Tax breaks scrutinized as Calif. battles $16 billion deficit

 

SACRAMENTO (AP) — Winning a California lottery jackpot won’t force you into a higher state income tax bracket, but if you strike it rich at the horse track or casino the state taxman will want a cut.

Buy a yacht, motor home or airplane in California and you’ll pay a hefty sales tax bill. But purchase the same item in Oregon and keep it out of California for more than 90 days, and you’ll avoid sales and use taxes altogether.

Sales taxes will be added to your restaurant bill, but there’s no tax on the candy bar you buy as you head out the door.

 

California’s tax codes are filled with hundreds of other exceptions that add up to an estimated $50 billion a year in breaks for businesses and individuals.

As lawmakers and Gov. Arnold Schwarzenegger struggle to deal with a state budget deficit that is projected to be $8 billion by summer, those deductions, credits and exemptions are coming under increased scrutiny.

The Legislature’s nonpartisan budget analyst, Elizabeth Hill, is recommending that lawmakers eliminate or reduce a dozen of them in an attempt to generate $2.7 billion in revenue.

“We have to take a hard look at these things to see if they’re worth the cost,” said Sen. Jenny Oropeza, a Long Beach Democrat and chairwoman of the Senate Revenue and Taxation Committee.

Schwarzenegger has stopped short of endorsing Hill’s recommendations, but last month he said he was “sure there (are) tax loopholes out there we can close that will give us additional money for our budget so we don’t have to make just cuts.”

 

He has proposed using across-the-board spending cuts to deal with virtually all of the deficit, including $4.3 billion to education and closing some state parks.

Republicans in the state Assembly have twice refused to close one loophole that the governor definitely wants to eliminate.

That’s the so-called “sloophole,” which allows Californians to avoid sales taxes on boats, motor vehicles and planes by buying them in a state such as Oregon that does not have a sales tax and then keeping them out of California for more than 90 days.

Assembly Republicans also rejected an attempt to impose a tax on oil production, contending it would lead to higher gasoline prices.

“We’re not going to waver on taxes,” said Assembly Minority Leader Mike Villines, R-Clovis.

But Oropeza said Democrats will not agree to balance the budget with spending cuts alone.

“It’s very clear that is impossible,” she said. “It would decimate our state as we know it and ruin our future. We have to do a combination of things.”

California has been piling up exceptions to its tax laws since the breaks became popular in the 1960s.

 

There are tax breaks benefiting corporations, parents, senior citizens, farmers, ranchers, small business investors, homeowners, low-income renters, ministers, magazines, credit unions, the blind, independent oil producers and college students, to name a few.

They range from widely used exemptions that cost the state billions a year in revenue — income tax deductions for mortgage interest payments, for example — to obscure tax breaks that are claimed by a relatively handful of taxpayers and trigger revenue losses in the thousands or millions of dollars.

For example, race horses sold for breeding are not covered by the state sales tax, an exemption that saves horse owners about $200,000 a year, according to the Board of Equalization.

Also exempt are wood shavings, sawdust and rice hulls that are used on poultry farms and then resold for fertilizer.

The exemptions were adopted for a variety of reasons — to aid a particular industry, stimulate business activity in depressed areas, help people buy homes or ease the cost of raising children.

But there’s no sure way to determine if the tax breaks achieve the desired result or simply result in a windfall for businesses or individuals who would have taken the same steps regardless of the tax consequences, officials say.

 

“It’s really, really difficult to identify how behavior changes because of tax expenditures,” said David Vasche, director of economics, revenues and taxation for the Legislative Analyst’s Office. “If you could put everybody under a lie detector, then you would know.”

For five years, from 1995 through 1999, the state Department of Finance used a model developed by the University of California to try to determine the broad economic effect of major tax law changes.

If the state granted a new business tax break, would it, for example, cause companies to hire more workers who in turn would pay more in taxes to help offset the revenue loss created by the new exemption?

The most optimistic projection the model ever produced was a 20 percent reduction in estimated revenue loss, and the Legislature didn’t extend the legislation requiring use of such a model when it expired in 2000.

There also is a debate over whether tax breaks or direct spending by the state are the best way to try to achieve a particular goal.

In other words, are income tax credits for child care expenses or direct state support for child-care programs the best way to help working parents care for their kids?

It’s difficult to make tax breaks specific enough to accomplish a particular goal, and it’s tough to assure they aren’t being abused, Vasche said.

 

They also are relatively easy to approve but tough to get rid of. It takes only simple majorities in the Assembly and Senate to approve new tax breaks but two-thirds votes to eliminate or scale them back.

It would take a vote of the people to eliminate the lottery tax exemption, which was created by the 1984 initiative that authorized the lottery. Tax officials estimate the exemption will cost the state $37 million this fiscal year.

The analyst recommended that lawmakers reduce or eliminate 12 tax breaks, including cutting the income tax credit for a dependent from $294 to $94 — the same amount as the personal credit for single taxpayers.

More than 80 percent of the savings generated by the extra $200 goes to taxpayers who make more than $50,000 a year, and about 30 percent goes to taxpayers with incomes over $100,000. Cutting the credit would give the state another $1.3 billion in the fiscal year that starts July 1, the analyst said.

Other recommendations include eliminating the special $94 income tax credit for taxpayers over age 65, limiting businesses’ research and development tax credit and phasing out tax breaks available to businesses that operate in depressed areas designated as enterprise zones.

Hill said there was no common theme she followed in putting together the 12. Some are ineffective or were increased in good times, making them candidates for cutting now, she said.

She also looked for changes that could be implemented in time to boost revenue in the budget year that starts July 1.

 

“In putting together about $17 billion in (budget) solutions, we felt we needed to offer more spending reductions than revenue increases,” she said. “But we also felt it was important to look on both sides of the equation.”

Rather than cutting tax breaks, some legislators are proposing new or bigger ones.

They’ve introduced bills that would boost the homeowners’ property tax exemption and authorize tax breaks for blood banks, spaying or neutering a dog or cat, opening health savings accounts, cutting greenhouse gases and making building improvements that reduce the risk of wildfire damage.

Sen. George Runner, a Lancaster Republican who also is a member of the Revenue and Taxation Committee, said he believes tax breaks can help generate state revenue but agrees it’s tough to measure how much.

 

But he said the state should consider new exemptions that reward businesses for hiring more workers or buying new equipment instead of looking for ways to raise taxes by eliminating or curtailing tax breaks.

“Rather than trying to figure out how to save a few millions or tens of millions, we should be figuring out how we can aggressively grow the tax base,” Runner said.