A coalition of more than 40 business and employer groups led by the California Chamber of Commerce is continuing to raise questions and concerns about the new “business net receipts tax” being considered by a special state tax commission.

The CalChamber and coalition called on the commission to take time to undertake a thorough analysis of how the new tax will affect jobs and the economy, even after a tax rate is unveiled, before the commission votes on whether to adopt the proposal.

“We expect that the commission will provide an estimated business net receipts tax rate before its final hearing, but we are a short time away from what may be the decision day, and still do not have it,” said CalChamber President and CEO Allan Zaremberg.

“In order for commissioners to understand the impact of this tax on companies and industries, businesses must have the time to calculate how this tax will affect their often-complicated operations.”

The proposed business net receipts tax is designed to be a type of value-added tax in which companies are taxed on total receipts minus all purchases from other firms. The intent behind this new tax is to reduce revenue volatility by basing it on total receipts, rather than profits. The tax also would bring a large category of services businesses into the tax base.

More Specifics Needed
The CalChamber-led coalition presented its latest comments in a letter responding to Gerald Parsky, chairman of the Commission on the 21st Century Economy. At a commission workshop last week, Parsky invited the CalChamber and coalition to follow up testimony with their remaining ongoing issues with the business net receipts tax proposal.

The commission has scheduled a meeting on September 10 in Los Angeles to discuss its tax recommendations.

When creating the commission last fall, Governor Arnold Schwarzenegger asked the group to examine the state’s tax structure with a goal of stabilizing state revenues and reducing volatility, as well as promoting California’s economic prosperity and competitiveness.

In July, the Governor extended to September 20 the deadline for the commission to present its findings and said he will call a special session of the Legislature afterwards to consider the commission’s recommendations.

The coalition said it is requesting a detailed written proposal—including the tax rate and a full analysis of the policy, operational and transitional implications—so that California businesses and economic experts have the opportunity to respond to the commission regarding the proposal and analysis.

“As we emphasized during our workshop testimony, we believe it is crucial for the commission to take sufficient time to analyze” the proposed business net receipts tax, “rather than be driven by any arbitrary deadline, so that any vote of the commission . . . is an informed vote,” the coalition stated in its letter.

A thorough analysis and response by sectors affected also must be available for legislative review because the commission intends for its recommendation ultimately to be presented to the Legislature for consideration, the coalition said.

Key Issues
The coalition letter outlines transitional and operational questions that were not addressed in a “Preliminary Overview” released by the commission on August 21 or the commission’s August 26 and August 28 workshops on the proposed business net receipts tax:

How did the commission arrive at the proposed tax rate? Will the commission model the rate over the past several economic cycles (about 10 years) to determine the ability of the business net receipts tax to generate revenue and stem volatility? What is the risk that revenues will substantially deviate from the commission’s projected estimates?
Which came first, the rate or the base? In other words, was the rate developed as a result of the commission’s judgment as to what best comprises the base of a business net receipts tax as a matter of tax policy, or did the commission determine the most appropriate rate for the economy, and engineer the base to accomplish that rate?

The coalition expressed appreciation for the commission’s strong statements clarifying that only the Legislature, and not an administrative body, would have the authority to set and change the business net receipts tax rate, but noted that the coalition cannot provide a complete analysis of this proposal, nor can an individual company understand it, without knowing the rate and the base to which it applies.

What are the proposed deductions that will be available under the business net receipts tax? More details are needed, the coalition said.

For example, according to the “Preliminary Overview,” employers would not be able to deduct from revenues the cost of employees, an expense that is allowed under the current corporate income tax system. At the workshop, however, the commission indicated there was a possibility of a partial deduction for employee costs.

What about tax fairness? Although the commission’s intent is to develop a less volatile tax system, it should also give due consideration to tax fairness. California’s current tax system is based either on profits, such as the personal and corporate income taxes, or is passed through as a tax on consumption, like the sales tax. The business net receipts tax is imposed upon companies even when they are in a loss position, and it cannot be passed on as a transactions tax.

The coalition noted that it is not aware of any substantial discussion of why the business net receipts tax is a preferable tax policy to the current taxes that are based on profits or consumption. It pointed out that the only other major tax similar to this proposal is the property tax, the subject of the Proposition 13 tax revolt 30 years ago when it became unaffordable for major parts of California society.

Taxpayers and policymakers deserve more discussion and analysis on this issue, the coalition said.

Which economic sectors will be winners and which losers under a business net receipts tax? Adoption of this recommendation must await analysis of its impact on specific economic sectors, the coalition said.  For example, businesses with low profit margins and high employee expenses presumably would be especially hard-hit, as would companies in a loss position.

In addition, based on the limited information so far available, it appears the business net receipts tax may shift more of the tax burden onto small businesses, since many pay under the personal income tax system, and would not benefit from elimination of the corporate income tax.

What impact will the proposal have on California jobs and the economy? Adoption of the recommendation must also await analysis of this impact, the coalition stated. If the business net receipts tax amounts to a tax on employees (because it appears employers will not be able to deduct the cost of employees as they do now), will it motivate companies to outsource jobs to other states and nations? Will it further constrain California’s ability to compete for future investments if business loses important incentives such as the research and development or enterprise zone credits? What will become of California’s ability to compete with other states and countries if the cost of exported California goods becomes substantially higher than goods offered by other states and countries? Additionally, will the cost of doing business increase for Californians, due to higher prices for advertising and other business purchases?

Staff Contact: Kyla Christoffersen

The BOE is sending letters to businesses with at least $100,000 in business gross receipts who are not already registered with BOE and do not hold a seller’s permit. This means all businesses, regardless of business type (including tax practices), must register.

The letters state that the BOE has identified these businesses as qualified purchasers subject to a use tax return filing requirement (even if no use tax is due). Businesses that receive the letter must complete the contact info and mail it to the BOE. The BOE will then register the business and send them an account number and log-in information so that they can e-file their returns. The 2009 returns are due April 15, 2010. Taxpayers who did not report use tax for 2007 and 2008 must file returns to report and pay that tax. We believe this is the first step in an audit process that will continue indefinitely.

Spidell is working on a worksheet for clients to track use tax liabilities and a checklist for practitioners to easily get needed information. We will have the practice aids prepared and available at Spidell’s Fall Tax Update Seminar. Register now at a location convenient to you. You may want to attend in November or December to prepare for the onslaught of requests from your clients.

The 6th annual Oxnard Economic Outlook event speakers are predicting a slow road to recovery for the region. “Clearly we’re at the bottom,” said Chris Thornberg, of Beacon Economics, who made the presentation as part of UC Santa Barbara’s Economic Forecast Project which did the research for the economic outlook.

Thornberg has a moderate view of the economic recovery, he believes the worst is over, however he also is estimating a considerably long rebound for businesses. During his speech, he did reveal that the city of Oxnard has fared better than many other California cities.

Scott Hadly, from the Ventura County Star, reported, “The data he used, from 2008, showed that employment fell by just .03 percent in the city while countywide employment dropped by 2 percent. More recent numbers, however, show that while the nation as a whole is seeing unemployment rates of 9.8 percent as of September, California’s rate was 12.2 percent. Ventura County’s unemployment rate was 11.2 percent. Oxnard’s rate was 15.1 percent in August.”

The letter below is from Amy C. Mmagu, the Legislative Assistant from CalChamber, welcoming new businesses into the fold.

Dear California Businesses For Enterprise Zones Coalition Members and EZ Supporters:

For those of you who recently joined CalChamber’s California Businesses for Enterprise Zones coalition, we would like to extend a warm welcome, and for those who are continuing members, thanks for your continuing support of EZs!

We just wrapped up the Legislative Session for 2009, which is in recess until January 2010. However, legislative activity concerning EZs has been scheduled to continue throughout the legislative recess months, including informational hearings and work on legislation. It will be important for EZ supporters to stay engaged, as we work to protect the strength and integrity of the EZ program.

The Assembly Committee on Jobs and Economic Development has hearings scheduled for the month of October in both Northern and Southern California:

Northern California:
Thursday, October 8, 2009
10:30 a.m. to 1:30 p.m.
San Jose, California
This hearing focused on the role of EZs as a facilitator of global innovation and manufacturing

Southern California:
Wednesday, October 14 hearing
10:00 a.m. to 1:00 p.m.
San Diego, California
This hearing will focus on workforce development and measuring success of the program

Public comments will be taken at both hearings. We are encouraging EZ supporters to attend the hearings in your respective geographical areas and speak during public comment period, which have been scheduled to take place during the lunch hour to facilitate members of the public’s work schedules.

In particular, businesses with success stories about the program are encouraged to attend. If you are or know of a business with a success story (whether attending or not), please contact me at amy.mmagu@calchamber.com.

We will continue to be in touch regarding further EZ developments.

Thanks!

Amy C. Mmagu

Today I attended the second of three hearings related to AB1139. The hearing focused on the Enterprise Zones and innovation. Assemblyman Manuel Perez, as head of the JEDE, presided over the hearing. Assemblyman John Perez, AB1139’s author was also present for the first part of the hearing and stated that his two main concerns were getting rid of the TEA criteria and getting rid of retroactive vouchering. His stated reason for wanting to delete the TEA criteria was not persuasive. He did not cite to any concrete numbers or even rough statistics, but in a general baby-out-with-the-bathwater stroke suggested that “some” employees who live in expensive lofts are qualifying for the credit because some nicer areas of Oakland, Long Beach and San Francisco are within the TEA. On that basis, he concluded that the TEA category must go.

There was some very persuasive commentary by proponents of the EZ, and particularly some truly amazing real life stories from businesses who said that but for the EZ, they would not be in business today. Interestingly, those employers are hiring the types of employees and providing the types of benefits that the EZ program was designed to accomplish. More on today’s hearing next week.

The next AB 1139 hearing is October 19 in San Diego.

Here is the FTB’s October 2009 Tax News. Enjoy.

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California Enterprise Zone Program: A Review and Analysis

Thursday, October 8, 2009 from 10:30 a.m. to 2:00 p.m.

Roosevelt Community Center
901 East Santa Clara Street
San Jose, California 95116

DRAFT AGENDA

This is the second in a series of hearings being held by the Assembly Committee on Jobs, Economic Development, and the Economy on the California Enterprise Zone Program and other geographically- targeted economic development area (G-TEDA) programs. Collectively, the G-TEDA programs represent one of the state’s primary economic and workforce development initiatives.

This hearing will focus on California as a world leader in industries that rely on innovation to remain competitive. Presentations will discuss the changing global economic landscape and the potential and current role of the G-TEDA programs in advancing the state’s competitiveness in the areas of innovation and manufacturing.

Welcome, Introductions and Opening Statements

Chairman Pérez and Members of the Assembly Committee on Jobs, Economic Development, and the Economy will give opening statements and frame the key issues to be examined during the hearing. Mr. Chuck Reed Mayor of San Jose will give a few welcoming remarks.

II. California’s Global Competitiveness: Re-establishing the State’s Innovation Edge

Sean Randolph, Bay Area Council Economic Institute (invited)
Louise Auerhahn, Working Partnerships USA
Representative from Lockheed Martin (invited)
Alissa Anderson, Deputy Director, California Budget Project (invited)

The G-TEDA programs operate within a larger economic and workforce development network. Presentations during this panel will give information on how these programs are used or could be used as part of the state’s larger economic development strategy to re-establish itself within a global marketplace.

III. Economic Development: Focus on Manufacturing
John Weis, Deputy Executive Director San Jose Redevelopment Agency
Neil Struthers, Santa Clara Building Trades Association (invited)
Representative from the Silicon Valley Leadership Group (invited)
Jeff Farano, Owner, SA Recycling (invited)
Representative from Siesman, a global manufacturing company located in an enterprise zone (invited)
Representative from the International Brotherhood of Electrical Workers (invited)

Statute provides legislative intent that clearly states that the purpose of the enterprise zone program is to “stimulate business and industrial growth in depressed areas of the State.” Presentations during this panel will discuss how the G-TEDA programs in conjunction with other programs are used or could be better used to meet this statutory intent and advance competitive manufacturing opportunities.

IV. Public Comment

Anyone interested in addressing the Committee may sign up to speak during the public comment period. A sign-up sheet is located at the back of the hearing room.

V. Summation of Key Concepts and Closing Remarks

Assembly Members will highlight key issues and provide recommendations on further actions by the Assembly Committee on Jobs, Economic Development, and the Economy.

After missing out on this year’s Enterprise Zone program, the city of Needles continues to push for tax breaks in order to attract businesses away from nearby Arizona. With Assembly Bill X3 82, the city has put together enterprise zone legistlation that would establish several key benefits for the region.

Marj Dario, from the Needles Deser Star, had this to say about the development: “The group effort started when those enterprise zone applicants not selected this year came together to form a coalition. Those applicants, plus an auto plant in Fremont, have proposed an initiative titled “100,000 New Jobs for Californians (11 New Enterprise Zones) which requests special one-time enterprise zone designations be granted.”

Along with Needles, other cities that joining the coalition are: Anaheim, El Monte, Escondido, Fremont, Gardena, Los Angeles County, Madera County, Monrovia, Needles, Oxnard and Wasco.

The city of Santa Clarita has recently completed a long-term comparitive study regarding whether it is more beneficial for surrounding communities to annex into Santa Clarita or to found their own cities. The report completed in time to educate voters prior to the November 3rd election, which will guide the future planning of the region. Below are some of the report details:

Taxes:

Burr estimates that residents in the studied areas would save money on taxes if they annexed into the City. This is based on information that indicates solid waste charges are an average of $43 more expensive per home in the County versus the City. Additionally, LA County levies a utility tax of approximately $151 per home. The City does not impose such a tax.

However, several additional City taxes will bite into that savings. These include a stormwater fee, increased streetlight assessments and a $26 per-year open space fee. Overall, Burr predicts that the average homeowner would save about $93 per year.

The study forecasts a better picture for businesses. If annexation occurs, the Burr report anticipates several tax decreases. The County’s 4.5 percent utility tax is not mirrored by the City, and hotel taxes are only 10 percent in Santa Clarita, compared to 12 percent in unincorporated areas. Furthermore the City’s designation as a State Enterprise Zone could offer greater tax incentives for businesses if annexation takes place.

Developers currently pay much higher fees for parkland development in the City than in the County, and therefore that industry would be impacted to a greater extent if annexation were approved.

Governance:

Currently, Stevenson Ranch, West Ranch, Castaic and Tesoro are governed by Los Angeles County officials, who meet in downtown Los Angeles. At the top of this structure are five La County Supervisors, elected by district. In our local district, Michael Antonovich is the elected Supervisor. Although voters in the studied unincorporated areas do get to vote for their supervisor, they make up only two percent of the constituency for the District 5 seat.

If annexed into the city of Santa Clarita, residents would be governed by five City Council members elected at large. All Council members would be local residents.

Public Services:

Overall, the Burr study found that residents would receive a greater level of service if they were to approve annexation into the City. While Los Angeles County contracts with the LA County Sheriff’s Department for public safety in the unincorporated areas, the City does so on a larger level. This, the study assumes, would provide additional law enforcement services such as COBRA (a gang detail unit), the Business Alliance program, and Community Interaction Team. Additionally, unincorporated areas currently rely on the California Highway Patrol for traffic enforcement. The Study anticipates that by annexing the areas would then benefit from Sheriff’s traffic enforcement and investigation on City streets. Note: these benefits could also be attained if the areas formed their own City, provided that the chosen leaders contracted for said services.

Both the County and City have varying attributes when it comes to Code enforcement. While both respond to emergency code violations in the same time frame, the City was found to respond faster on non-emergency calls. However, the County operates regular code sweeps whereas the City only responds to complaints. The Study did note that the City operates a neighborhood makeover program which reaches out to violating neighborhoods.

Park space was found to be comparable in the studied unincorporated areas.

From the City side:

From a governmental standpoint, the Burr report predicts that the annexation would be a positive move for the City of Santa Clarita. While the City would have to pay some form of mitigating fees to the County for at least 7 years, local economic recovery and growth is expected to make the entire City function at a sustainable rate.

Voters in the unincorporated areas will chose from the following options in the November 3 election, selecting their preference for the future: incorporate a brand new city, stay exactly the same, or annex into the City of Santa Clarita. The vote is only meant to gauge what the residents prefer. The results will guide future actions towards the most popular option.

Of course these estimations can vary widely, depending on a host of circumstances. For example, the November 3rd vote might reflect interest in annexation from only a portion of the studied areas. If that is the case, each area’s fiscal benefits and detracting factors could force different results. Furthermore, if a majority of the studied areas do support annexation proceedings, and the City moves forward, the Local Agency Formation Commission (which has the ultimate approval over annexations provided less than 15% of registered voters in the affected areas don’t formally oppose) could alter the annexation area and/or County mitigation payments.

Both of the conducted studies represent the political infancy of this issue, and the resident vote will be the next major milestone.

The next community meeting to discuss these will be Thursday September 24, from 6:30 – 8:00 p.m. at Castaic Middle School located at 28900 Hillcrest Parkway in Castaic.