local governmental entity: a “tax” requires a vote of the people. With governments at all levels seeking to increase revenue, the imposition of fees rather than taxes is a growing financial issue for taxpayers.    

What caused the “tax or fee” debate?  

As is the case with so many tax topics in California, the discussion begins with the words “prior to the passage of Prop 13. Until Prop 13 passed in 1978, the distinction between a tax and a fee was meaningless. The state Legislature could approve both items with a simple majority vote of both houses. At the local level, cities, counties, and special districts could impose taxes and fees through a majority vote of the governing body.   Prop 13 and later Prop 218 made those distinctions critical through the following changes:  

  • Required 2/3 vote of the electorate to pass a tax designated for a special purpose
  • Required majority of the electorate to pass a general purpose tax
  • Required 2/3 vote by both houses of state Legislature to increase taxes

Because fees are easier to impose and increase than taxes, there is an incentive at both the state and local level to use fees rather than taxes as a revenue source. It is no wonder that fees have been expanding in both type and number. Of course, fees are supposed to cover only the reasonable cost of providing the service or licensing to which the fees relate.  For example, fees for building permits pay for building inspection services.    

Fees have moved beyond their modest beginnings. Now, the most expensive fees are “impact” fees which seek to cover the impact of building houses or offices on local roads. East County recently increased its “traffic fee” on a new home to $15,000 which adds to the affordability problem. The Antioch City Council increased its “franchise fee” on garbage collection by 140%.  Both increases were done without a vote of the residents.   

Because the amount of a fee is not supposed to exceed the cost of providing a service, the size of a fee is rarely challenged. This allows fees to be used to underwrite the cost of expensive public employee benefit programs. These expenses have certainly have contributed to the fee increases that are appearing everywhere from tree cutting permits to rental of public picnic areas.   

In the case of 911 fees, the courts are already being asked to decide the “tax or fee” issue. In two current cases, a 911 fee is charged monthly for each phone number.  The fee is not for using the 911 service, but to support services that are already available.  The 911 emergency communications system was created and financed through a statewide tax on phone bills, but does not cover police and fire operations.  The legal argument is that these are basic law enforcement and fire suppression activities and therefore should be financed by taxes, rather than a “fee.”  The decisions on these issues will impact the future use of fees.    

As required by law, all taxes should be presented to the public for a vote. While “…a rose by any other name would smell as sweet,” taxpayers should be sure that what is being called a “fee” is not really a tax. 


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Devil Is in the Details on Property Tax Bill
(published October 1, 2005)

If you own property in Contra Costa County, your property tax bill is in the mail. When it arrives, resist the temptation to jump to the total and actually read through what can be a very long list of line items. The property tax bill acts as a collection tool for a number of governmental agencies. So, in addition to the actual “property tax,” everything from mosquito abatement to school bonds is on the bill depending upon where you live in the county.  

The bill is divided into two sections, “Ad Valorem Taxes & Assessments” and “Special Taxes & Assessments.” “Ad Valorem” means a tax or assessment levied on property based on its “assessed” (not market) value. School bonds and the basic property tax fall into this category.

The items you will see on the Ad Valorem side of the property tax bill include:

                        A 1 percent countywide tax -this is the actual property tax and increases are limited by the terms of Prop 13. This tax is actually collected for a variety of entities and is split approximately as follows:  50 percent to schools, 21 percent to special districts, 12 percent to the county, 9 percent to redevelopment agencies, and 8 percent to cities.  

                        East Bay Regional Park – this repays bonds authorized by voters in 1988 to buy land.  The Park District gets part of the 1 percent of the property tax for operations. 

                        Community College Bond 2002 – Used to remodel and update the facilities of the Contra Costa Community Colleges.

                        On the Special Taxes and Assessments side of the bill: 

                        CCC Sanitary District Sewer Charge – Every residence has a sewer charge by a sanitary district, ranging from $100 to over $300. 

                        CC Federal Stormwater Fee – mandated by the Federal government to eliminate contaminants from storm water runoff. 

                        Mosquito & Vector Control Special District – covers programs to control pests like rats and mosquitoes. 

                        Emergency Med B – used to expand ambulance service, provide defibrillators, train paramedics, etc.

                        Eastbay trails – East Bay Regional Park District parcel tax for trail maintenance.   

The number and cost of the individual items on the property tax bill varies depending upon the city (if any), school district, etc. in which  the property is located as well as the assessed value of the property. 

For example, El Cerrito has more than twenty ”extra” taxes and assessments while Antioch has eight. 

These other items can add significant amounts to the taxes you pay. A review of a cross-section of tax bills shows an overall increase of as much 16 percent in some communities in the past year.  

In some cases, the Special Taxes & Assessments have increased over 50 percent.

As a property owner and voter, you can control some of the increases in your tax bill. Make sure you vote when new taxes or bonds appear on the ballot and be aware that bonds will not appear on the tax bill until the bonds are actually issued.

Even though they don't see a property tax bill, renters are impacted by tax increases since those costs normally flow through to them in the form of higher rent.

After your income taxes, property taxes are likely your next highest bill. Know what you are paying for – read your tax bill. 


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LAFCO’S Influence Is No Laughing Matter 
(published October 29, 2005)

The Local Agency Formation Commission (LAFCO) is another of those little- known commissions that can have a major impact on taxpayers.  LAFCO is actually a state commission, but each county in California has its own LAFCO comprised of local officials.  If you have heard of LAFCO, — it’s likely in conjunction with annexation of land.  This is  LAFCO’S most highly publicized and controversial role. LAFCO does not determine zoning or regulate land use; those decisions are the prerogative of each city or county.  However, LAFCO impacts land use decisions through approval or denial of boundary changes. 

LAFCO’s main responsibilities are to: promote orderly growth and development, preserve open space and agricultural land, discourage urban sprawl, and to ensure that public services  are provided to county residents in the most effective and efficient manner. To meet these responsibilities, LAFCO approves or denies proposals for such things as:

  • Annexation of land to cities and special districts

  • Contracting the boundaries of cities and special districts. 

  • Forming, dissolving, or consolidating cities or special districts; and

  • Conducting municipal-service reviews that include an analysis of “cost avoidance opportunities,” always a taxpayer favorite.

There are 44 taxpayer-supported special districts in the county that fall under LAFCO.  These districts provide essential services such as water, sewer and include healthcare districts (formerly known as hospital districts).

LAFCO is required to conduct service reviews every five years for the  special districts and cities. These reviews assess whether the  needs of the county’s residents are being met by these districts and cities, and whether the services are being delivered in a cost-effective manner.      The outcome of a review could result in dissolving a district.     

LAFCO updates the “sphere of influence” (SOU) of each city at least every five years.  SOI is a plan for the probable physical boundaries and service area of a city (or special district).  This is LAFCO’s most controversial duty, because expansion of a SOI can lead to expansion of a city or special district.

Designating a SOI is not the same as annexation.  Annexation is a highly complex process that includes such items as the city and County reaching agreement on how they share revenue from the annexed area. Ultimately, annexations require approval by LAFCO.

In 2002, the County Grand Jury published a report entitled “Narrow Focus of Contra Costa County Local Agency Formation Commission” (Report No. 0209).  It was the Grand Jury’s conclusion that LAFCO was not carrying out its responsibilities for reviewing special districts.  

The Grand Jury cited three healthcare districts, Mt. Diablo , Los Medanos and West Contra Costa (WCCHD) as examples where LAFCO had provided little oversight.  None of these districts had operated hospitals for years (WCCHD assumed operation of its hospital again in 2004). Mt. Diablo and Los Medanos both continue to tax those in their districts, while providing only limited services.  LAFCO could, if its findings justified it, dissolve either or both of these districts and save taxpayers money.

So where do the members of this powerful commission come from?  Contra Costa County ’s LAFCO is made up of seven members: two county supervisors chosen by the Board of Supervisors, two city representatives selected by the Mayor's Conference, two representatives from special districts chosen by the Contra Costa Association of Special Districts and one public member chosen by the other commissioners.

So even though not well known, this is a State agency that carries a big stick. It potentially has a great impact on growth and delivery of government services in the County. 

The Commission meets on the second Wednesday of each month at 1:30 pm in the Board of Supervisors chambers in Martinez .  


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Is Redevelopment a Blessing or a Curse? 
(published November 12. 2005)
 

Redevelopment is one of those concepts that sound so good on paper.  “Blighted” urban areas are cleaned up through creation of a Redevelopment Agency (RDA) where private investment could not handle the job. 

Property is purchased by the RDA, the area is improved, and ultimately sold to private developers.  In theory, RDAs spur economic development and create jobs. Beginning in 1970, a requirement to provide “affordable” housing was added.  

Does this sound too good to be true? There’s a financial catch. Increases in property taxes for the RDA area go mainly to the RDA.  Schools and other local governments have their share of taxes limited for decades.  

This is how it works: a base year property tax is established when an RDA is created. As property values in the RDA increase, the property tax increases, called tax increments, go to the RDA. Other governmental entities such as schools, cities, special districts, etc. continue to receive the base year tax amount. The Sacramento Bee estimated the state pays $1.5 billion to schools each year just to make up for the money diverted to RDAs.    

Recognizing the strain that redevelopment financing was causing other local jurisdictions, the state helped them regain some of the tax increment through payments called pass-through.  For redevelopment plans adopted before January 1, 1994, pass-through agreements were voluntary and subject to local negotiation. (at least 80-90% of all schools failed to receive proper "pass-through" agreements).  

Since then, pass through agreements are mandated following a complex formula. The original intent was that an RDA would close when its objectives were achieved.  Under the statutes, RDAs can exist for up to 40 years but can be extended under some conditions.  Some RDAs dating back to the 1940’s are still in existence.  Tax increments continue being collected until an RDA closes.

Here are some additional facts about redevelopment in California :  

RDAs are widespread:  

§    25% of all developed land in the California is in redevelopment areas

§    In Contra Costa County , the County government and 16 of the 19 cities have RDAs.

§    Much of Pittsburg is an RDA.  Its RDA’s long-term debt exceeds $230 million.

§    San Jose has been the poster child for redevelopment with long-term debt of more than $2 billion.  

RDAs have a huge financial impact:  

§    Each year, over $3.1 billion or 10% of state-wide property taxes go to RDAs.

§    RDAs have issued over $21 billion in bonds which means they owe $571 for every man, woman and child in the state. These bonds do not require voter approval.  

RDAs are expanding and/or not meeting their original mission:  

§    The definition of blight has been interpreted liberally.  For example, RDAs have been created around locations such as the Pleasant Hill BART station, which was not a blighted economic area.  

§    RDAs are required by law to set aside 20% of their revenue for low- and medium-income housing, but the State Controller recently reported that only 3% was actually being spent for that purpose.

§    Eminent domain, another RDA tool, has been used for years to take property in the name of "economic development."

§    Redevelopment opponents maintain that RDAs often reduce affordable housing by replacing modest dwellings with high priced, market rate housing.

§    There is little oversight by the state although RDAs are established under state law.  

Do RDAs justify the diversion of tax revenues? A Public Policy Institute of California study concluded that “Few projects generate enough increase in assessed value to account for their share of these revenues”. What is clear is that, even with pass through, the tax increments diverted to RDAs have caused schools and other local governments to suffer financially.    

Concerns about redevelopment are increasing.  A joint Senate/Assembly hearing on eminent domain and “blight” is being held in Sacramento in November 17 in response to public concerns about eminent domain and the growing calls for redevelopment reform.


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Talking Taxes After the Leftovers Are Gone
(published November 26, 2005)

If the post-Thanksgiving conversation lags, here are some tax-related facts that are sure to get everyone talking again. 

1.  The Howard Jarvis Taxpayers Association (HJTA) just released a study about government revenue in the post-Prop 13 era.  The research revealed that revenues for every category of government in California increased when adjusted for inflation and population growth between FY 1977-78 and FY 2002-03. 

So despite the passage of Prop 13 in 1978, governments have continued to raise and spend more money. 
(The study can be found at www.hjta.org/CGAreport.htm)

2. HJTA also reported after being adjusted for inflation, revenue for k-12 school districts increased over 30 percent per student between FY 1977-78 and FY 2002-03.

3.  Income tax first started in 1862 in order to support the Civil War effort.  The Supreme Court declared it unconstitutional in 1895.  It was not until 1913, that the 16th Amendment to the Constitution passed and made income tax a permanent fixture.

4.  If you think Federal income taxes are high now, the financial needs of World War II really put pressure on taxpayers. By the end of the war those with taxable incomes as little as $500 faced a tax rate of 23 percent.  Those with taxable incomes over a million were paying a top tax rate of 94 percent!  With those expanded rates, the number of people paying income taxes jumped from 4 million in 1939 to 43 million in 1945.

5.  The “pay-as-you-go” tax plan, which we now call “withholding”, was another outcome of WW II. While this method made it easier to collect taxes, it also made it easier to raise taxes by removing the pressure of paying all of the income taxes at one time. We might feel different about the amount of income tax we pay if we had to pay it all at once.

6. In 2005, Americans celebrated Tax Freedom Day on April 17 according to the National Tax Foundation. Until that date, every penny you earn goes toward paying the various tax obligations.    

Those days breakdown like this:

  • Income taxes = 38 days

  • Social Insurance Taxes = 30 days

  • Sales and Excise taxes = 16 days

  • Property taxes = 11 days

  • Other taxes = 12 days

7.  Item 6 shows that Ronald Reagan was right when he said, “The taxpayer is someone who works for the government but doesn't have to take a civil service examination.”

8.  In 1900, Tax Freedom Day was celebrated on January 22 and taxes as a percentage of income were just under 6 percent.  Today, that figure has grown to 29 percent.

9. In 1953 the Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS). According to the U.S. Treasury, the new name was chosen to stress the “service” aspect of its work.  And we know we always think “service” when we think of the IRS.

10. If you are interested in who wastes your tax dollars you might want to take a look at the California Piglet Book (found at www.hjta.org/CalPigletBook2005.pdf) which includes a sizable list of those abusing the public trust. For example, you have probably heard that 70% of California Highway Patrol officers retire with Workers’ Comp claims. But you may not have read the Sacramento Bee article that disclosed: “ California ’s 150 workers’ compensation judges are six times more likely to file on-the-job injury cases than their judicial counterparts in state government.” Nor is it unusual for the same lawyers and doctors representing plaintiffs in a judge’s courtroom to represent that same judge for his/her workers’ compensation case.  

And unlike those turkey leftovers, taxes are never going to disappear.


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How Benefits Become Liabilities
(published October 15, 2005)

While taxpayers are still reeling from learning the cost of public employee pensions, a new topic is appearing on the scene. It is the unfunded costs for retiree health care.  Based on early assessments, these costs are going to run into the billions in California alone. Contra Costa County is about to begin its actuarial study, and County officials have already acknowledged that the County’s unfunded liability for retiree health care is likely to be $1 billion or more.  

Note: “Retiree health care” in this context refers to non-pension costs so it could include health care, prescriptions, vision care, life insurance, etc. depending on the benefits offered by a particular government entity.

The focus is shifting to retiree health care costs because the Government Accounting Standards Board (GASB) is requiring disclosure of these costs in financial statements beginning as early as 2007.  GASB is a private, nonprofit group that sets the financial reporting and accounting standards for state and local governments.  GASB recognized that many governmental entities were promising retiree health care benefits to their employees today that would obligate them far into the future without including the cost of these expenses in their financial statements.     

Most governmental entities fund retiree health care on a pay-as-you-go basis. This  means they only pay the amount for the current year’s expenses, even though they might be committing to pay health care benefits to their retired employees and their beneficiaries for the rest of their lives. With employees retiring earlier, living longer, and the cost financial statements inaccurate, but that these costs could be ignored for years while a mounting financial obligation grew sight unseen.  

West Contra Costa Unified School District (WCCUSD) provides an actual example that shows the impact of using pay-as-you-go while allowing the cost of future benefits to accumulate. The district had the foresight to do their actuarial study for GASB 45 (the requirements appear in Statement 45) disclosure purposes early. WCCUSD currently provides lifetime health care benefits after working for the district for five years.  

When the actuaries calculated the numbers as of July 1, 2004, the annual contribution for 2004/2005 under GASB would have been $72 million, while pay-as-you-go was only $12 million.  That $72 million, which reflects the true cost of providing benefits already promised, translates into about $2,200 per student per year. With WCCUSD receiving about $7,700 annually per student, you can see the potential impact on district operations.  The district is currently working to reign in their retiree health care obligations by taking a number of actions.  If they succeed, these numbers will change.

It is important to note that GASB 45 does not change the amount of retiree health care cost nor does it require these costs to be funded.  These costs already existed; GASB 45 merely requires disclosure of the critical financial facts that will facilitate good financial decision making. The majority of governmental costs are personnel-related.  So as these costs escalate, either services, including education, will have to be cut or taxes raised. Prior to GASB 45, it was easy for governmental entities to promise retiree benefits without having to deal with the realities of the future cost.  Now they will have that information. GASB 45 is a useful tool that has shown that is sometimes essential to turn “benefits” into “liabilities” in order to have sound financial planning.


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Will Income Tax Reform Ever Be In The Cards?
(published December 10, 2005)

 “Tax reform is not for the timid”
Congressman Richard Armey

A recent Tax Foundation poll showed “a majority of Americans believe federal taxes are too high, the tax code is too complex, the tax system is unfair, and they support tax simplification even if that means giving up deductions and exemptions”.

Since Federal income tax became a permanent fixture in the Constitution in 1913, the tax code has grown from 400 pages to almost 55,000.  Just since the last major reform effort in 1986, there have been more than 14,000 changes to the tax code.  

To understand the costs, impacts and complexities of our current system, consider these facts:  

  • The IRS has over 100,000 employees.
  • It still collects only 85% of the taxes due – more than a $300 billion loss.
  • Americans spend 6.6 billion hours filling out tax forms.  There are up to 1.2 million paid tax preparers in the country – almost eight-times the size of our Army in Iraq.
  • Between $100 and $200 billion are spent annually by taxpayers for tax accountants, software, etc.
  • There’s a tax form for every “special interest” - over 500 of them.  To figure out how to fill out Form 6871 – “Gains and Losses From Section 1256 Contracts and Straddles” (whatever that is) requires 76 pages of instructions.

In an effort to simplify and restructure the income tax system, on January 7, 2005, the President formed the Advisory Panel on Federal Tax Reform which delivered its recommendations on November 1st of this year.  Some of the recommended changes were highly controversial:

  • Eliminate the deductions for state and local income taxes.
  • Cap or eliminate home mortgage interest deductions (consider the impact on the real estate and housing industries).
  • Cap or eliminate some other itemized deductions, like charitable contributions, health care costs, etc. (only about one-third of tax payers actually itemized these deductions).
  • Abolish the Alternative Minimum Tax - an alternative tax calculation designed to ensure taxpayers with large deductions or credits do not escape federal tax liability.
  • Eliminate the Inheritance Tax, the so-called “Death Tax.”

It is always difficult to attempt changes in income taxes because every change impacts someone else. Changes do not take place in a vacuum. For example: if you eliminate the deduction for state income taxes, then taxpayers in high tax states such as California would feel it more than in a state without personal income taxes such as Nevada.   

Even though the majority of citizens, including politicians, agree our current system is badly out of whack, any significant changes proposed always run into the political windmill just like Don Quixote.

Imagine a world where the tax form is as simple as it was in 1913; where the IRS is reduced by 90% (this might even come close to balancing the federal budget); where you don’t need to hire a tax accountant, or even buy TurboTax; and where you won’t have to spend numerous hours collecting receipts, records and struggling with tax forms.

Utopia?  Of course.  But vested interests probably won’t let it happen.  But it would be interesting to see the impact of turning 90,000 IRS employees out on the street. 

The Tax Foundation poll also found “An overwhelming 77 percent said the federal tax code ‘needs major changes’ or ‘needs to be completely overhauled”.  With such a strong feeling among the public, in a future column we will discuss the various options that have been proposed for replacing the income tax system as we know it.


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The Tax Mechanics’ Letter to Santa Claus
(published December 24, 2005)

"Christmas is a time when kids tell Santa what they want and adults pay for it.  Deficits are when adults tell the government what they want - and their kids pay for it." Richard Lamm - Former Colorado Governor and Author

Dear Santa,

In the spirit of giving to others, rather than asking for ourselves, we hope you will deliver the gifts on this list:  

 1.    A copy of “Balancing Books for Dummies” to the Contra Costa Board of Supervisors who have been spending more than the County has been taking in for the last four years. Be sure to highlight the section on income equaling expenditures and the importance of maintaining a reserve for emergencies.

2.    A box of Legos for CalTrans with instructions on building a bridge so they can practice scheduling, pricing, and engineering without costing the taxpayers a bundle of money.

3.    For the citizens of Contra Costa, billboards at the main entrances to the County showing the current bond debt of the county and the state. Since our children’s children will be paying for those 30 year bonds, we want to remind everyone about the gift that keeps on giving. 

4.    iPods loaded only with the best ”sound bite” legislation for the offending elected officials at all levels.  It should be on a continuous loop, played at double the usual volume and be punctuated with periodic announcements of the cost of all the staff time wasted on legislation that is unnecessary, unenforceable, or unlikely to be approved.  

5.    Pinocchio noses for everyone connected with producing untruthful political ads. As of the last reporting available, over $230 million was spent on California’s November election campaign blitz but, because of the dueling ads, none of us were really sure what the heck we were voting for.

6.    Sugar plums for the voters that aren’t fooled by the sugar-coated promises that never seem to happen, like the completion of Highway 4 or BART to East County. Of course, since we believe in Santa, maybe we should believe these myths too.

7.    An adding machine for those government officials who want an additional fee or tax.  Hopefully, this will enable them to realize that each new item really does add up.

8.    A scrapbook for West Contra Costa Unified School District to remind itself that it keeps promising to do the same things with bond after bond after bond.  

9.    A copy of the SimCity video game for transportation planners who acknowledge that the vast majority of those who actually work in transit villages drive there in single occupancy vehicles.  (You might include a free upgrade of SimCounty to help them better understand housing and freeway capacity in East County.)

10.  A calendar to explain to those politicians who blame Proposition 13 every time they are short of money, that Prop 13 passed 27 years ago and it really is time to get over it. 

11.  A wall plaque for the County Board of Supervisors Chambers engraved, “The people who need the government’s services most are the ones who suffer when good financial management is not practiced”.  

We’ll put the cookies and milk out for you.

Kris and Ken  

P.S. We are sending you a separate list of politicians we think should have coal put in their stockings.


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New Year = new tax: are you surprised?
(published January 7, 2006)
 

Historically parcel taxes have been used for locally identified projects such as parks, schools, and libraries.  These taxes require a two-thirds vote as guaranteed under Proposition 13. However, there is currently an effort underway that could bring Californians the first ever statewide parcel tax (at $50 per parcel) and that parcel tax would be passed by a simple majority.   

How is this possible?  The answer is simple: change the state constitution to include this new tax category. A constitutional change only needs a majority vote to pass.  

The creators of the “Classroom Learning and Accountability Act” (CLAA) have taken the first steps toward the ballot box.  According to the Howard Jarvis Taxpayers Association, many of those behind this tax change were the same people who financed the campaign for Prop 39 which reduced the required vote on school bonds from two-thirds to 55%. Reducing the percentage vote has dramatically increased the number of school bonds that pass. That is the goal of this tax proposal.  

The approach is innovative and the Tax Mechanics congratulate the proponents on their ability to craft this major shift away from the Prop 13 protections; one that opens the door to similar tax proposals by a variety of special interests in the future.  

Because the CLAA has been designed with such care, it will be extremely difficult to defeat.  The aspects that make it virtually “bullet proof” at the ballot box include:  

  • It only requires a majority vote, as opposed to two-thirds required today.

  • This parcel tax is for education, and anyone opposing it will be branded as anti-education (ask the Governor about the wisdom of opposing the education establishment).  Businesses are always reluctant to risk that label.

  • The opposition has been skillfully blunted.  The authors of the initiative will likely give exemptions or discounts to seniors who live in owner-occupied housing (this large voting block can vote for a tax they do not have to pay).  Wealthy individuals or companies owning many parcels aren’t likely to oppose a $50 parcel tax since the cost could still be trivial to them.

  • Many renters don’t perceive parcel taxes as applying to them, so they are likely to vote for the tax.

  • The supporters of this measure funded a massive ad campaign for Prop 39 and will undoubtedly be able to do so again. As we have seen in the recent election, it is charitable to call many such political campaigns as “misleading.”

This proposed ballot initiative is poised for success and could open the floodgates for similar taxes that would add to the burden of homeowners. While we admire the skill that went into what sounds like a modest proposal, it is a major change in California’s property tax policy. We might even find ourselves back in the days before Prop 13 when property tax increases were out of control.  

The two-thirds vote on property taxes is a vital protection for homeowners. Parcel taxes are regressive; the owner of a small home will pay the same rate as the owner of a mansion or a large office building.  The voting requirement was set at two-thirds because all voters can vote on parcel taxes even though only property owners are directly obligated to pay them.  

Taxpayers should keep a close watch on the progress of the CLAA initiative.  We intend to.


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State of the state: Build now and pay later?
(published 01/21/06)
 

The insidious thing about debt is that you have to pay it off” 
-
California State Senator Dave Cox

 We’ve seen it all before. An upturn in the economy, a looming election, and suddenly government spending is “in” again. This time a bond spending spree is aimed at replacing California’s failing infrastructure.  Potential projects include roads, levees, and schools that all will improve the quality of our lives and strengthen the economic competitiveness of the state.  But when the Governor says “let’s build it,” we must ask, “how will we pay for it?”

 Californians would agree that the state’s investment in the infrastructure has not kept up with our population growth. Our aging infrastructure is inadequate now and will be worse in the future.  During revenue shortages, there was a conscious decision to divert revenue from specific sources such as the gasoline tax that was supposed to support transportation projects and use it instead to bail out the shortfall in general revenues.  Now that there is political support for investment in critical public infrastructure, additional sources of revenue will be needed, and the preferred source may be new taxes.   

The condition of the state’s financial health remains precarious.  While revenue is up, the state is still facing budget deficits each year for the next five years in the range of 3 to 10 billion dollars each year according forecasts from California’s Finance Director.  These projected deficits will continue to increase even more if new General Obligation bonds, as proposed by the Governor, are approved.   

Unfortunately, we have done this financial death spiral before.  It’s reminiscent of the spending splurge during the dot.com “boom” (1992) when permanent spending programs were approved only to be followed by dot.com “bust” (2001) when expenditures exceeded revenues by $14 billion. Now, while the state is experiencing windfall revenue, Governor Swarzenegger’s 2006-07 budget proposes spending it on permanent obligations.  While some of the Governor’s bond proposals introduce user fees, etc., most of the bond payments will have to be made from the General Fund where debt servicing costs are currently $5 billion each year.  

Elizabeth Hill, the Legislature’s non-partisan budget advisor, says the Governor’s budget proposal “moves the state in the wrong direction” by increasing the General Fund debt.  She continued “…the 2006-07 budget should focus more on paying down existing debt before making expensive new commitments”.  

The Governor wants voters to approve $68 billion in new bonds over a decade while relying on the Federal government to provide enough more to total $220 billion.  

Why should you be concerned about the “let’s build it” plan?   

·        If the proposed bonds pass, the state deficit will be even larger than the multiple-billions forecasted over the decade

·        Relying on Federal funds is risky - Washington has its own financial problems

·        The bonds will use up the state’s bonding capacity for the next decade making other items such as library bonds unlikely

·        Because California bonds already have the lowest ratings in the nation, it raises the cost of servicing this debt

·        There is no specific strategy to pay for the bonds.  

Everyone agrees that our infrastructure is in shambles.  Hopefully a “pay as you go” strategy will surface rather than one based on debt.  If the Governor’s proposal makes it to the ballot and is approved by the voters, big increases in taxes and fees are likely.  The political will is not present in Sacramento to reduce spending in order to repair and maintain our critical infrastructure.  

As we have said before “bonds aren’t free”.  With bonds, we can build now and pay later – and paying later will cost us at least twice as much as “pay as you go”.  Instead of “let’s build it” perhaps the message should be closer to “when we build it, you will pay” and that will happen either sooner or later.    


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Unlike Your Taxes, We Will Be Going Away
(published February 4, 2006)



GUEST COMMENTARY

WHEN WE STARTED this column eight months ago, our goal was to provide an objective look at issues that impact taxpayers, including the background and philosophy of them. This column is number 18, and we have covered many subjects over this time.

Tax Mechanics will now go on hiatus. The reason: One of the co-authors, Kris Hunt , is about to launch her race for Contra Costa County Supervisor. We agree with the Times that, should she run, she couldn't ethically continue as an author of the column.

We are grateful that we have had this opportunity. We also are thankful to the numerous readers who have contacted us with questions and comments. It has provided some interesting e-mail and phone exchanges.

There are a number of unresolved tax topics that you should pay close attention in the coming months.

• The assault on Proposition 13 is still the big one. We recently covered the latest effort that would bring Californians the first ever statewide parcel tax (at $50 per parcel). Because this would come about by changing the California Constitution, this new tax could be passed by a simple majority. Should it pass, the floodgates will open for a parcel tax to benefit any special interest. That will gut the Prop. 13's tow-thirds vote requirement.

• Pension and retiree health benefits for public employees have created huge liabilities that should be dealt with sooner rather than later. While this is a statewide issue, we don't have to look further than Contra Costa County to find a serious problem. For example, Contra Costa County 's pension total liability is over $1 billion and the estimated cost for paying employee retiree health benefits (as yet unfunded) are at least that much. West Contra Costa Unified School District also has a $ 1 billion retiree health care liability.

• Bonds still aren't free! We can't say that often enough. Unfortunately many taxpayers (and politicians) don't grasp this message. Bonds, plus interest, must be repaid with our tax dollars (although some are repaid through fees such as bridge tolls). With every tax dollar that goes to repaying the bonds/interest, there is that much less to go for current services.

• Fees are now the preferred way to avoid the word "tax." Government entities are increasing existing fees and introducing new ones almost daily. Politicians claim these aren't new taxes, but that contention is increasingly being disputed as attempts are made to stretch the legal definition of a "fee." These fees are a form of taxation but we don't get to vote on them.

• Redevelopment: With 25 percent of all developed land in California now in redevelopment areas, there is reason for concern that some redevelopment agencies are out of control. Statewide, 10 percent of our property taxes go to RDAs thereby diverting those funds from other governmental entities such as schools, cities, special districts, etc.

•  Contra Costa County has been spending more than it takes in for the past four years. With its reserves nearly depleted, it won't be long before essential services will have to be cut. Whether it is reduced sheriff's deputies, unfilled potholes or fewer health care services for those who need them most, it will happen unless the overspending is ended.

As we have said many times before, it's the voters who need to pay attention and vote wisely on all tax issues.


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