STATE OF CALIFORNIA
COMMISSION ON THE 21 st CENTURY ECONOMY
STATE OF CALIFORNIA
REVENUE & TAXATION
Commission BNRT Workshop
Friday, August 28, 2009 9:00 a.m. – 1:20 p.m.
University of California, Los Angeles De Neve Plaza, Plaza Room De Neve Commons 351 Charles E. Young Drive, West Los Angeles, California
Reported by: Daniel P. Feldhaus Certified Shorthand Reporter #6949 Registered Diplomate Reporter, Certified Realtime Reporter
Daniel P. Feldhaus, C.S.R., Inc. Certified Shorthand Reporters 8414 Yermo Way, Sacramento, California 95828 Telephone 916.682.9482 Fax 916.688.0723 [email protected]
1 st Commission on the 21 Century Economy – August 28, 2009
A P P E A R A N C E S
COMMISSION ON THE 21 ST CENTURY ECONOMY
GERRY PARSKY Commission Chair Aurora Capital Group
RUBEN BARRALES President/CEO San Diego Regional Chamber of Commerce
JOHN COGAN Professor Stanford University
CHRISTOPHER EDLEY, JR. Dean/Professor of Law Boalt Hall School of Law
JENNIFER ITO Research, Training, Policy Director SCOPE
CURT PRINGLE Mayor City of Anaheim
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BNRT Workshop Panel
JUNE SUMMERS HAAS Partner Honigman Miller Schwartz & Cohn LLP
CARL JOSEPH Director Multistate Taxation Bureau Legal Division Franchise Tax Board
DOUG POWERS Franchise Tax Board
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 2 st Commission on the 21 Century Economy – August 28, 2009
A P P E A R A N C E S
COTCE Staff Present
MARK IBELE Commission Staff Director Board of Equalization
ASHLEY SNEE GIOVANNETTONE
ANTONIO LOCKETT
PHIL SPILBERG Chief, Financial Research Department of Finance
MARGIE RAMIREZ WALKER
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Presenters
JIM BARNETT Vice President, Tax Edison International
HATEF BEHNIA Tax Partner Gibson Dunn & Crutcher
DAVID CHASE Governor’s Office
JIM EUPHRAT Tax Manager General Dynamics/National Steel & Shipbuilding Co.
RUSSELL GOLDSMITH Chairman/CEO City National Bank
MARTY KELLER Director Office of Small Business Advocate
Daniel P. Feldhaus, CSR, Inc. 916.682.9482 3 st Commission on the 21 Century Economy – August 28, 2009
A P P E A R A N C E S
Presenters Continued
GREG LIPPE Managing Partner Lippe, Hellie, Hoffer & Allison LLP
ERIC MIETHKE Motion Picture Association of America
MIKE ROCKENBACH Chief Financial Officer Emulex
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Public Testimony
MICHAEL D. SHAW Legislator Director National Federation of Independent Business
WILLIAM SPILLANE Americans for Fair Taxation
CHRISS STREET Treasurer-Tax Collector County of Orange
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 4 st Commission on the 21 Century Economy – August 28, 2009
Table of Contents
Item Page
Welcome and Introductions
Chair Parsky ...... 7
Banking/Finance:
Russell Goldsmith Chairman/CEO City National Bank ...... 12
Technology:
Mike Rockenbach Chief Financial Officer Emulex ...... 59
Entertainment
Eric Miethke Motion Picture Association of America ...... 78
Ports/Shipping
Jim Euphrat Tax Manager General Dynamics/National Steel and Shipbuilding Company ...... 98
Energy
Jeff Barnett Vice President, Tax Edison International ...... 114
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Table of Contents
Item Page
Small Business/Professional Services
Marty Keller Director Office of Small Business Advocate ...... 129
Greg Lippe Managing Partner Lippe, Hellie, Hoffer & Allison LLP ...... 134
Hatef Behnia Tax Partner Gibson Dunn & Crutcher ...... 136
Public Comment
Chriss Street Treasurer-Tax Collector County of Orange ...... 170
Michael D. Shaw Legislator Director National Federation of Independent Business ...... 177
William Spillane Americans for Fair Taxation ...... 180
Adjournment ...... 185
Reporter’s Certificate ...... 186
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Daniel P. Feldhaus, CSR, Inc. 916.682.9482 6 st Commission on the 21 Century Economy – August 28, 2009
1 BE IT REMEMBERED that on Friday, August 28,
2 2009, commencing at the hour of 9:08 a.m., at University
3 of California, Los Angeles - Covel Commons, 330 De Neve
4 Drive, Los Angeles, California, before me, DANIEL P.
5 FELDHAUS, CSR 6949, RDR, CRR, in the state of California,
6 the following proceedings were held:
7 --o0o--
8 CHAIR PARSKY: This forum is certainly
9 recognizable for me given my involvement with University
10 of California. I want to thank everyone for participating
11 in this public workshop.
12 Just a few comments by way of introduction.
13 As part of the process of the Commission established by
14 Governor Schwarzenegger and Karen Bass and Darrell
15 Steinberg, we have been considering a package of possible
16 recommendations. At the last Commission meeting, we put
17 forward an approach that we would take with respect to
18 the recommendations we would make, divided up, really,
19 into three sections that the report and recommendations
20 will be structured around.
21 The first section will contain tax-law changes,
22 revenue-related, that the Legislature can act on as their
23 process unfolds, but that they can act on.
24 The second section would be tax-law changes,
25 revenue-related. That may require an amendment or change
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st Commission on the 21 Century Economy – August 28, 2009
1 to the State Constitution, or that might involve a voter
2 initiative.
3 And the third section will be recommendations
4 that commissioners will make that are for others to
5 consider, areas of reform that may be revenue-related
6 and may not be revenue-related, but that they’re areas
7 of reform that could – that, from the Commission’s
8 standpoint, others should consider.
9 That structure was agreed to by the Commission.
10 It’s been posted on our Web site, and it will serve as
11 the framework for the recommendations that we will make
12 under our deadline of September 20 th .
13 We plan to have another full commission meeting
14 on September 10 th , here at UCLA, and then, if necessary,
15 also on September 14 th of the Commission.
16 And then we also put forward a package that
17 all the commissioners wanted to still be part of the
18 consideration. And there were a number of items on that
19 package: Changes in the personal income tax, changes in
20 the corporate income tax, changes in the state sales and
21 use tax, and the possible establishment of a business
22 net-receipts tax.
23 In addition to that, there was the proposal for
24 a possible pollution tax on fuels, a split-roll property
25 tax, a severance or royalty on expanded oil drilling, a
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1 rainy-day or reserve fund, and the possibility of
2 recommending a forum or establishing a forum for settling
3 tax disputes in California.
4 That package of recommendations, or that
5 package, will serve as the basis for the ultimate
6 recommendations. It could be that some items on that list
7 wouldn’t be supported by enough commissioners and,
8 therefore, would become part of Section 3, which, as I
9 indicated, would be recommendations for others to consider
10 as part of reform. And they could be parts of Sections 1
11 or 2.
12 Anything outside of that package could still be
13 part of Section 3 but would not be part of Sections 1 or
14 2. That’s the structure.
15 Now, we’ve been looking extensively at a major
16 change in the tax system around a new form of tax, and
17 that’s the business net-receipts tax. And the Commission
18 felt that because of the magnitude of this potential tax,
19 the fact that it would be new to California, that more
20 work really needed to be done by the Commission to
21 understand the impact of such a tax on various taxpayers,
22 parts of our community. And, therefore, it was
23 recommended that we hold public workshops just around
24 that tax. And I was able to get the voluntary
25 contributions of John Cogan and Chris Edley, two
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1 commissioners to help conduct these workshops.
2 We have sought the expertise of the Franchise
3 Tax Board, of the Legislative Counsel’s office, of the
4 Legislative Analyst’s Office; and we also have, working
5 with us, representatives from Ernst & Young that have done
6 a lot of work in state taxation. And June Haas, who is
7 here with us, who is a private practicing lawyer, but was
8 very involved as commissioner in the state of Michigan,
9 and very familiar with the approach taken by Michigan to
10 a similar, although not exactly the same, form of tax.
11 We also have two commissioners here -- all
12 commissioners are welcome -- Curt Pringle and Ruben
13 Barrales -- to listen to this give-and-take impact of
14 this tax.
15 These workshops are only oriented around this
16 business net-receipts tax. However, I think it is very
17 important that the community, as a whole, step back and
18 understand the relationship between the changes that
19 might be made in the other taxes and their impact on
20 business, individuals, others in California. Because it
21 is a package, and will be seen as a package. But the
22 purpose here is for us to understand the reactions of
23 people, to have an open give-and-take about it.
24 We would all urge that the people that would
25 be presenting to us here, as the people that presented to
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1 us two days ago in San Francisco, orient their comments
2 around this tax.
3 We may have some give-and-take about making
4 sure people take into account adjustments that might be
5 made in the other taxes. Inherent in the materials that
6 we submitted for people to consider, was a clear
7 transition period. This is not a tax that the Commission
8 would recommend be put into effect all at once. Clearly,
9 we would have in mind that it wouldn’t -- if it was to be
10 recommended -- begin until the fiscal year ending 2012,
11 and then thereafter, phased in over a period as long as
12 five years. Other taxes would be adjusted downward as
13 this tax was adjusted upward. And so I want to keep
14 reminding people to please bear that in mind.
15 And although any new tax, and certainly one of
16 this size, might evoke an initial reaction of, “Oh, my
17 goodness, let’s not do anything that dramatic,” the issues
18 faced by the state are dramatic. And as people now see,
19 many of the services that have been promised from the
20 government of the state of California aren’t being
21 provided, or those services have had to be cut
22 back, primarily because the anticipated revenues from
23 going to the general fund have not been nearly as high
24 as was anticipated.
25 So the volatile nature or the wide swings in
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1 the amount of revenues that are going to the general
2 fund have caused real consternation in our state and in
3 all of our communities.
4 So if this Commission can recommend for
5 consideration ways in which that volatility or those wide
6 swings can be adequately eased for the future, I think
7 it will benefit all Californians.
8 With that introduction, any comments that any
9 of my fellow commissioners might want to make?
10 John or Chris, Ruben?
11 COMMISSIONER BARRALES: No.
12 CHAIR PARSKY: Curt?
13 Then we will begin our panel with Russell
14 Goldsmith.
15 Russell, I know, is here.
16 This is a little bit more formal than -- I know
17 Russell quite well. He’s a terrific chairman of a quality
18 bank. I told him this would be kind of an informal
19 discussion. It looks a little more formal than really
20 it is.
21 But we really appreciate your coming forward,
22 giving your comments about the impact or concerns you may
23 have about this tax, and we’ll have some give-and-take.
24 Thank you very much.
25 MR. GOLDSMITH: Thank you, Mr. Chairman, and
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1 thank you for including me here at this workshop. I
2 appreciate the opportunity.
3 First, I want to commend the entire Commission
4 for agreeing to a set of principles that I concur should
5 guide tax reform: Establishing a 21 st century tax
6 structure for the state’s 21 st century economy;
7 stabilizing state revenues and reducing volatility;
8 promoting the long-term economic prosperity of the state
9 and its citizens; improving California’s ability to
10 compete with other states and other nations for jobs and
11 investments; reflecting principles of sound tax-policy
12 principles like simplicity, competitiveness, efficiency,
13 predictability, and ease of compliance and administration;
14 and last, but not least, ensuring that our tax structure
15 is fair and equitable.
16 With tax policy, these principles are an
17 outstanding place to start. And in this context, I would
18 like to address two things this morning. One is the
19 proposed business net-receipts tax, and whether or not it
20 should be applied to banks. I’d also like to briefly
21 emphasize the importance of establishing a fair and
22 equitable tax system that promotes job-creation and
23 economic growth throughout California and does not put our
24 state at a competitive disadvantage.
25 Let me briefly tell you something about City
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1 National Bank, which is a wholly owned subsidiary of
2 City National Corporation. We’re headquartered here in
3 Los Angeles, listed on the New York Stock Exchange. We
4 have been here since our founding, 55 years ago. And
5 City National today is backed by nearly $18 billion in
6 total assets. We’re actually the second largest
7 independent bank headquartered in the state of California.
8 We provide banking, investment, and trust services to
9 thousands -- tens of thousands of clients through
10 64 offices, mainly in Southern California and the
11 San Francisco Bay Area, plus some offices in Nevada and
12 New York City.
13 City National and its eight majority-owned
14 investment affiliates also manage or administer close
15 to $48 billion in client investment assets. And, again,
16 most of those assets would be here in California.
17 Our company employs about 2,700 men and women,
18 and nearly all of them live here in California.
19 We now pay corporate income tax at a rate of
20 11.84 percent to the state of California.
21 As we understand it, the Commission is proposing
22 to phase out the current corporate income tax and replace
23 it with a business net-receipts tax. Obviously, we don’t
24 have all the details. But as I understand it, I believe
25 you have essentially four alternatives under
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1 consideration. And I’d like to comment on each of those.
2 The first is a net-receipts tax calculation
3 which, under the proposed general rule, would exclude
4 items such as interest income, interest expense, dividend
5 income, and compensation costs. Our understanding is
6 that this particular formula would exempt banks. And we
7 agree that banks should be exempted. City National and
8 virtually all banks earn most of their revenue from the
9 loans made to businesses, entrepreneurs, and consumers.
10 If interest income and expense were excluded,
11 those companies, including ours, would essentially operate
12 tax-free. We might enjoy that and would appreciate the
13 consideration, but I suspect that’s not what you wanted
14 to have happen, and I acknowledge that’s not equitable.
15 So recognizing that banks would not and should
16 not be taxed under the general rule, as I understand it,
17 the Commission has proposed three alternative tax
18 computations. One is a modified business net-receipts
19 tax, presumably one that would include interest income
20 and expense. A net income tax that excludes compensation
21 expense. Or third, the net income tax that corporations
22 pay under the current law. So let me try to talk about
23 each of those.
24 The first alternative, a modified net-receipts
25 tax, raises several concerns for us. For one thing --
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1 and I’m not sure people fully appreciate this -- banks
2 are fundamentally different from manufacturers and even
3 other services companies. But a bank does, in fact, pay
4 for the goods that it manufactures but in a way that most
5 people don’t recognize.
6 Our cost of goods -- any bank’s cost of goods,
7 since our goods are essentially money that we rent --
8 so any tax structure that tried to tax our gross receipts
9 should have to factor out the cost of the goods that we,
10 in effect, manufacture and then turn around and rent.
11 So any fair receipts tax calculation for the banking
12 industry would have to include both interest income and
13 interest expense for their part of the cost of the
14 commodity that, in some cases, we own our capital, but in
15 most cases, goods that we’re renting from our depositors.
16 It would also have to take in all of the costs
17 that banks have to pay for money to rent. After all, a
18 bank’s inventory consists of cash; and we obtain it by
19 borrowing the money, in effect, by paying for deposits
20 and raising capital.
21 A net-receipts tax calculation for banks would
22 also have to include other costs of our getting this money
23 and renting it out, like the possibility that we’ve seen
24 all too dramatically for real credit losses. That’s a
25 real cost of this product. You could call it waste,
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1 like on a factory floor, what you throw away. There is
2 a waste factor in banking that is also a cost of our
3 product.
4 Credit risk and credit loss is a cost of doing
5 business for banks that should also logically be deducted
6 from net receipts.
7 Failing to do all of that will make loans more
8 expensive for the public, harder to get for the public.
9 And, you know, if you pick up today’s LA Times , you
10 realize the enormous stress the banking industry goes
11 through periodically, and would be harmful to the banking
12 system here in the state.
13 The second tax alternative cited by your
14 Commission, as I understand it, would exclude deductions
15 for compensation expense. This, I think, is troubling.
16 It would make it more expensive to hire people. And I
17 think that at a time when the state has 12 percent
18 unemployment, as I know you’re all very much aware, it
19 will put more pressure on companies that provide jobs
20 to the public. A tax like this would, in effect,
21 discriminate against companies that hire lots of people
22 and penalize disproportionately all of the
23 people-intensive, labor-intensive California companies
24 and businesses, of which there are many, that are
25 providing much-needed jobs to Californians.
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1 A bank like ours, for example, does not succeed
2 simply by buying and selling goods. We have succeeded at
3 City National because we have a lot of people, they’re
4 highly skilled, they’re highly compensated, and that,
5 too, is a real cost of our product, knowing -- you know,
6 selling a tomato in a grocery store is very different from
7 deciding to lend somebody a million dollars to start up a
8 grocery store, and so the personnel costs are integral to
9 the costs of our product.
10 If a new tax system makes that more expensive
11 and more difficult, it would be harder for us to grow,
12 harder for us to lend money, harder to create jobs, and
13 harder to compete with banks who keep a lot of their
14 functions outside the state of California.
15 How exactly each of your options would affect
16 City National and all the many banks in the state of
17 California is something that we don’t -- I don’t entirely
18 know until we see the tax rates that would be applied and
19 how it interacts with the other taxes, as your chairman
20 was describing a few minutes ago. But based on what we
21 know, we continue to believe that the current income-tax
22 system, because it taxes banks like ours and a lot of
23 other businesses in proportion to their financial success,
24 and is able to take into account the complex and subtle
25 costs of our products, is a fairer, more comprehensible,
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1 and importantly, more competitive when you recognize that
2 we’re competing with 49 other states and a bunch of
3 countries.
4 As you weigh various alternatives, I would ask
5 you to give particular attention to establishing a tax
6 system that promotes job creation and economic growth and
7 does not hurt California’s competitive position with other
8 states.
9 This is a concern I’ve actually worked on over
10 the last few years chairing the Los Angeles Economy and
11 Jobs Committee, which Mayor Villaraigosa created.
12 California, as you are well aware, is the
13 eighth largest economy on earth. Because, among many
14 things, it is still the manufacturing center of the
15 United States, the entertainment capital of the world,
16 and our nation’s trade gateway to Latin America and the
17 Pacific Rim. And because it is the birthplace and the
18 center of technology industries and the nation’s leading
19 producer of everything from agriculture and aerospace to
20 biomed and toy design, all of these industries employ
21 large numbers of men and women. They would be hurt by a
22 business receipts tax that did not encourage employment
23 but, instead, rewarded not hiring or even firing people.
24 In these perilous times, every job is precious
25 and under pressure. California must protect and encourage
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1 employment, not penalize it.
2 I think this is especially true here in
3 California, where we benefit enormously from our unique
4 entrepreneurial culture that produces spectacularly
5 innovative and globally competitive companies that we
6 desperately need in the 21 st century. Just to name a few
7 obvious names: Apple, Facebook, Google.
8 California, as you know, attracts more venture
9 capital than any other place on the planet. Northern
10 California is the No. 1 recipient of venture capital.
11 Southern California is the No. 2 recipient. Greater than
12 Boston, greater than Texas. Maintaining that is critical
13 for our state.
14 A lot of small start-up venture-capital-backed
15 companies go through a number of lean, nonprofitable,
16 unprofitable years. Biotech clients that we have in
17 San Diego go for many years losing money. To be hit with
18 a tax while they’re losing money, trying to create drugs
19 or technology that will benefit the public and help the
20 economy is obviously an issue that needs to be considered.
21 We don’t want to risk losing California’s receipt of
22 venture-capital funding, nor do we want to lose these
23 companies as they emerge from those incubation phases and
24 create enormous tax revenue and jobs.
25 Let me give you one example. A few years ago,
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1 one of my children was in the same college class as Mark
2 Zuckerberg. He dropped out; my kids graduated.
3 Unfortunately, he created a lot more value than my kids
4 did. But he had to leave Cambridge, Massachusetts, to
5 find the right place to take Facebook and build it into
6 what it has become today.
7 He chose California. He didn’t have to come
8 here. But, if you will, the soil of financial resources,
9 intellectual capital, the tax climate -- it was an
10 attractive mix and, obviously, has helped the state and
11 his company.
12 But if you have a tax on unprofitable companies
13 that employ lots of people, will the Zuckerbergs of the
14 future bring the Facebooks of the future to California or
15 will they be attracted to other places that don’t have
16 that tax?
17 I also would point out that while in the short
18 run you might pick up some tax revenue from these
19 money-losing companies that employ lots of people, it’s
20 also true that growing businesses produce more tax revenue
21 for the state in the long run. It’s the grow-the-pie
22 theory rather than fighting over the slices of the pie.
23 Peter Weber has a report you may have seen,
24 called, “Growing California’s Regional Economies .” And it
25 concludes that a 1 percent increase in California’s
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1 economic output would add between $2.5 billion and
2 $5 billion in new tax revenue. Obviously, as businesses
3 invest and hire more workers and become profitable, the
4 tax base expands and our state receives more money.
5 Crafting tax reform, in my view, should be like
6 practicing medicine. The first rule is to do no harm.
7 I really do appreciate the fact that you’ve given me this
8 opportunity to speak. And, obviously, many organizations
9 have made many comments about which your important work
10 is about.
11 I’d underscore four questions that have been
12 raised that I think need to be addressed: How would the
13 proposal affect the tax liabilities of California’s
14 leading industries? Would it negatively influence already
15 negative perceptions about doing business in this state?
16 Would a net-receipts tax encourage job creation or
17 provide incentives to scale back employment or move jobs
18 out of California? How would the tax affect prices and
19 California’s ability to compete with other states and
20 other countries?
21 I’m confident that the answers to these and
22 other questions will become clearer as your tax proposal
23 continues to take shape and you focus on these complex
24 issues and detail.
25 And I commend you for taking the time today and
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1 the other day to let people like myself share our thoughts
2 with you.
3 I would just add that besides the business
4 receipts tax -- and I know that’s what you want to focus
5 on -- I really do think looking at alternative taxes that
6 don’t hurt the state’s competitive position would help
7 ease the burden and move towards a goal of bringing down
8 the corporate income tax and personal income tax makes
9 sense.
10 One idea I like, and the chairman mentioned it
11 a second ago as being on your list, is the oil-extraction
12 tax. There’s a business that cannot move out of
13 California. And the fact that we don’t have that tax and
14 Alaska does and Texas does, I find it incomprehensible
15 that we wouldn’t have an oil-extraction tax that’s
16 competitive somewhere between the Texas and Alaska rates.
17 And, obviously, the price of oil -- I mean, it’s a red
18 herring to say it’s going to affect the consumers’ cost
19 at the pump. Oil prices are set in the global
20 marketplace, and California should be getting its fair
21 share. Alaska doesn’t have an income tax. There’s a
22 reason for that.
23 I know it’s controversial, but I do think --
24 and I pay that tax -- vehicle registration taxes are too
25 low. They should be competitive. We can extract some
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1 more revenue there without hurting this economy.
2 And so those would be two that I would just
3 mention.
4 For decades, California’s economy has been the
5 envy of the world. In many ways, it still is. But it’s
6 going to take a lot of work to sustain the prosperity of
7 this state.
8 The talent and resources, industries, and
9 entrepreneurs that set our state apart are as rich and
10 compelling as they ever were. But I believe all of us
11 must do more to foster a strong economy. And I appreciate
12 the fact that that’s what I believe this commission is
13 trying to do.
14 We need a set of tax policies that are sound,
15 fair, equitable, competitive, more stable, and designed
16 to protect the jobs we have, and promote the job-creating
17 investments that are critical in the 21 st century.
18 In particular, every economy, including
19 California’s, needs a strong banking system, as we’ve
20 seen all too clearly in the last 18 months. The
21 net-receipts tax is not the right method for banks to
22 pay their fair share for California.
23 Thank you very much for listening to me. And
24 if you want to discuss it further, I’m happy to do that.
25 CHAIR PARSKY: We would.
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1 First of all, I want to thank you very much for
2 that thoughtful presentation.
3 I’m going to ask the staff, the Franchise Tax
4 Board -- don’t get too nervous about the fact that the
5 Franchise Tax Board is here. They’re here as advisors.
6 MR. GOLDSMITH: I didn’t bring my returns.
7 CHAIR PARSKY: They’re advisors to this
8 Commission, and they’ve done fabulous work for us here.
9 And I’ll ask my fellow commissioners. One
10 comment you made at the end, I’d be interested in your
11 views, you mentioned the oil-extraction tax. If you
12 coupled that with a willingness to allow expanded oil
13 drilling, how would you feel?
14 MR. GOLDSMITH: You know, I think that -- and
15 I preface it by saying, I’m no expert on oil drilling --
16 but, first of all, I think that the state has just agreed
17 to expanded oil drilling without -- if you’ll pardon the
18 pun -- extracting an oil-extraction tax. It would seem
19 to me, that’s putting the horse before the cart. Why
20 give the right for expanded oil drilling without getting
21 an oil-extraction tax? So I think, in part, as I
22 understand it, the state’s already agreed to do that.
23 But assuming your question is, should there be
24 more drilling, I think, based on what I know, there are
25 enormous safeguards today that didn’t exist back when we
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1 saw the oil spills in the Santa Barbara Channel. And I
2 think we are at a time when we have to choose among a set
3 of less palatable alternatives. This country needs to
4 be energy-independent, it needs to have the ability to
5 transition to an alternative energy era. And I think it
6 would behoove the state, as the country simultaneously and
7 the state, have policies that are in favor of and promote
8 clean energy, I think if part of the price of getting
9 revenue for oil extraction is greater drilling, prudently
10 done, I would support that.
11 CHAIR PARSKY: Curt, would you like to ask
12 questions?
13 COMMISSIONER PRINGLE: How did you know that?
14 I didn’t do anything to signal -- no, no, I just want to
15 make sure we hear this in context.
16 What is -- for example, does our staff know any
17 proposed extraction tax and the value of that based upon
18 the current potential for drilling?
19 MR. GOLDSMITH: I can tell you, I read in the
20 paper -- your staff probably has a better number -- but
21 the 9.9 percent tax that was proposed would produce
22 $800 million in tax revenue. And that was a couple
23 months ago, when the price of oil was lower. So if you
24 think oil is going to go back up over $100 a barrel one
25 of these days, you know, I think the notion that you
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1 could raise a billion dollars -- Alaska has a 25 percent
2 oil-extraction tax, which probably affords their governor
3 the ability to say things our governor can’t.
4 You know, a 9.9 percent --
5 CHAIR PARSKY: Maybe their former governor.
6 MR. GOLDSMITH: That’s right. We haven’t heard
7 from the current governor.
8 COMMISSIONER PRINGLE: But I think that is a
9 good mark. Let’s say it is a billion dollars,
10 Mr. Chairman. And I guess my challenge with that is,
11 isn’t it true that the BNRT, business net-receipts tax,
12 is somewhat around $10 billion to $12 billion estimated
13 in value for every one percentage point?
14 CHAIR PARSKY: Yes.
15 COMMISSIONER PRINGLE: And that we are talking
16 about eliminating the corporate income tax, dramatically
17 reducing the state sales tax, and dramatically reducing
18 the personal income tax obligation, and to get into the
19 range of twenty-five-some-billion dollars, $30 billion, of
20 modifications of existing taxes.
21 To fill that gap, that is the challenge we’re
22 faced with. And seeing -- I think there is probably a
23 diverse point of view on this panel about an oil-severance
24 tax or extraction tax, even. But still, under that
25 theory, you’re talking about one, two, three billion
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1 dollars compared to kind of our task, is to see the
2 shifting from some of the taxes that are the most
3 volatile. It’s a twenty, thirty billion dollar puzzle.
4 And that’s the depth by which we’re looking. And I think
5 that defines some of my challenges with looking at some
6 of those taxes that may not be necessarily as broad-based
7 and valuable in the overall picture. Not that they might
8 not be perfectly legitimate.
9 MR. GOLDSMITH: Well, I guess, to quote a
10 famous Republican, Everett Dirksen, “A billion here and
11 a billion there, and before you know it, it’s real money .”
12 I think that what I’m suggesting is, the net-receipts tax
13 probably does make some sense for certain parts of the
14 economy that are not labor-intensive, where you’re not
15 going to impact it. And, obviously, you’re calibrating
16 the trade-off against the reductions. So if you look at
17 law firms, you know: Is it personal income tax, or is it
18 taxing a partnership? I appreciate the complexity of
19 that.
20 But I think -- and, obviously, I feel strongly
21 that some industries, like banks, like probably highly
22 labor-intensive but moderately profitable businesses,
23 that there are some drawbacks to this tax as I see it.
24 But I also think a way to ameliorate the problem
25 is, as I suggest, to grow -- which is what I think you’re
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1 trying to do, by the way -- grow the tax-revenue pie.
2 The net-receipts tax is obviously designed to bring a
3 different type of revenue into the tax revenue pie for
4 the state. I think that’s a laudable goal. I do think
5 it needs to be more stable but carefully defined. And I
6 appreciate that you’re trying to figure that out. But I
7 think you don’t have to put -- it’s not an all-or-nothing
8 fight. It doesn’t have to be all to the net-receipts tax
9 and zero corporate income tax and zero personal income
10 tax. We’re willing to pay a corporate income tax in lieu
11 of being in the net-receipts tax.
12 But if you’re trying to build a bigger, stabler
13 pie for a state tax revenue, I’m suggesting whether it’s
14 the oil-extraction tax, whether it’s increasing the
15 vehicle-registration tax -- obviously, there are a number
16 of other taxes that are under consideration that could
17 ameliorate the balance that you need to get from both.
18 Also, you know -- and I haven’t tried to
19 address it, I’m sure the FTB would be better-suited for
20 this -- there are things that could be done on the
21 corporate income tax as well to bring the rate down but
22 to close some of the things that reduce revenue.
23 So I don’t envy you, the complexity of your
24 task.
25 CHAIR PARSKY: Maybe focus some questions just
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1 on the impact of this tax and the justification for
2 including banks in it.
3 Why don’t you start -– yes, go ahead, John.
4 COMMISSIONER COGAN: Russell, thank you very
5 much for your excellent testimony. It’s nice to have
6 someone of your expertise here to help us think through
7 these issues.
8 MR. GOLDSMITH: Thank you.
9 COMMISSIONER COGAN: Let me try to explain the
10 dilemma that I think we have. The BNRT seems to us, with
11 its low rate and broad base, to be one that is certainly
12 worth pursuing for California, and that’s sort of why
13 we’re here. And if you approach tax policy from a
14 30,000-foot level, you say, “Ideally, we’d like to have
15 one tax for all businesses, not two tax regimes.” Two
16 tax regimes will distort economic activity and slow
17 economic growth.
18 If we left the banks out, we’d have banks under
19 a regime of within 11.8 percent rate, I believe you said
20 was the bank rate now.
21 MR. GOLDSMITH: Right.
22 COMMISSIONER COGAN: We’d have another regime
23 side-by-side at, let’s say, our BNRT rate would be around
24 3 to 4 percent.
25 Each tax regime would have different expenses
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1 that could be deducted. And that seems to me to be
2 terribly distorting from an economic standpoint.
3 Whereas Chris Edley said last time, it’s too
4 many opportunities for tax planning. And so tax avoidance
5 would become sort of the objective of many business
6 decisions when it wouldn’t be.
7 And so that’s what we’re concerned about, is
8 having businesses with an opportunity, in effect, to
9 choose between these two. And the banking sector, I
10 believe many of its activities could be classified as
11 financial and other -- or outside the financial. So
12 that’s our worry.
13 At the same time, when I think about the BNRT,
14 it’s like a value-added tax. And I ask myself, “How do
15 we measure the value-added in the banking business?”
16 And that’s where I have a lot of trouble. What is the
17 measure that we use?
18 And so one thing we’ve sort of hit on here is
19 to say, “Look, let’s try a measure that simply takes the
20 banking business as a cash-flow business, and sort of says
21 at the heart, ‘Look, the value-added is the difference
22 between what you have to pay to have access to credit
23 markets and what you get in return by making that money
24 available to the private sector.’”
25 So if you’re able to get credit at 2 percent
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1 and you’re able to earn a return of 5 percent on that
2 money, why isn’t that the amount of money that represents
3 a good approximation of the value that your operations
4 have added to productive activities?
5 And so maybe you could help me think through
6 why that’s not a good measure of value-added, since at
7 some fundamental level it does seem to me to be reasonably
8 an appropriate measure.
9 MR. GOLDSMITH: Well, I’ll try.
10 And, by the way, I meant to say, 10.84 percent
11 for the marginal rate.
12 You know, if the banking business were as
13 simple as: What do we pay the depositor and what we get
14 back from the borrower, then maybe there would be -- it
15 would be a lot easier to find wisdom in the approach that
16 you’re taking. But the fact is, the cost of the money
17 that we lend is a lot higher.
18 You know, pick up today’s LA Times business
19 section. I mean, you’ve got banks failing across this
20 country under enormous stress. Having a receipts tax
21 would be enormously burdensome. And, obviously, we’ve
22 seen a number of bank failures already in California,
23 which is not good for the state or the people who live
24 here or its economy.
25 As I tried to suggest, the cost of the money
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1 that we lend is often -- I think has so many pieces that
2 is so complicated, that it doesn’t lend -- no pun
3 intended -- it doesn’t lend itself to the simple
4 measurement of, say, our posted CD rate versus our
5 lending rate. Every bank has multiple rates that they
6 pay.
7 At our bank and a number of other banks, we
8 have businesses that leave millions of dollars in our
9 accounts, and we pay them nothing for it in terms of a
10 rate, but we pay them through services. We provide free
11 checking. We provide free online banking. Maybe we give
12 them a preferential rate on loans because they’re keeping
13 large, compensating balances with us.
14 So to send a squadron from the Franchise Tax
15 Board in and say, “What is the cost of the goods you’re
16 renting,” it’s not as simple as going down to Hertz
17 Rent-a-Car and saying, “Okay, what did you pay for the
18 Chevy, and what are you renting it out for?”
19 COMMISSIONER COGAN: Right.
20 MR. GOLDSMITH: It’s much subtler than that.
21 You know, if you provided a driver in the car,
22 you provided somebody to wash it every morning, you
23 provided somebody to give you a neck massage while you’re
24 riding in the car. I mean, it’s a complicated mosaic as
25 to the cost of the goods. And the cost of doing business,
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1 as we’re seeing painfully right now, are the losses and
2 the reserves.
3 And so I think part of why the income tax is
4 fairer for business is that it takes into account all
5 those legitimate costs and gives the state, you know, a
6 share when there are profits to be had.
7 I’m sure there are a number of other businesses
8 where maybe it’s a lot simpler and the net-receipts tax
9 makes great sense.
10 Obviously, having multiple tax systems isn’t
11 theoretically the most desirable approach, but we’re
12 stuck with it. We have federalism; we have multiple
13 taxes.
14 You know, I haven’t studied it, but it would
15 seem to me, you know, that one approach here would be to
16 go with more -- expanding where the sales tax applies.
17 And so you don’t have to get into the question of the
18 cost of goods.
19 The notion of missing the legitimate costs that
20 a lot of businesses have to put that product forward,
21 which is the issue with banks in particular, and the
22 issue of making it more expensive to hire people in this
23 state -- I mean, we see the ads from other states. If
24 it’s cheaper to have workers in Nevada or Arizona or
25 Texas, as it is now, I fear this exacerbates it.
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1 At least now, if you do business in California,
2 which is a higher-cost state, you can deduct those
3 legitimate costs that are inherent in doing business in
4 California. And I would hate to see that change.
5 COMMISSIONER COGAN: You know, with respect to
6 the FTB, I worry that if we have a dual system in place,
7 then banks will find it in their economic tax interests
8 to have non-banking activities, and to assign certain
9 deductions to those non-banking activities, and certain
10 receipts to the banking activities, to have a tax at a
11 3 to 4 percent rate rather than a 10.8 percent rate.
12 And, boy, I tell you, what I worry about is,
13 that’s an invitation to have the FTB very much in your
14 business.
15 COMMISSIONER PRINGLE: Send a little squadron.
16 MR. GOLDSMITH: I appreciate the problem. I
17 mean, the fact is, virtually every bank has non- -- when
18 you say “non-bank,” really, you should call it
19 “non-lending activities.”
20 COMMISSIONER COGAN: Right.
21 MR. GOLDSMITH: And, frankly, consumers and
22 bankers want to do that. We provide investment advice,
23 others provide insurance -- I mean, a range of things.
24 A simple approach to it might just be to say,
25 principally, if you’re a bank measured by, say, the
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1 majority of your revenue is interest income, then all of
2 your activities to be subject to the existing corporate
3 income tax, and not put the put the whole bank, if
4 administratively that seems too challenging.
5 Obviously, filing two tax returns, segregating
6 your business gets complicated.
7 I don’t think it’s as hard for the great bulk
8 of our revenue. I mean, we have a very substantial
9 wealth-management business, as I mentioned. It’s pretty
10 clear to us how much revenue is coming in from that
11 business and how much is coming in from interest income.
12 We’re a public company; you can see it in our statements.
13 So, you know, would it be a little complicated?
14 Yes, but I don’t think it would actually be all that
15 complicated.
16 And the truth is, in this state, most banks --
17 and there are hundreds, if not thousands of independent
18 banks in the state of California, that are pretty much
19 simple loan-and-deposit operations.
20 So I think it’s doable either way.
21 (Commissioner Ito entered the meeting room.)
22 COMMISSIONER COGAN: Yes.
23 One final comment is, I share a lot of the
24 concerns that people have about including the banking
25 sector in. After all, you go over to Europe where they
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1 have the similar types of taxes to a BNRT, a value-added
2 tax, and I think in virtually all of the European
3 countries, the banking sector is set aside and not part
4 of that value-added tax because of the issues that you’ve
5 raised here.
6 And yet think about grand tax reform in
7 California without having all of California industry in
8 it, and it sort of makes you --
9 MR. GOLDSMITH: That’s why I’d like to see an
10 oil-extraction tax. Let’s include the oil companies in
11 this grand reform.
12 COMMISSIONER COGAN: I sort of share Curt’s
13 view. Tax reform is one thing. Having an oil-extraction
14 tax that will offset 1 percent of any tax change that we
15 would make, it’s, like, irrelevant for tax reform. It
16 might be good for raising revenues. But, again, if it’s
17 $800 million, it’s 1 percent of the general fund revenue.
18 So I hear you on that, but I just think it’s
19 kind of irrelevant with respect to the fundamental
20 question that we face, which is: How do we make our
21 current tax system, a tax system that will promote
22 economic growth for the state?
23 MR. GOLDSMITH: Well, I appreciate that.
24 I guess I would just say, instead of trying
25 to have one massive, single-payer solution, you know,
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1 the net-receipts tax, one sizes fits all, I think the
2 complexities of the industries and the complexity of the
3 burdens that are already on the taxpayers of the state
4 suggests that while a simple one or two, you know, silver
5 bullets would be fabulous, I don’t think that’s the
6 reality.
7 And so I appreciate that the oil-extraction
8 tax is just a piece; but the vehicle-registration tax,
9 as an example, then you don’t have to increase it by
10 another billion. Maybe you just increase it by
11 $1 billion, not $2 billion. That can comes right out
12 of the pocket of motorists.
13 I think it’s a mosaic, a complex mosaic that
14 has to have multiple parts. We live in a complicated
15 world, and I appreciate your willingness to hear my views
16 about one slice of it, the banking industry, that doesn’t
17 really fit into the net-receipts tax.
18 COMMISSIONER COGAN: All right, thanks very
19 much.
20 MR. GOLDSMITH: Thank you.
21 CHAIR PARSKY: I’d just like to ask Carl --
22 Carl, do you want to ask some questions about whether
23 this industry should be part of the system or not?
24 MR. JOSEPH: Well, one of the things that would
25 change under what the Commission has proposed is, I think
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1 under our current system of where we’re heading into
2 single-factor apportionment, the provision for banks to
3 remain on the equally weighted three-factor formula is
4 still in the code.
5 And so in the proposal of the Commission,
6 everybody goes to single sales, which would take away
7 from banks, having to have a payroll factor in your
8 apportionment formula.
9 And I’m just wondering if you have any opinion
10 about how that encourages employment in California to get
11 rid of that payroll factor for you all, versus having the
12 payroll included under the BNRT, and whether you thought
13 about the interplay of that at all.
14 MR. GOLDSMITH: I don’t fully understand.
15 How would it work, in terms of it would reduce
16 some payroll costs?
17 MR. JOSEPH: Yes. Well, for banks now, the
18 apportionment is payroll, property, and sales --
19 single-weighted sales. And the Commission’s proposal is
20 to put everybody on single-factor sales apportionment.
21 No more payroll-factor inclusion at all. And I’m
22 wondering for a bank like you all, since you wouldn’t
23 have the payroll factor in your computation for your
24 apportionment percentage for California, if the removal
25 of that payroll factor at all, in your mind, offsets the
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1 inclusion of the payroll in the base for the BNRT, in
2 that your apportionment factor should fall under this
3 proposal versus what the current law would be?
4 MR. GOLDSMITH: I’d have to really take a look
5 at the numbers with our tax guys and see what the
6 trade-off is to give you an answer. And I’d be happy to
7 take a look at that.
8 But one other point that I’d highlight that
9 you’re seeing, as I’ve said today, in a tough economic
10 period like this, a huge cost of our product are the loan
11 losses that we take. And so part of my problem with the
12 net-receipts tax is the procyclicality of it in a tough
13 economic environment.
14 So at a time like this, when companies are being
15 urged -- banks are being urged to keep lending -- which,
16 by the way, City National has kept lending, and City
17 National -- for the record, we accepted all the IOUs from
18 the State of California, for what that’s worth to you.
19 But obviously profit margins are thin -- thinner in this
20 period. And, roughly, half the banks in the United States
21 aren’t even profitable. So I would be concerned -- one of
22 my other concerns about the tax is that it will penalize
23 banks at their most vulnerable moments in various economic
24 cycles, and that would hurt lending.
25 CHAIR PARSKY: June, what was the approach taken
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1 in Michigan to the banking industry?
2 MS. HAAS: Under the single-business tax, which
3 is an added -- value-added tax, the banking industry was
4 subjected to essentially a net income tax. And so it was
5 not included in the additive value-added tax base.
6 When Michigan most recently moved to its
7 Michigan business tax, which is a net income tax and a
8 modified gross-receipts tax, combined, the banking
9 industry was actually sort of narrowed a little bit.
10 The definition of “financial institution ” was
11 limited to those that are regulated as financial
12 institutions; whereas under the single business tax,
13 they were looking at those that had financial-type assets.
14 So they narrowed the group of entities that then were
15 treated as financial institutions and they are subjected
16 to a net capital tax, instead of the modified
17 gross-receipts tax and business income tax. So that’s
18 the history of treating financials in Michigan.
19 CHAIR PARSKY: I think one of the biggest
20 challenges that we face is the area we’re talking about
21 now. I think that one underlying objective of looking at
22 the business net-receipts tax, is that as the economy of
23 California has moved more and more toward a service
24 economy, that sector is not part of the broad tax base
25 reflective in the sales tax. And so one of the objectives
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1 is to include that sector in that base. That can be
2 accomplished in more than one way. But it certainly
3 would be accomplished under this business net-receipts
4 tax.
5 How to deal with banks in that equation is a
6 complicated subject. And we’ve been struggling with not
7 having a complete answer; but how should this commission,
8 if we decide to recommend consideration of this kind of
9 change, what should we recommend considering about banks?
10 And, as John said, when you have institutions
11 as yours, that has more than just lending but has other
12 services that are provided, how does that fit into what
13 might be a different scheme for a bank?
14 And you’ve identified, rightfully, the issues
15 that we are struggling with, and that the Legislature
16 would have to struggle with if they decided to proceed
17 with this kind of change.
18 MR. GOLDSMITH: Well, as I understand it, you
19 are trying -- which I think is commendable -- as the
20 economy has shifted, to get the state kind of its fair
21 share of revenue out of services businesses. And I think
22 whether it’s a net-receipts tax or some form of a sales
23 tax, whether it’s, you know, dry-cleaning or alcoholic
24 beverages or consulting services of one sort or another,
25 I think those are revenue-rich environments for the state
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1 that, as you point out, are essentially outside of the
2 tax system.
3 But a bank typically -- I’m not aware of a bank
4 that’s not a corporation in the state of California.
5 They are regulated, typically by two, three, four
6 entities. There’s enormous visibility. It’s not like a
7 partnership that, to your point, that can monkey around a
8 little bit with, “Well, if we distribute more to the
9 partners, then there’s no profit at the partnership
10 level.” You know, there are virtually no banks -- there
11 are probably a handful of little ones -- that are even
12 owned by a small group of people. So I think the banking
13 system, for a variety of reasons, is in the tax-revenue
14 system for the State; it has unique properties, both in
15 terms of figuring out the complexity of its costs and the
16 challenges that it has in the business-cycle process,
17 where -- and given the fundamental nature, as you’re
18 seeing in Washington, the essential quality of having a
19 healthy banking system to foster the health of the
20 economy.
21 So I think there are areas, whether it’s oil
22 extraction or it’s dry-cleaning, where there is a
23 legitimate opportunity for the State to get some revenue.
24 I think the corporate income tax actually -- obviously,
25 the rates could be lower, the definitions could be fairer.
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1 But that’s a whole other ongoing challenge. But I think
2 it’s a system that’s proven to be reasonably equitable;
3 and I suspect, in normal times, produces healthy revenues
4 for the State of California.
5 COMMISSIONER PRINGLE: Mr. Chairman?
6 CHAIR PARSKY: Go ahead, Curt.
7 COMMISSIONER PRINGLE: Well, thanks.
8 I do want to respond because, as the son of a
9 dry-cleaner --
10 CHAIR PARSKY: Who knew? That’s the danger of
11 examples we’re using. That’s all right.
12 COMMISSIONER PRINGLE: I actually think that
13 you pointed out what may be missed in some of this
14 discussion, is that there are a lot of people who pay
15 taxes and different types of taxes, but there are some
16 companies –- let me see, an unincorporated retail store
17 pays not only -- their customers pay a retail sales tax
18 on the commodity purchased, but also all of that corporate
19 income tax is paid, as well as any corporate distribution
20 to any of the principals in personal income tax.
21 I would say a dry-cleaner pays -- either
22 they’re incorporated, like my father was, or they’re a
23 sole proprietor, and they pay a personal income tax on
24 all of that that’s brought in. But they don’t pay a
25 sales tax, nor do you.
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1 And, you know, talking about extending --
2 there’s a couple advocates here to extend the sales tax
3 and not even create this new BNRT. There’s some advocates
4 that say, extend it to all services. And I hear a lot
5 in your words, that that is something that you would
6 contemplate as being equitable.
7 So would you see there is equity in extending
8 it to financial services, so the services that you provide
9 your customers -- not necessarily the interest on their
10 accounts -- but the services that if -- am I really
11 hearing that you think that that would be an equitable
12 way to address expansion of the sales tax, broaden the
13 base of the sales tax, as you suggested, be it to dry-
14 cleaners or to banks, that that is a commodity that’s
15 being purchased, is that service, just like goods. So
16 is that something you see that would balance off, instead
17 of a BNRT, extending all sales tax to services?
18 MR. GOLDSMITH: First, I want to applaud your
19 father for being an entrepreneur. We’re bringing on
20 entrepreneurs at City National.
21 I used that because I thought it looked like a
22 product, right, that you get something back, whether it’s
23 a bottle of liquor or a clean garment. I think it’s
24 different when you’re lending money. That’s not exactly
25 a service and that’s not exactly a product. And I think
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1 trying to put a sales tax on that really doesn’t fit.
2 That’s why I think the corporate income tax has been an
3 equitable solution to get the State some revenue.
4 I sympathize greatly with your discussion of
5 the paying of tax at every level. I think it would be a
6 lot better if we didn’t have to have all these taxes.
7 But, obviously, the State’s got a revenue crisis. And
8 the issue is trying to come up with a system that’s
9 competitive with other states, that doesn’t further damage
10 our image as a place to do business.
11 And I think the “Do no harm” is a huge issue.
12 You know, you pick up TIME magazine, you pick up any
13 number of places. The image of this state as a place to
14 bring your business is under enormous pressure. And I
15 think you want to find -- which is why I go back to, you
16 want a mosaic of incremental change that doesn’t send the
17 wrong signal to the businesses, the entrepreneurs. We
18 can’t drive jobs out of the state. We’ve got to attract
19 jobs. We have a lot of tremendous capabilities and
20 resources. And I think incrementally changing this in a
21 way that seems equitable and that doesn’t put us at a
22 competitive disadvantage with other states is critically
23 important.
24 I know of any number of jobs, as I’m sure you
25 do -- and I know the Chairman has businesses scattered
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1 around -- you know, businesses that are moving from
2 Santa Monica to Austin, Texas, with terrific jobs because
3 they view Texas as business-friendly, and they view
4 Santa Monica and California as hostile to people who make
5 money.
6 So finding a balance where California doesn’t
7 look like it’s hostile to entrepreneurs, hostile to
8 economic growth and job creation, I think is fundamental.
9 COMMISSIONER PRINGLE: I do have one other
10 question. I won’t get into the fact that I believe
11 dry-cleaners have more regulatory agencies overseeing
12 them than banks -- and I think I can prove it.
13 MR. GOLDSMITH: I’ll defer.
14 COMMISSIONER PRINGLE: But, in fact, I would
15 like to make sure I understand the distinction -- and
16 maybe, Mark, you can help me. All businesses in
17 California aren’t treated equal. There are, for example,
18 insurance companies don’t pay a bank and corp tax rate;
19 is that correct?
20 MR. IBELE: Yes, they pay the gross premiums
21 tax.
22 COMMISSIONER PRINGLE: So describe, one, what
23 you perceive as the rationale for the Legislature creating
24 a separate tax structure for insurance companies. And I
25 want to hear it as a comparative to the thought about
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1 financial institutions.
2 MR. IBELE: Well, I think it goes -- it probably
3 goes back to the 1930s when we first had the corporation
4 income tax. And I think the rationale was, it was
5 difficult to capture the activities -- it was difficult
6 to put insurance companies in the same sort of box, or
7 conceive of them in the same way as other types of
8 companies. And perhaps it was easier to administer.
9 There may be some other issues associated with that.
10 COMMISSIONER PRINGLE: So it’s a strict gross
11 premiums tax?
12 MR. IBELE: Gross premiums tax. It’s a
13 2 percent rate on gross premiums.
14 COMMISSIONER PRINGLE: 2 percent on all premium
15 purchases or premium values?
16 MR. IBELE: Premium payments. Gross premiums
17 received by the insurance, by the insurer.
18 COMMISSIONER PRINGLE: I see.
19 And that is not in any contemplative sense a
20 part of our package; is that correct?
21 MR. IBELE: It’s been brought up, but it’s not
22 part of the package. It’s been discussed just briefly.
23 CHAIR PARSKY: Carl, not to say that you were
24 there in the 1930s, however, any comments about the
25 history there?
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1 MR. POWERS: I don’t know exactly when it came
2 in, but it’s actually in the Constitution. So the gross
3 premiums tax is in the Constitution, and requires a
4 constitutional amendment to actually change it.
5 COMMISSIONER EDLEY: But there’s nothing about
6 dry-cleaners?
7 MR. POWERS: Not that I’m aware of.
8 CHAIR PARSKY: Not in the Constitution.
9 MR. JOSEPH: I would point out that we have had
10 problems with that in the sense that insurance companies
11 and insurance activities are often parts of corporate
12 groups that file the corporate income tax return. And
13 because the insurance companies do not pay the corporate
14 income tax return, they have been a bit of an issue for
15 purposes of tax planning, to the point that not too many
16 years ago, the Legislature put in a pretty complex set
17 of rules to deal with the problem of companies putting
18 intangible assets and things into insurance companies,
19 to essentially avoid the corporate tax on those assets
20 if they had been held and sold by somebody who was paying
21 the corporate tax.
22 So even that variation has caused some issues.
23 And so I think there is some concern about exacerbating
24 that by essentially doing it again.
25 CHAIR PARSKY: Jennifer, do you have --
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1 COMMISSIONER ITO: No.
2 CHAIR PARSKY: Chris?
3 COMMISSIONER EDLEY: Two, I think, quick
4 questions.
5 The first: How should we think about venture
6 capital firms? Anything special spring to mind?
7 MR. GOLDSMITH: Well, I think, first and
8 foremost, I go back to my “Do no harm.” Venture capital
9 is the lifeblood of so much job-creation and critical to
10 this state’s future when you consider what’s happening,
11 you know, with auto plants and so forth.
12 As I think about it, some of them are -- many
13 of them are partnerships. So really, in that sense, it
14 looks like law firms. I think they’re under assault at
15 the federal level. I talked to a friend and client of
16 mine who is a venture-capital firm -- and I’m sure
17 Mr. Parsky can give you great insight into this whole
18 field -- but, you know, there are these contemplated
19 changes at the federal tax level, and that’s going to
20 have an enormous impact on venture-capital firms.
21 I think for the State to further impact that
22 business until it’s clear what’s going to happen at the
23 federal level, you know, it might be prudent to wait.
24 CHAIR PARSKY: We might separate a little bit
25 venture-capital firms from start-up businesses.
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1 COMMISSIONER EDLEY: Right, that was my next
2 question. Yes, exactly.
3 CHAIR PARSKY: Differentiate it a little bit
4 there.
5 And as currently contemplated, there would be a
6 minimum level of gross receipts, currently contemplated
7 $500,000, which would take you outside of the business
8 net-receipts tax.
9 We’re quite concerned about the impact of this
10 tax on small business in California and on, obviously,
11 start-up businesses.
12 I don’t know the exact statistics, but I know
13 Phil has indicated something along the lines that maybe
14 as many as 80 percent of the businesses in California
15 might be deemed small business.
16 Is that about right, Phil -- or even higher?
17 MR. SPILBERG: Could be. Under the definition
18 of $500,000, it could be even higher.
19 CHAIR PARSKY: It could be even higher?
20 All of those businesses, as contemplated, would
21 come outside of the reach, if you will, of the business
22 net-receipts tax.
23 COMMISSIONER EDLEY: Some of them would be
24 filers, but they wouldn’t have any liability.
25 CHAIR PARSKY: Liability.
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1 COMMISSIONER EDLEY: No tax liability.
2 CHAIR PARSKY: Right.
3 MR. GOLDSMITH: I think the concern is -- and
4 I think Facebook is -- and I have no affiliation with
5 Facebook -- I don’t even use Facebook, but --
6 COMMISSIONER EDLEY: What is it?
7 MR. GOLDSMITH: What is Facebook?
8 COMMISSIONER EDLEY: Never mind.
9 CHAIR PARSKY: The Boalt Law School is sometimes
10 a little bit removed from day-to-day activity, but that’s
11 okay.
12 MR. GOLDSMITH: Ask your students, how many of
13 them have a page in Facebook. It’s a social phenomenon
14 that started at Harvard college and has spread around the
15 globe, and --
16 COMMISSIONER EDLEY: Do we tax those?
17 I’m sorry.
18 CHAIR PARSKY: Anyone from Harvard college will
19 get taxed as part of the system.
20 MR. GOLDSMITH: I’m against that.
21 But what would worry me about a gross-receipts
22 tax, I believe -- I don’t know this, but I believe
23 Facebook may still not be profitable, and yet it employs
24 an enormous number of people and is seen as having a very
25 bright future, à la Google, à la Apple.
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1 And so I recognize and respect the notion of
2 carving out small business and the dry-cleaners of the
3 world, who have the sole proprietorships. But what I
4 would hate to see happen is the Mark Zuckerbergs of the
5 future, who have a great company, need some venture
6 capital, need the intellectual capital that we have in
7 this state; but they have it in Texas, they have it in
8 India, they have it in Massachusetts. And if they say,
9 “Wait a minute, as soon as my company” -- I’m sure
10 Facebook has far more than $500,000 in revenue. But
11 let us assume, as I believe that it is still, quote,
12 “pre-profit,” I would think a lot of entrepreneurs are
13 going to say -- and VC funds in particular -- “I’m
14 investing in this company not to get it to $500,000 in
15 revenue, but to $500 million in revenue; and if I move it
16 or start it or incubate it in California, I’m going to, in
17 addition to absorbing and having to fund losses for three,
18 five, ten years -- certainly biotech in San Diego, this is
19 a big, big, issue -- and then it explodes with revenue and
20 profitability, that’s when the State should reap its fair
21 share of revenue; not when these fledgling companies are
22 trying to make it.
23 And the scale of these enterprises, they can
24 absorb $100 million in capital and have hundreds of
25 millions in revenue.
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1 Amazon, which isn’t in California, but is a
2 perfect example of that, it was losing money for a very
3 long time and now is a phenomenal business.
4 That’s another thing, and I haven’t said this,
5 but the whole issue of taxing Internet sales, so the
6 State loses sales tax. The amount of sales that occur
7 in California via the Internet is huge and is only going
8 to get larger. It’s a federal exemption issue, as I
9 understand it. But that may be something that you want
10 to take a look at.
11 CHAIR PARSKY: John?
12 COMMISSIONER COGAN: Carl, you mentioned that
13 the banks are still under the three-factor apportionment
14 for interstate sales. Could you indicate, what was the
15 rationale for keeping them separate?
16 MR. JOSEPH: Well, yes, I certainly wasn’t in
17 the Legislature when they wrote the bill the way they
18 did. But when we went from a three-factor formula to a
19 double-weighted sales factor formula, which increased the
20 emphasis on sales -- this was back in 1993 -- at that
21 time, there were industries in the state that requested
22 that they remain on the standard three-factor formula.
23 Extractive industries were one. Banking and financial
24 was another one.
25 And so at that time, those industries said,
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1 “Please don’t make the formula more about the market,
2 because our markets in California, for the most extent” --
3 at that point, you know, banks were more state as
4 opposed to big, national things, I assume. So when the
5 Legislature just recently went to allow an election to go
6 to single-factor sales, no other factors at all, the way
7 they wrote the bill was essentially if you could elect
8 the double -- or “elect” -- if you were a double-weighted
9 entity under the existing law, then you could elect to
10 just use single-factor sales under the new law.
11 If you were an entity that was -- the average
12 weight of the -- the normal three-factor formula, you
13 would stay on that formula. And that leads me to assume
14 that they believe that those industries who didn’t want
15 50 percent of their factor to be sales back in 1993,
16 would certainly not want 100 percent of their sales to
17 be the factor. And so they were remaining on that
18 equally weighted three-factor formula.
19 Your proposal here is a sales-factor proposal.
20 And I’m just wondering whether or not that difference in
21 any way compensates at all -- that getting rid of that
22 payroll factor, which is often argued in literature to
23 be a tax on payroll, essentially -- if that in any way
24 subsumes some of the problems for the banks in the taxing
25 of their employees’ labor.
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1 COMMISSIONER COGAN: Right. You know, it would
2 be interesting if the decision was made to keep banks
3 outside of a BNRT. If we went with a BNRT, it would be
4 interesting to take a look at what the consequences would
5 be of changing the law with respect to the interstate
6 sales apportionment factor for banks.
7 COMMISSIONER EDLEY: Well, what about law
8 firms? I take it, the issue with banks is that you’re
9 originating the loans all over the place, so your sales
10 are all over the place, but the workforce is largely
11 local. Well, the same would be true of a law firm or an
12 accounting firm, right, is that they’d be --
13 COMMISSIONER COGAN: I didn’t think we were
14 thinking of a policy that would keep the law firms
15 outside of the BNRT.
16 COMMISSIONER EDLEY: I know. But I’m trying to
17 figure out, what would be the rationale?
18 Well, for the BNRT, yes, right.
19 COMMISSIONER COGAN: I’m just saying, assume
20 that we made a decision that banks would be outside the
21 BNRT.
22 COMMISSIONER EDLEY: Right, right.
23 COMMISSIONER COGAN: Then does it make sense
24 for us to be thinking about the apportionment factor for
25 banks, changing that?
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1 COMMISSIONER EDLEY: Right.
2 MR. JOSEPH: Yes, I’m not aware of what happened
3 as far as input from the banks on the sales-factor formula
4 that went through the last time. You know, that was
5 during the sort of budget process. And I don’t know how
6 much input there was from industry. I don’t know whether
7 or not that assumption, that they would not like a bigger
8 sales factor and a smaller payroll factor, is necessarily
9 true anymore. But certainly that’s --
10 COMMISSIONER COGAN: That’s what I’m wondering,
11 yes.
12 COMMISSIONER EDLEY: I guess what I was getting
13 at, John, is if the logic -- if the apportionment --
14 whatever the tax is, why doesn’t the same apportionment
15 logic follow for services like law and accounting, as for
16 the service provided by a bank?
17 COMMISSIONER COGAN: Regardless? You’re
18 saying --
19 COMMISSIONER EDLEY: Right.
20 COMMISSIONER COGAN: -- regardless of whether
21 we’re in a BNRT or not?
22 COMMISSIONER EDLEY: Right.
23 COMMISSIONER COGAN: And that raises a question
24 that we have talked a little bit about already, which is:
25 What is the most appropriate apportionment factor within
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1 the BNRT?
2 COMMISSIONER EDLEY: Right.
3 COMMISSIONER COGAN: And is the same
4 apportionment factor, the right factor for all?
5 And in the staff proposal we have so far, it’s
6 a sales-apportionment factor.
7 COMMISSIONER EDLEY: We should let Russell get
8 back to work.
9 COMMISSIONER COGAN: Yes, yes.
10 CHAIR PARSKY: Russell, we kept you a little
11 longer because we have really struggled with how the BNRT
12 should or shouldn’t apply to the banking industry. And
13 so we really thank you very much. A very thoughtful
14 presentation. And I think we will probably try to
15 develop some examples, concretely, of how the existing
16 system might affect the bank and how the proposed system
17 and maybe some of your people in the tax area will take
18 a look at those examples.
19 MR. GOLDSMITH: Well, I appreciate the
20 opportunity to share my thoughts and have the dialogue.
21 And, yes, we’d be happy to be helpful. We have some
22 people who know more about tax and apportionment and some
23 of these other sexy issues.
24 And so, yes, if there are some fact patterns
25 or something you’d like us to say how we think it affects
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1 us, either way, I’m happy to have -- to ask somebody to
2 do the homework and supply it to you. And I applaud what
3 you guys are trying to do, as I said in my statement.
4 Thanks very much.
5 CHAIR PARSKY: Thank you very much.
6 Let’s move on to Technology, or another
7 technology presentation.
8 Is Mike Rockenbach here?
9 MR. ROCKENBACH: Good morning.
10 CHAIR PARSKY: Please, Mike. I’m sorry to keep
11 you a little longer, but we’ll try to catch up.
12 MR. ROCKENBACH: No problem.
13 I don’t really have any prepared remarks, so
14 maybe that will speed it up a bit. But as way of an
15 introduction, let me maybe give you a little background
16 on myself and the company that I work for.
17 COMMISSIONER EDLEY: Okay, and then tell us what
18 you think we should do to banks, now that Russell is gone.
19 MR. ROCKENBACH: Banks are our friends.
20 So my background is, born and raised in
21 California. I’ve got a couple of kids that I’ve raised
22 in California. I’ve worked here all my life.
23 The company I work for is Emulex Corporation.
24 It’s been around for quite a while as a technology company
25 that’s somewhat challenging. We’ve been a public company
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1 for about 30 years. I’ve worked there coming up on
2 18 years. I’ve been CFO of the company for about the
3 last ten or 11 years. And so I’ve got a little bit of a
4 background.
5 No background in tax, other than the experiences
6 I get from filling out taxes and signing tax returns.
7 But as I think of some of the earlier comments, when we
8 have had to make decisions as a company, quite frankly,
9 taxes is kind of -- well, not necessarily an afterthought,
10 but kind of a result of the things that we’re working on.
11 It’s very difficult, I think, as a technology company, to
12 make the basis of your business decisions on accounting
13 treatment, tax treatment, those types of things, because
14 you’ve got to do the right thing for the business. And
15 in technology, that really consists of innovation and
16 growth.
17 And I think, as we’ve changed a lot over the
18 years as a company, we’ve had our tough times, we’ve had
19 our good times. We’re in a position now where we’re a
20 fairly global company. I don’t know that we’re
21 representative of all technology companies in California.
22 In fact, quite frankly, I think we’re probably not a good
23 representation of all technology companies. For us, we
24 manufacture high-speed components for big OEMs. So the
25 guys we’re selling to are HP, EMC, Dell. So big, global
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1 companies.
2 And, you know, our products are being integrated
3 into their products and then they’re being sold to big
4 data centers, where they’re storing lots of information
5 and accessing a lot of information.
6 So banks are our friends because they do a lot
7 of transactions, and that’s kind of the specialty of the
8 products that we build.
9 You know, as a global company, we’ve been
10 through a variety of changes. When I started at the
11 company, we were a global company, we had 13 international
12 subsidiaries. Went through a lot of changes, shrunk down
13 a lot to just a single corporation, and we’ve been going
14 the other way for the last ten years, maybe. And we’re
15 kind of back out at that growth and the extent of the --
16 you know, the current environment. But we’re now that
17 global company again.
18 We design all our own products. We partner
19 with a lot of different people to help us build products
20 and design products. We’ve done our own manufacturing
21 in the past, but we don’t today. We outsource that.
22 But because of the way that we do business,
23 we’re selling to these OEMs. And so ultimately, our net
24 revenues, if you will, in the state of California are
25 really dependent on where our customers are building
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1 product. So we don’t ultimately sell a lot into
2 California if our customers aren’t building products in
3 California.
4 So, being not a tax expert, I can’t tell you
5 if a receipts tax is better than an income tax. When I
6 think about a receipts tax, you know, we’ve got several
7 subsidiaries in Europe and so we’ve got a little bit of
8 experience with value-added tax. You know, the challenge
9 we have as a U.S. company and value-added taxes, it’s in
10 local currency, so you’re exposed to currency gain/loss
11 more than anything else with the value-added tax.
12 But, you know, when I think about it, when I
13 think of a receipts tax -- and you talked about the
14 example of a small start-up company -- under $500,000 in
15 revenue wouldn’t be taxed on the net receipts. But, you
16 know, a net-receipts tax is kind of like -- you know, kind
17 of an existence tax: “I’m here, therefore, I’m taxed.”
18 And, now, the other side of that, though, is
19 we’re getting a lot of benefits; right? There’s
20 services that the State is providing because we’re here.
21 And so when you’re in a start-up, I think that is a bit
22 of a challenge, right, because you aren’t generating a
23 lot of revenue, even when you get -- from a technology
24 company’s perspective, even when you get past $500,000
25 in revenue, you may not be making a profit yet.
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1 But, on the other hand, when you’re profitable,
2 you’re generating income, and so that’s more of a
3 share-the-wealth type of tax; right? If I’m doing really
4 well, I’m sharing more with you; and if I’m not doing so
5 well, we’re both suffering.
6 And what that does from the State’s perspective
7 in terms of delivering those services to us as a company
8 and, you know, the citizens of the state, is that puts a
9 lot more volatility in the revenue stream.
10 And I think, obviously, when you’re using a
11 profits-based tax -- and you can debate what “profit”
12 is -- but when you’re using a profit-based tax, it’s
13 probably got a more disproportionate impact on a
14 relatively small change. And the reason I say that is
15 if you -- you know, you look at gross domestic product,
16 maybe it’s coming down 10 percent this year, but profits
17 are coming down 60 percent. So if I’m sharing the wealth
18 with you, you’re getting hit by 60 percent, when on the
19 top line and the services that you have to provide maybe
20 only got cut by 10 percent. So what that does, I think,
21 by transferring from an income-tax base to a revenue-tax
22 base, is it provides more stability in the State’s revenue
23 stream, which is good during the bad times.
24 And kind of the counter to that, though, is
25 you don’t get the upside during the good times. So I
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1 think it shifts directionally from the State or from the
2 government to the individual corporations. In some
3 respects, you’re putting a little bit more instability
4 on the company because we’re going to pay taxes on our
5 revenue base as opposed to our income base. So if we’re
6 less profitable, the tax is still the same. If we’re
7 more profitable, it’s great because it’s lower on a
8 relative basis.
9 So when you get more stability in the State’s
10 income, you know, the onus is on the companies to take
11 more responsibility when we’ve got the volatility on our
12 side of the income. So I don’t know that -- I think
13 you’ve got an unenviable task.
14 I certainly appreciate --
15 COMMISSIONER EDLEY: Everybody agrees on that.
16 CHAIR PARSKY: That’s a given.
17 COMMISSIONER EDLEY: Can we just put that in our
18 report?
19 MR. ROCKENBACH: I probably should have started
20 off with that, I guess. But, you know, I think it’s hard
21 for me or for a company to look at just a receipts tax
22 independently. I don’t know whether I feel good or bad
23 about it -- in fact, I don’t feel good or bad about it
24 because, you know, for me as an officer in the company or
25 an executive in the company that you’re trying to run a
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1 business, that’s just one of the variables you take into
2 account. So you have to look at the sum of the parts.
3 If you had a -- I don’t know what numbers you’re looking
4 at -- or I don’t think you’ve filled in the blanks on the
5 numbers yet as you look at these things -- but if you
6 have a 2 or 3 percent revenue tax but the income tax on
7 individuals that we’re employing is 30 percent, well, I
8 have the same problem, it’s just moved to a different
9 line on my P&L.
10 I think that at a certain level, a receipts tax
11 maybe benefits established companies a little bit more
12 than a start-up company. But that doesn’t mean there
13 can’t be other offsets that make it beneficial to be a
14 start-up company. And so I think that’s how we would
15 look at it as a company. And I can’t speak on behalf of
16 all technology companies because a lot of them have
17 different variables than we have.
18 But I think from a public company’s perspective,
19 or from any company’s perspective, the things that help
20 us are probably fairly broad. You know, a great school
21 system that’s generating a lot of very talented math,
22 science majors and communication majors and a variety of
23 skill-sets like that is going to help us as a company.
24 So that’s a service. So we’re certainly willing to pay
25 a little bit more in another bucket if we’re going to get
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1 a little bit more in that bucket.
2 And I think it will be interesting to see how
3 this plays out. As I say, I live here, and I fully
4 intend to continue living here. But it’s difficult to do
5 these types of changes at all. And I think it’s painful
6 to do them as iterative changes. But that’s not to say
7 that the pain of doing a massive change is any less. But
8 the thing that I think helps us at a broad base is
9 simplicity, to the extent we can.
10 The more cumbersome it is to figure out what
11 the tax rate is, the more expense there is to us as a
12 company. So, again, I kind of have to look at it from
13 all the variables, not just one.
14 And I think there’s a lot of value in a
15 receipts-type tax. If it reduces some of the volatility
16 and lets you continue as a state and, as an economy, to
17 be able to invest through the tougher times, but you’re
18 not necessarily, like I say, going to get all upside of
19 the better times, but that’s okay. The government is
20 there as a service and, you know, support provider as
21 opposed to, you know, the entrepreneurship is on the
22 company side. And an environment that encourages that
23 and supports that, I think, is the biggest driver to
24 success for companies.
25 CHAIR PARSKY: Thank you.
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1 John?
2 COMMISSIONER COGAN: Thanks, Mike, for taking
3 the time to come here.
4 A couple points you said.
5 We don’t get the benefit under a BNRT or a more
6 stable revenue flow, that we don’t get the upside when
7 the economy booms. But I think, from what I’ve seen of
8 the way the State has dealt with, or spent on the upside,
9 what they’ve done is just created a budget that’s a
10 disaster for California programs when the downturn hits.
11 And that’s what we’re seeing now. And so the benefits
12 of having a stable revenue source is really -- I think
13 really, really important for the State.
14 The second point is that you said that part of
15 the reason for your success is that you make decisions
16 based upon economics, not on how to game the tax code.
17 One of the benefits of a broad-based tax system that has
18 a low rate, is that further encourages people to make
19 their decisions based on sound economics and not on tax
20 policy. And so that’s another reason for thinking about
21 a broad-based, low-tax-rate kind of regime.
22 Let me ask you two questions. One is, when it
23 comes to planning for a company such as yours, one of
24 the provisions we have is an apportionment formula for
25 assigning your tax liability based upon your in-state
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1 sales versus your out-of-state sales. And we’ve been
2 playing with two options: Make that an annual
3 calculation, so it’s annual sales inside of California
4 relative to the rest of the world. Another is a five-year
5 averaging of that sales ratio.
6 Does it make a difference -- an appreciable
7 difference for a company like yours in terms of tax
8 planning or in terms of, more importantly, economics
9 planning for your company, which way we would go? Do
10 you see any important difference?
11 MR. ROCKENBACH: That’s a great question.
12 I think if you’re in a -- let me think about
13 how that would affect us.
14 I think if you’re growing pretty quickly, I
15 would guess, you know, a five-year average look-back might
16 be better for you.
17 COMMISSIONER COGAN: Uh-huh.
18 MR. ROCKENBACH: Because that would kind of
19 lower it, you know, overall. That’s my guess.
20 CHAIR PARSKY: Well, it might be helpful, maybe
21 to take a look, post this discussion, at the actual
22 experience of your company.
23 MR. ROCKENBACH: Yes.
24 CHAIR PARSKY: And without necessarily
25 disclosing anything that’s not publicly disclosed, maybe
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1 provide us with what impact it would have on your company
2 if we went in one or the other of these directions.
3 MR. ROCKENBACH: Sure, I could take a look at
4 that.
5 Yes, like I say, I think for us, it’s probably
6 not representative of technology companies as a whole.
7 It would depend on how much it changed within the state
8 of California. I mean, we could have very dramatic
9 changes elsewhere and, you know, they wouldn’t
10 necessarily affect California as much.
11 I think new technology is going to tend to be
12 on that curve of accelerating revenue growth. More
13 established companies, maybe it’s not going to make as
14 much of a difference if you’re growing 5 or 10 percent
15 a year, there’s less volatility in your numbers. So
16 whether it’s one year or five years might not make a big
17 difference.
18 But from a start-up’s perspective, maybe
19 five-year averaging would alleviate some of the other
20 pressures you have, because you would see a little bit
21 of a benefit, maybe as you’re kind of hitting an
22 acceleration curve, where the tax would be a little bit
23 lower because your averaging look-back is five years,
24 or some subset of five years. So you would kind of
25 get -- you would have a little bit of pain at the
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1 beginning, but you’d get some benefit as you kind of got
2 into the market.
3 COMMISSIONER COGAN: Yes, unless you start
4 selling first in California and then branch out; right?
5 MR. ROCKENBACH: That’s true.
6 But, again, I think if you’re selling first and
7 only in California, there’s -- if there’s compensating
8 things within the business that make it more efficient
9 for you, that’s not necessarily a penalty.
10 COMMISSIONER COGAN: Right.
11 Then does your company make use of the
12 research-and-development tax credit? How important is
13 that to your company?
14 MR. ROCKENBACH: We do use the research, the
15 R & D credits. We also have benefitted -- this was for
16 us, anyway, it was quite a few years ago -- but from
17 net-loss carry-forwards -- net-loss carry-forwards, I
18 think if you’re a company that’s done acquisitions --
19 we’ve done acquisitions in the past. There’s some
20 benefits from acquiring NOLs. You know, there’s some
21 limitations on how much you can use it.
22 But, again, I mean, those are things where,
23 when we look at a company from a perspective of an
24 acquisition, we’re not making the decision based on
25 whether we’re going to get these losses that I can absorb
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1 or not, because we’re looking at it just purely from
2 innovation and technology.
3 COMMISSIONER COGAN: Right.
4 MR. ROCKENBACH: And what we look at -- and
5 now we’re probably a fairly normal company -- these
6 things are really just a make-or-buy decision for us. So
7 we’re trying to look forward in the market, directionally,
8 where things are going and where we need to be; and then
9 our decision comes down to, do we have the time and the
10 wherewithal to do it internally, or is there somebody out
11 there, as the case of the start-up or somebody funded by
12 venture capital, that can go do that, or is already doing
13 that? And an acquisition makes more sense. And then,
14 you know, whether you have an NOL or not comes into play
15 after you make that decision. So I mean, they tend to
16 be very business-driven decisions. And I think the taxes
17 either are a little bit of a drag on that or they
18 complement that decision.
19 COMMISSIONER COGAN: Great, got it.
20 Thanks very much.
21 CHAIR PARSKY: Ruben?
22 COMMISSIONER BARRALES: So you’re agnostic right
23 now on the business net-receipts tax.
24 Is there any tax system that would give you
25 heartburn immediately? I mean, is there a proposal or an
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1 idea that would cost jobs at any lengths or be considered
2 harmful?
3 MR. ROCKENBACH: I can’t think of any specific
4 ones.
5 You know, I think -- we’re a company -- well,
6 because we sell to OEMs, we’re a company that has
7 relatively fixed costs in a lot of ways. We don’t have
8 a lot of variable costs. So when things slow down,
9 spending is relatively confined. I mean, we’re like
10 everybody else. We’ve assessed our spending and made
11 changed in our spending over the last two years. But, you
12 know, if our revenue is off 20 or 30 percent, you know,
13 we’re maybe only able to cut expenses 10 or 15 percent.
14 So I don’t think -- you know, on the other hand, as we
15 grow, we’ve got a lot of leverage towards the upside.
16 So -- and I think there’s benefits from R & D
17 tax credits. But, again, that’s only a big benefit to
18 the extent that there is a penalty somewhere else. So
19 if there aren’t R & D credits but overall taxes are lower,
20 that’s a good thing for us.
21 CHAIR PARSKY: I think if you look at this --
22 I don’t know the details of your business at all, but I
23 would urge you to look at this tax in the context of the
24 way in which you grow. If you’re a very high-margin
25 business and fixed costs are really under control, I think
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1 you could potentially really benefit from a substitute.
2 But we’d like you to look at it.
3 MR. ROCKENBACH: Yes. Like I said, I think for
4 an established company, I don’t know -- I mean, like I
5 say, you have to look at it in the context of all the
6 changes you’re making. But in general, as an established
7 company, I don’t know, maybe we would favor a receipts
8 tax as opposed to an income tax because we’re established.
9 That might not necessarily work out for everybody else.
10 But, you know, what that does, I guess --
11 kind of the counter to -- would a receipts tax impact
12 innovation within the state, it might -- maybe it just
13 changes the way you do innovation in the state. And I
14 guess I’m probably pointing it out to people that already
15 know, but there’s a lot of things that can come into
16 impacts on whether start-ups work or not. Tax is only
17 one piece of it. And, you know, you can debate on how
18 big of a piece that is.
19 But if a receipts tax, at a very broad, macro
20 level, favors established companies versus start-ups,
21 that’s not necessarily a bad thing. If companies have
22 the wherewithal within the state and the ability to draw
23 on an educated workforce, a strong workforce, to deliver
24 better innovation, it just shifts the burden from being --
25 it shifts the burden back to more of a make from a buy.
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1 So we would have less of a burden as we’re profitable.
2 We can make more investments in research and development
3 to expand our business as opposed to looking at it and
4 saying, “Well, we have to go buy somebody that’s more
5 innovative in that particular area than us because there
6 is a guy out there that was a start-up and did that.”
7 So it might just shift the way things happened as opposed
8 to being a big negative or a big positive. It’s kind of,
9 like I say, within just the concept of a receipts tax,
10 that’s a hard variable to look at. But you do have to
11 look at these things as an all-inclusive approach, I
12 think.
13 CHAIR PARSKY: Thank you very much. We really
14 appreciate your contribution.
15 MR. ROCKENBACH: Thanks.
16 CHAIR PARSKY: Next, Motion Picture Association.
17 COMMISSIONER EDLEY: Gerry, while he’s coming
18 up, can I make two quick points?
19 One is, I think John made a point about how,
20 when in the current system, when receipts go down for the
21 State, we get into a mess. Because when receipts were
22 high, we started doing all the spending. Well, I just
23 wanted to set the record straight from a left perspective
24 here --
25 CHAIR PARSKY: You’re on my right. He’s on my
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1 left.
2 COMMISSIONER EDLEY: When things get out of
3 whack on the downside, speaking generally, there are
4 three explanations.
5 One may be that there were commitments made to
6 expenditures that can’t be continued.
7 Another may be that there are discretionary
8 programs that the Legislature refuses to cut.
9 And the third may be that, when times were good,
10 the Legislature cut taxes.
11 And it’s all three of those things, it’s not
12 just one of them. And so I think the expenditure issue
13 that gets us into trouble is when they’ve made a
14 commitment to some kind of program that they’re not
15 willing to trim back. And as we’ve certainly seen in this
16 round, wherever there’s been a discretionary program to
17 get cut -- with the exception of prisons and so forth --
18 they’ve cut it. But certainly, I would agree that on
19 the entitlement side, you run into much more difficult
20 problems.
21 But it’s also, I think we’ve seen both in
22 Sacramento and in Washington, a tendency when times are
23 good to cut revenues which also contributes to the
24 problem.
25 COMMISSIONER COGAN: I certainly would not
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1 disagree with that at all. The point is, what we want
2 to try to do is get a tax code that prevents what we’re
3 seeing now, which is these deep, wrenching cuts in
4 certain programs that were expanded before merely because
5 the Legislature took a temporary increase in revenue and
6 treated it as a permanent increase.
7 COMMISSIONER EDLEY: That’s right. I’d
8 certainly agree with that.
9 The second thing I want to say is, I think it’s
10 important for us to remember that in trying to figure out
11 how we think about start-ups and the seeming unfairness
12 of forcing a company to pay a BNRT if they don’t have
13 profits, it’s not paying the BNRT as compared to not
14 paying any taxes, because you don’t have profits to be
15 taxed if, in fact, we’re going to expand the sales tax
16 as an alternative. So it may be they have no profits,
17 but they’ve got a sales-tax liability as well. So that’s
18 the comparison.
19 Now, that wouldn’t apply in the case of, say,
20 a biotech start-up where there’s a long pipeline and you
21 actually have no sales of anything.
22 COMMISSIONER COGAN: Right.
23 COMMISSIONER EDLEY: But something like that.
24 CHAIR PARSKY: Something like both.
25 COMMISSIONER EDLEY: Right. But for something
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1 like the Facebook example, Facebook is really big now,
2 but they don’t have any profits. If there’s something
3 there that would be folded, would be encompassed within
4 sales, they would be paying a sales tax.
5 CHAIR PARSKY: Right.
6 COMMISSIONER EDLEY: And also, the bigger they
7 get, I think our argument would be that with the bigger --
8 if they had gotten really big but still don’t have any
9 profits, if the rate is low enough -- 3 to 4 percent --
10 then that’s kind of a cost that can be better, it seems
11 to me, integrated into their business operations, into
12 their structure -- their financial structure, because
13 they’re big enough. In that sense, it’s not much
14 different than if they faced cost increases in some other
15 factor of production or they’re paying more for their
16 labor.
17 COMMISSIONER BARRALES: Dry-cleaning.
18 COMMISSIONER EDLEY: Or for their dry-cleaning,
19 for that matter. Right.
20 So I think that that would be, that there’s
21 wiggle room. In other words, that there would be enough
22 wiggle room. At some point you get big enough, that
23 there’s enough wiggle room that if the rate is small, you
24 ought to be able to cope with it, I think, plan for it,
25 or pass it along, whatever.
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1 COMMISSIONER COGAN: Yes.
2 CHAIR PARSKY: Okay, Eric, we’re going to move
3 along, but we really appreciate your coming.
4 MR. MIETHKE: Thank you very much, Mr. Chairman.
5 I have submitted written testimony, so I won’t
6 read it, and I’ll try and get you back on schedule by just
7 summarizing as quickly as I can, answering what questions
8 you may have.
9 CHAIR PARSKY: I know the level of your
10 expertise, so I’m sure you can summarize well.
11 MR. MIETHKE: If it’s anything like my family
12 advises me, it shouldn’t take long because I don’t have
13 much expertise in much of anything. Particularly, ask my
14 12-year-old, Sam.
15 At any rate, I appreciate the opportunity to
16 come today on behalf of the MPAA. You’ve asked us to
17 comment briefly on the business net-receipts proposal as
18 we understand it, and perhaps offer just a few comments
19 about the package, too, as we understand it.
20 I’ll restrict it to the proposal to phase out
21 the bank and corp tax and reduce sales and use tax rates.
22 I did not believe any discussion of the flattening of the
23 PIT was part of this, so we have no comments on that.
24 Some of the things I’ll be saying is not
25 different from what you’ve heard so far. To the degree
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1 that it’s redundant today, I’ll try to really skip over
2 it, one of which is, of course, like everyone else, the
3 more detail that we could have, the easier to be for us to
4 give you a better idea of how this will have an effect on
5 the industry.
6 Some of the major pieces that would be helpful
7 to have as soon as possible would be, of course,
8 information on the rates, the BNRT rate, and also the
9 phase-out rates on bank and corp, and ultimately, too,
10 what the Commission will be recommending for the sales
11 and use tax rate. As you know, the state sales and use
12 tax rate is federally made up of six different rates.
13 And the decision on whether to eliminate some or all of
14 them will have a fairly profound impact on some of these
15 compensating taxes that will be used to offset the BNRT.
16 Certainly another big issue will be treatment
17 and expensing of equipment, what happens with carryforward
18 credits and NOLs. And certainly one question that all are
19 interested in is, to the degree that part of this package
20 is the reduction or elimination of these other taxes,
21 what guarantees do we have that that will actually occur?
22 Is the proposal to have that all preprogrammed as part of
23 the original legislation, so that it doesn’t become, in
24 essence, at the end of the phase-out period discretionary
25 on the part of the Legislature as to whether to eliminate
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1 the replacement taxes or not?
2 One thing I do want to stress, too, is that
3 people tend to think of the motion-picture industry as
4 being just that, and distinct and unique. But at least
5 the studios that make up the Motion Picture Association
6 of America, many of them are part of a much larger
7 corporate conglomerate that are engaged in far-reaching
8 activities, some completely unrelated to motion-picture
9 production and distribution.
10 To that extent, this information is important
11 because we will analyze this proposal not just in the
12 individual context of our motion-picture operations, but
13 the members will analyze it in terms of their overall
14 corporate context. Because, again, this is based on,
15 as I understand it -- as we understand it, your unitary
16 group, as would be for bank and corp tax which, again,
17 would include all these many, many diverse businesses
18 within it. So the sooner we get the information, the
19 better.
20 Now, based on what we do know, we do have a
21 few matters that do concern us that we’d like to offer
22 testimony on today. One is -- and I won’t belabor it
23 because others have -- and that is, there is a built-in
24 incentive, to some degree, to outsource and offshore,
25 which has been talked about to some degree. Because, of
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1 course, payments to your own employees are not deductible.
2 Payments to a firm are.
3 We have worked very, very closely with our union
4 partners in the industry to try and encourage the
5 expansion of California production, discourage runaway
6 production. And so certainly that would be something that
7 we would be concerned about if, in fact, these incentives
8 are out there.
9 We don’t believe the fixes to that problem are
10 necessarily easy. We do think there are constitutional
11 issues involved, significant ones. And certainly to the
12 degree that we bypass the legal constraints, as we saw
13 in the 1980s, from the unitary-tax wars, worldwide
14 combination, at some level, these issues become political
15 ones with our foreign-trading partners as well. If they
16 find themselves subject to this place called California’s
17 taxation, they begin to wonder, you know, how does that
18 work, and complain to Washington who, in turn, turns
19 around and threatens federal legislation. So all these
20 things become problematic.
21 There has been commentary on start-ups. You
22 know, the motion-picture industry is a very strong part
23 of California’s entrepreneurial spirit. And, indeed, a
24 lot of start-ups and truly innovative companies occur in
25 our industry.
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1 The bane of all small businesses is capital
2 preservation, formation, retention -- you name it, it’s
3 all about capital and, indeed, a tax that, at least on
4 its face, would seem to apply whether profitable or not,
5 where there’s no deductions for interest payments on debt.
6 And also there’s one thing that I don’t think anyone has
7 touched on, current changes in the bank and corp law not
8 only allow for NOL carryforward, but a two-year NOL
9 carryback. And from what I could see from the materials
10 that the Commission made available on BNRT, at least it
11 didn’t say that the NOL carried back would be continued
12 on into this tax program. That’s something I really
13 would advise thinking about.
14 We are, to some degree, concerned about whether
15 this would increase the cost of production in California.
16 Now, it is true that whatever production company in
17 California would pay to a firm would be deductible from
18 its own BNRT. But the entities -- the multitude of small
19 companies and others that perform all the subspecialties,
20 ranging from lighting, cinematography, editing, special
21 effects, sound effects, application makeup, these
22 entities would all become subject to BNRT.
23 Currently, their services are not taxed under
24 the sales-and-use tax law. And there’s a debate, of
25 course, even within our members as to whether you should
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1 view this as a sales tax or an income tax.
2 But nonetheless, the testimony that we have
3 from E & Y, I believe at the first hearing where this was
4 introduced, was that the bulk of this would be passed
5 along in the form of higher prices. So presumably, even
6 though we would be deducting those higher prices from our
7 BNRT liability, those are still increased costs that we
8 would have to bear.
9 Now, whether those would be significant or not,
10 of course, is a function of what are the other offsetting
11 considerations. And, indeed, even that service provider,
12 whether the other offsetting provisions would offset the
13 need to pass along the BNRT in the form of higher prices.
14 As you all know, the Governor and the
15 Legislature has had a tremendous focus in this last year
16 on the issue of lowering the cost of production in
17 California. We have all worked together, and we’re very,
18 very pleased to see a production tax credit offered,
19 finally, for shooting in California.
20 California has been in a very competitive
21 situation with other states, like New Mexico, Connecticut,
22 New York, Illinois, that have offered major tax incentives
23 to come shoot there.
24 We appreciate California’s recognition of that.
25 We would like to shoot here. This is the industry’s home.
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1 We would certainly want to make sure that nothing about
2 the BNRT is inconsistent with that and with that movement
3 and on a public policy level.
4 I just want to say a couple of words about the
5 income tax -- the current income tax -- and this goes
6 more along the order of a transition from an income tax
7 to a BNRT.
8 The income tax has actually been a pretty
9 stable, relatively well-known commodity to the
10 motion-picture industry. The regulation, actually -- the
11 income tax regulation that applies to the motion-picture
12 industry, frankly, is undergoing the first revision this
13 year in -- what, Carl, 27 years?
14 MR. JOSEPH: A long time.
15 MR. MIETHKE: A long time.
16 So it is pretty well known. And we have had
17 relatively few issues with it. So to the degree that
18 there is movement away from it, we’re moving from the
19 known to the unknown. And there’s always issues that
20 arise and questions that arise in connection with that.
21 One of the major ones, of course, is the
22 expensing versus capitalization of equipment. The
23 motion-picture industry, both through its direct
24 operations as making and producing motion pictures, as
25 well as other things, like theme parks and other things
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1 with which you’re well familiar, buys a tremendous amount
2 of high-value, high-dollar equipment every year.
3 The issue of whether that’s expensed or
4 amortized is going to be one that’s really quite
5 significant.
6 And as I noted earlier, these equipment
7 purchases are still going to be subject to some portion
8 of sales tax.
9 By my own rough calculation, under the most
10 rosy scenario, we would be looking at a state sales tax
11 rate of about 1.75 percent, and under a worst-case
12 scenario -- and a worst-case scenario would be where the
13 half-cent portion of the rate that’s for realignment,
14 that took place when -- I think it was 1991, the
15 Legislature handed off health and welfare responsibilities
16 to the county, sent down a half cent of revenue in the
17 realignment of that -- whether that, in fact, would be
18 repealed or not. Assuming it isn’t, and realignment is
19 in place, and you were to make a purchase in the highest
20 tax jurisdiction in the state -- local jurisdiction, which
21 is, I believe, Pico Rivera and Southgate -- that would be
22 4.75 percent, still existing after full phaseout. So
23 you’re looking at quite a range of continuing potential
24 sales-tax liability on major purchases of inputs.
25 Again, one of the reasons why, for many years,
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1 the industry has, like the rest of California industry,
2 urged a sales-tax exemption on manufacturing capital
3 inputs, certainly.
4 Just a few other passing comments. Although
5 this has not been a major issue in our industry, we do
6 note that the BNRT would carry over the existing
7 business/nonbusiness income distinction. That has been
8 somewhat problematic in the past. There’s no easy answer
9 for replacement. But having business/nonbusiness issues
10 in two tax programs at the same time is certainly some
11 level of concern.
12 We notice, too, from looking at your preliminary
13 overview of net-receipts tax is that it contains numerous
14 apportionment formulas that appear -- and, again, I
15 haven’t really had time to confirm with FTB -- but it
16 would appear to continue what we call both interstate
17 apportionment -- trying to figure out what portion of
18 gross receipts or income is apportionable to California
19 as opposed to other states -- and intrastate
20 apportionment, meaning, once you’ve determined how much
21 is allocable or apportioned to California, how much of
22 those receipts, or how much of that income should be
23 apportioned to each of the individual companies that are
24 doing business in California.
25 That, in the past, has generated some problems,
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1 some technical problems -- and FTB, I’m sure, can brief
2 you more in detail on that -- of the shifting of income
3 by virtue of these formulas and also stranding of tax
4 credits.
5 Now, I did not notice, really, any discussion
6 of whether tax credits would spring anew and be in a
7 business net-receipts tax regime, or whether we would
8 just be using up credits earned under the bank and
9 corporation tax. But to the degree that credits are
10 almost a political reality at some point for -- someone’s
11 going to come up with something that the Legislature
12 deems to be a creditable activity, that’s at least
13 something to keep your eyes on.
14 Finally, I just want to touch on a couple of
15 transition issues. This has morphed a little bit in
16 the documents. There’s been now two iterations of the
17 overview of the BNRT.
18 What’s going to happen with tax credits and
19 NOLs that are at the end -- remaining at the end of
20 phase-in? That’s a very large issue.
21 Originally, the documents were silent. And we
22 presumed that that meant that they would disappear. Now,
23 it’s listed as an option as to whether they would be
24 carried over and be used either at face value or some
25 variation thereof as an offset against BNRT liability.
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1 But this is a serious balance-sheet issue.
2 FTB can give you the recent numbers; but the
3 last time I looked at this, there’s about $10 billion
4 of accumulated and unapplied R & D credits alone.
5 So I state that for two reasons: One, to give
6 you an idea of the magnitude of the balance-sheet issue,
7 because there’s $10 billion of these things on people’s
8 books. What happens to that could have a pretty profound
9 impact on the books. But also it’s a public-policy issue,
10 in terms of to the degree that the decision is made to
11 allow these, it’s going to have a quite a significant
12 impact on your BNRT rate, your transition issues, all
13 these things. So all these things become interrelated
14 and seamless.
15 There is also some -- and, again, I don’t
16 profess to be an expert on this particular piece of it --
17 but there’s some issue of the treatment of deferred gains
18 and deferred income at the end of the transition period
19 as well. That’s been referred to what’s called “future
20 legislative action.” Again, more uncertainty as to what
21 that would mean. But we would think that if that’s not
22 dealt with really up-front, the presumption is going to
23 be that that income and those gains are going to be
24 triggered at the end of the phaseout, which could again
25 be a significant liability.
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1 And again, just to end as I started, there’s a
2 lot we don’t know. We will be very, very interested in
3 seeing the details of the package and, again, trying to
4 be a resource to you to help how to guide the discussion
5 as we approach the end of the Commission’s deliberations.
6 And with that, I’ll end and try to get you back
7 on schedule and be as brief as -– and I’m here for you.
8 CHAIR PARSKY: Thank you very much.
9 Curt?
10 COMMISSIONER PRINGLE: Yes, I personally am
11 concerned if Eric limited his testimony. So I want to
12 make sure I expand it as much as possible. I told him
13 that was my singular goal.
14 And there’s three areas, Mr. Chairman.
15 But first, before I get to those, so you
16 believe, under the present local sales tax, of what you
17 would assume is the most severe circumstance in reduction
18 of sales tax under our present perceived plan, Pico Rivera
19 area, at 4¾ may be the highest combined sales tax at the
20 end of this process?
21 MR. MIETHKE: As I understand the Commission’s,
22 at least, current thinking --
23 COMMISSIONER PRINGLE: Goal or discussion.
24 MR. MIETHKE: -- as I understand what the
25 thinking is, we’re not going to disturb what exists
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1 currently at the local level.
2 Currently, statewide, there’s a uniform state
3 rate of 1 percent. Local jurisdictions, pursuant to
4 Prop. 218, are allowed to add local transactions and use
5 tax. The jurisdictions that have added the most of those,
6 again, I believe are Pico Rivera and Southgate, which have
7 now gone up to I believe 3½ percent at the local level.
8 If you add that to the pieces of the state rate, that
9 piece that’s in the Constitution for police and fire and
10 the piece that’s related to deficit-reduction bonds,
11 which I presume are sacrosanct and can’t be repealed
12 without at least a constitutional amendment as it relates
13 to the half cent for police and fire. Certainly I don’t
14 know what arrangement could be made with the bondholders.
15 That’s how I came up with a worst-case scenario of 4.75.
16 COMMISSIONER PRINGLE: 4.75 --
17 MR. MIETHKE: And throwing in realignment as
18 well. I’m sorry.
19 COMMISSIONER PRINGLE: As compared to today, the
20 rate in that city is what?
21 MR. MIETHKE: 10.75.
22 COMMISSIONER PRINGLE: Okay, so I think that
23 does demonstrate -- I don’t know necessarily if we can
24 eliminate or even drop the entire state share, even after
25 the constitutional restrictive pennies and half pennies.
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1 But I think that, alone, is very demonstrable.
2 Do you think the entertainment industry makes
3 many major purchases in Pico Rivera?
4 MR. MIETHKE: I can’t say. I cannot say where
5 people make their purchases. I’m just pointing out
6 that --
7 COMMISSIONER PRINGLE: But if they did, if they
8 did make major purchases in Pico Rivera, wouldn’t you
9 suggest that that is a tremendous benefit in savings as
10 well?
11 MR. MIETHKE: Well, all I can say is that it’s
12 a reduction. Now, again, how much of an incentive that
13 is depends, of course, on a number of things, which is
14 all the other pieces put together.
15 COMMISSIONER PRINGLE: That’s true.
16 MR. MIETHKE: I’m just saying –- all I’m saying
17 is that –-
18 COMMISSIONER PRINGLE: Eric, I’m just giving you
19 a hard time. You don’t need to defend that.
20 MR. MIETHKE: Okay.
21 COMMISSIONER PRINGLE: So on the net operating
22 loss carryback issue, I think that is interesting. And
23 that’s something we’re going to have to struggle with both
24 carryforward and look-back, or however that works.
25 But isn’t the look-back a limited, sunsetted
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1 period of time in which that can occur?
2 MR. MIETHKE: No, sir.
3 COMMISSIONER PRINGLE: So the two-year look-back
4 is permanently in –-
5 MR. MIETHKE: It was.
6 COMMISSIONER PRINGLE: -- and it came to you
7 without a sunset; is that correct?
8 MR. POWERS: Yes, it is. It’s permanent, but
9 only for losses generated 2011, going forward.
10 COMMISSIONER PRINGLE: Say that again?
11 MR. POWERS: So for losses generated in 2011
12 and future years, you can always carry back two years.
13 So the existing pool of losses, you can’t take back.
14 Does that make sense?
15 COMMISSIONER COGAN: Right. It starts in 2011.
16 COMMISSIONER PRINGLE: Yes, so, again, all of
17 the NOL stuff we’ve got to figure out how that transition
18 is made. And then anything we were contemplating, not
19 everything would start on Year 1. Some of us would like
20 to see one thing starting on Year 1, is the elimination
21 of the corporate income tax side. And if that is the
22 case, then it makes those issues more challenging to deal
23 with right out of the gate. So I respect that.
24 The movie-industry credit that is in place, what
25 type of credit is that right now?
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1 MR. MIETHKE: It’s a combined. Actually, it has
2 two elements to it. One, if you’re -- it has a sales tax
3 refund element to it, and it also has, for other types of
4 companies, it’s just a regular income tax credit. Now,
5 it can be, after 2011, like all credits, it will be able
6 to be assigned amongst the members of the unitary group,
7 which is helpful. But I don’t know if that answers your
8 question.
9 COMMISSIONER PRINGLE: No, it really doesn’t.
10 What value -- I mean, what percentage of the
11 value of the credit is in a sales tax credit-back versus
12 a straight corporate income tax credit?
13 MR. MIETHKE: The credit is just getting off
14 the ground. In other words, it’s just part of the most
15 recent budget negotiations that came out. I’m not even
16 sure that -- just the first round of credits have just
17 been awarded. So I think that’s fairly premature to tell
18 where all this is going to end up.
19 COMMISSIONER PRINGLE: Is this a pool of credit
20 and then applied maybe --
21 MR. POWERS: Yes, so credit is actually --
22 it’s an allocated credit. The Legislature granted
23 $100-million-a-year authorization to the Film Commission.
24 And as Eric said, the first credits are being awarded but
25 won’t be used until -- 2011 will be the year they could
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1 actually be used --
2 COMMISSIONER PRINGLE: I see.
3 MR. POWERS: -- is in 2011. The taxpayer has
4 an election to apply it against sales tax. The
5 independent films can actually be transferred to other
6 entities. And, as Eric pointed out, in 2011, the larger
7 entities can --
8 COMMISSIONER PRINGLE: So this is not just a
9 straight corporate credit –- corporate income tax credit;
10 therefore, the assignment of that credit -- I mean, if
11 someone ever wanted to move into that realm, it could be
12 assigned to a BNRT, for example? I mean, there would be
13 nothing that would restrict that from that same type of
14 assignment?
15 MR. MIETHKE: Well, it would take legislation
16 because, in other words --
17 COMMISSIONER PRINGLE: Everything we’re doing
18 here today is contemplating legislation.
19 MR. MIETHKE: Right, yes. The answer to your
20 question is yes. The only reason I was confused is
21 because currently it can be used under the existing
22 legislation. It can be applied against sales-and-use tax
23 liability.
24 COMMISSIONER PRINGLE: Got it. So that makes
25 it clean. Just so I understand, it could be assigned to
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1 a BNRT liability?
2 MR. MIETHKE: Yes, it could.
3 COMMISSIONER PRINGLE: And finally -- I’ve known
4 you for a long time, maybe at least 20 years, as you have
5 spent a lot of time in tax policy, tax advocacy, as an
6 attorney, as a consultant, as a lobbyist, all that kind
7 of stuff. And the Legislature addresses tax-conformity
8 bills almost every year. And under that guise, that is
9 similar to our charge here, where you have this desire
10 to have a tax-neutral package, right, and we put together
11 conformity on the federal side or things that the State
12 wishes to do, but really balance them out in a package
13 that is revenue-neutral; is that right?
14 MR. MIETHKE: The Legislature has, in fact,
15 done conformity bills that they have done on what they
16 tried to make a revenue-neutral basis, as close to as
17 possible.
18 COMMISSIONER PRINGLE: And under that
19 definition, though, of revenue neutrality, under no
20 circumstances have we really looked to see if every
21 single taxpayer would pay the same amount under the new
22 legislation as they did under the existing legislation
23 that we’re modifying; right?
24 MR. MIETHKE: You are correct.
25 COMMISSIONER PRINGLE: So part of our charge --
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1 you know, a previous speaker said something like the
2 first rule is to do no harm. And I guess I accept that
3 but not on a patient-by-patient basis. That, in fact,
4 the --
5 COMMISSIONER EDLEY: Another one of the
6 pull-the-plug people.
7 COMMISSIONER PRINGLE: Well, in dealing with
8 the State’s tax policy, it’s not -- everything that is
9 accomplished, even in singular year-by-year tax bills,
10 that are tax-neutral, never contemplates every single
11 taxpayer being -- their outcome being the exact same at
12 the end of the day. That there are going to be folks
13 within year-to-year tax conformity bills where there are
14 winners and losers, and there are also going to be the
15 same case when you’re looking at the entire tax code and
16 how to modify it and change it; right?
17 MR. MIETHKE: I agree with your statement that
18 there’s going to be winners and losers.
19 COMMISSIONER PRINGLE: Therefore, your job here
20 is to make sure that we -– to ensure that the industries
21 you’re representing today are in the winners, or at least
22 not in the losers. So I want that. But it’s also -- I
23 mean, this is one of our challenges. We’re going to
24 hear from all the different industries, and different
25 industries are going to tell us where it may make them
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1 not a winner, and they’re concerned about being a loser,
2 just like we all would be.
3 But when you’re dealing with this, and the
4 Legislature deals with this type of stuff every single
5 year in a package of bills that affect the tax code,
6 there will always be, within that package of bills, some
7 that win a little bit and some that lose a little bit in
8 the final outcome.
9 MR. MIETHKE: Is that a question?
10 As I understood what the Commission requested,
11 it was a description of how the BNRT proposal, in the
12 narrow sense, and the proposed package would affect our
13 industry, okay. That’s what we’ve tried to come forward
14 to, to talk about today.
15 COMMISSIONER PRINGLE: I think he should just
16 stop or else he might get in trouble with his client.
17 But I think you did a great job. But I wanted
18 to kind of put it in context for at least my point of
19 view, that we’re hearing from all of the different
20 industries in that same vein.
21 MR. MIETHKE: I appreciate that. Thank you.
22 COMMISSIONER PRINGLE: Thanks.
23 CHAIR PARSKY: Thank you very much. We really
24 appreciate it, Eric.
25 MR. MIETHKE: You’re welcome.
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1 CHAIR PARSKY: Next, we have Ports/Shipping.
2 Jim?
3 MR. EUPHRAT: Good morning, Chairman and Panel
4 Members. Thank you very much for this opportunity to
5 address you. I think you’ve got a very challenging
6 situation here for the State. And I’ll give my
7 perspective as a representative of a manufacturing
8 industry.
9 My name is Jim Euphrat. I’m the tax manager of
10 General Dynamics, National Steel and Shipbuilding Company,
11 also referred to as “NASSCO.” I’ve been employed as an
12 employee there for 30 years, almost all of which has been
13 in my current role in dealing with tax matters. I’m a CPA
14 and I have a master’s degree in business as well as a
15 degree in economics. So I do tend to look at it both
16 ways: As a tax practitioner and as an economist, trying
17 to think big-picture for the state.
18 NASSCO is located in San Diego and is the only
19 remaining full-service shipyard on the West Coast of the
20 United States capable of building U.S. Navy ships. So we
21 build really large ships. We also design and build all
22 commercial vessel types. We also are a prime contractor
23 and a strategic partner for the U.S. Navy for the repair
24 of multiple ship classes. We’re physically next door to
25 the 32 nd Street Naval Station, home of the Pacific fleet
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1 there.
2 We consistently deliver vessels to our customers
3 that are superb in fit and finish, and ahead of schedule
4 and below budget.
5 We also do face, though, a near-term business
6 challenge. Our order book currently reflects no
7 commercial work after the year 2010. And shipbuilding
8 is a very long-lead item. So we’re trying to look ahead
9 much further than that, typically. And we have no Navy
10 work after the year 2012 at this point. In order to
11 attract new business in the immediate future, it’s
12 imperative that we remain competitive.
13 NASSCO is the largest manufacturing company
14 in the San Diego region. We employ about 4,500 people
15 in the San Diego area, plus an additional 1,000,
16 approximately, long-term subcontractors and support
17 personnel.
18 NASSCO provides a critical employment niche
19 between San Diego’s high-technology industries and the
20 service-based tourist industry. We provide above-average
21 hourly wages and benefits to skilled tradesmen and women,
22 along with extensive training and education programs.
23 We take a lot of people right out of high
24 school and offer them a very good mobile, upward path
25 for a long-term career.
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1 Many of the NASSCO employees are represented
2 by the boilermakers and machinists unions; and we rely
3 critically on a stable and well-trained local workforce
4 to meet the needs of our customers.
5 NASSCO provides a significant economic benefit
6 to California. In the year 2008, we spent over
7 $500 million in payroll for employees and with over 370
8 suppliers, generating approximately $1.25 billion in the
9 California economy. In addition, we spent an additional
10 $80 million on facilities improvements. That’s just since
11 the fall of 2007.
12 It’s a very capital-intensive industry, as you
13 would understand, including a blast and paint facility
14 that’s beyond environmental compliance standards.
15 Today, I’d like to provide you, at least, my
16 view of a real-world indication of what the proposed
17 business net-receipts tax structure could mean to
18 manufacturers in California using NASSCO as an example.
19 I would like to address three points: Job-
20 creation incentives versus disincentives; competitiveness
21 in the national marketplace; and net operating-loss
22 carryforwards, which I’ve addressed a little bit, which
23 encourages, in my view, business risk-taking.
24 First, in my reading of the BNRT proposal, it
25 appears that a deduction is permitted for payments to
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1 subcontractors and suppliers. However, there is no
2 similar deduction for labor costs. Therefore, since
3 labor costs are included in the net amount that is taxed,
4 it appears to discourage needed job creation in
5 California.
6 Manufacturing jobs have a higher economic
7 multiplier effect -- we estimated it at about 2.5 -- than
8 most service jobs. Manufacturing companies are heavily
9 dependent on the retention of skilled employees.
10 The BNRT, in our view, discourages just this
11 type of job creation and has the unintended consequence
12 of providing an incentive for manufacturing companies to
13 relocate jobs elsewhere.
14 Further, since manufacturing businesses
15 regularly contract with subcontractors or suppliers that
16 operate nationally or globally, again, the BNRT appears
17 to unintentionally encourage sourcing jobs outside of
18 California.
19 Second, based upon testimony in front of this
20 Commission at the July 16 th meeting, I’ve done a
21 preliminary estimate. I was using a rate of 3.3 percent
22 that was mentioned then. It would appear that NASSCO
23 would pay significantly more tax under the proposed BNRT
24 than under the current system. And that’s probably
25 because we’re a relatively low-margin business, and we
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1 have a lot of employees. So that’s probably not a
2 surprise from other comments I’ve heard here.
3 There may be a perception, though, that large
4 businesses of the California market can bear a higher
5 price with low risk to the underlying business or related
6 jobs. However, NASSCO very much competes in a national
7 marketplace. A lot of our competitors are on the gulf and
8 the East Coast.
9 The price of an ocean -- and they have, by
10 the way, a lower general cost of living compared to
11 California. So there’s a variety of economic concerns
12 here. The price of an oceangoing ship, in order to
13 protect the competitiveness of companies that employ
14 thousands of people, this type of major tax-policy shift
15 should be viewed in the context, obviously, of national
16 and international markets. We’re already subject to a
17 higher tax rate than our Gulf and East Coast competitors.
18 A shift such as this could make NASSCO less competitive
19 in the marketplace, resulting in business conditions that
20 would force us to have layoffs and lead to job reductions.
21 Shipbuilding does have a history of being a
22 very cyclical type of business. And we have had pretty
23 public major losses in some years. So the current system
24 has been helpful in that regard, in that in a loss year,
25 we’ve been able to carry forward the net operating losses,
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1 and then that’s helped to offset future profits.
2 The business cycle for shipbuilding is not one
3 year, it’s a multiyear deal. So the net operating loss
4 has been very helpful even though we’re not a start-up.
5 We’re a relatively large company. It’s been critical to
6 our long-term survivability here.
7 This tax convention could have the effect --
8 you know, the NOL has the effect, I would argue, of
9 encouraging business risk-taking, creating jobs, with
10 the state benefiting in the long run from taxes paid in
11 profitable years.
12 The BNRT, again, has the unintended consequence
13 of penalizing business risk-taking, by levying a tax,
14 regardless of whether the company has any profits from
15 which to pay the tax.
16 In conclusion, I respectfully encourage the
17 panel to reconsider -- or consider rejecting a plan that
18 relies on the BNRT as the tax standard in California.
19 It’s my opinion that BNRT will serve to negatively
20 impact industrial manufacturing growth in this state,
21 discouraging creation of middle-class jobs, and
22 prolonging the economic downturn.
23 Representing just one of the manufacturers that
24 will be harmed, the BNRT would encourage outsourcing jobs
25 out of California, limit competitiveness in the global
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1 marketplace, and eliminate -- at least, as I see it, the
2 net operating-loss carryforward to the detriment of
3 business risk-taking.
4 Clearly, I’m basing this on what I’ve read.
5 And the details, I appreciate fully, are still evolving.
6 But NASSCO is fully committed to growth and maintaining
7 our position as an economic engine in the San Diego
8 region. We’re not a real mobile type of business. We
9 have been there in some form or another about 100 years.
10 Like I say, I’ve been there 30 years. We tend to be
11 pretty stable. Nonetheless, we do face a lot of
12 volatility. Our number of employees, over the 30 years
13 I’ve been there, has fluctuated down as low as a thousand
14 and up almost to 8,000. And so we are volatile. And
15 then I’m concerned that this BNRT could increase our
16 volatility and put us on a further downward spiral at
17 the extreme.
18 And I would, again, want to thank the
19 commissioners for the opportunity to speak here. And
20 anything I can do to answer questions, I’ll be happy to
21 do so.
22 CHAIR PARSKY: Thank you very much.
23 Maybe either Carl or Mark can articulate a
24 little bit the thinking on how this tax would apply to
25 purchases out-of-state versus in-state.
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1 MR. IBELE: Sure. I’ll start and Carl can jump
2 in.
3 The purchases from other firms would be
4 deductible. But to the extent that they’re in-state
5 corporations, they themselves would be subject to the
6 business net-receipts tax, if that would be incorporated
7 in their costs. There would be no real savings there.
8 There is a potential issue with subcontractors,
9 that is not -- or independent contractors that we’re
10 still sort of grappling with as to whether there would
11 be an advantage for outsourcing. So we’re still kind of
12 working with that issue.
13 Carl, I don’t know if you want to --
14 MR. JOSEPH: Yes, I think that’s right. One
15 of the things that the Commission’s package contains, is
16 it contains an economic-nexus provision which would
17 essentially mean that if a corporation went to use --
18 went and outsourced work, if that work was -- the
19 benefits of those services or that work was provided to
20 a California company, that contractor would itself become
21 a taxpayer for purposes of the BNRT. And so from a
22 standpoint of what you would have to pay that
23 subcontractor, they would have to be taking that into
24 account in the price that you’re paying, assumedly.
25 So, you know, the thought is that that would
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1 make that a little more neutral, I think.
2 MR. IBELE: It would be incorporated in their
3 cost of doing business as well.
4 MR. EUPHRAT: Right. Again, my concern, though,
5 is maybe larger than that. Because if it is included in
6 their cost to us and then, in turn, we’re essentially
7 paying what I perceive as a tax on labor that is in excess
8 of what we currently have, that makes us less competitive
9 in the national or global marketplace. And so just all
10 by itself, it would seem to me to be a factor that would
11 tend to decrease manufacturing jobs within this state.
12 COMMISSIONER COGAN: So there is really two
13 separate issues, Jim: One is, does the BNRT create an
14 incentive to outsource outside the state --
15 MR. EUPHRAT: Right.
16 COMMISSIONER COGAN: -- say, labor services.
17 And then the second one, quite independent of
18 that, is to what extent does the BNRT impose an additional
19 tax on labor, regardless of where those labor services
20 are performed?
21 MR. EUPHRAT: Okay, right, sure.
22 COMMISSIONER COGAN: I think that’s the right
23 way to -- and you’ve touched on an issue that we’ve all
24 just been grappling with for the last six months of this,
25 this whole process -- to clearly think through the two
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1 separate issues.
2 And I know for myself, as I’ve thought through
3 at least the outsourcing part, I do believe that for at
4 least large, large transactions, we have mitigated the
5 incentives to outsource quite a bit by the economic-nexus
6 provisions of our plan. That is, there really is, for
7 any sizable purchase, I don’t see that there is really
8 much -- in fact, any difference between subcontracting
9 inside California and subcontracting outside California.
10 Because of the economic-nexus provision, subcontracting
11 services from outside California would also be subject
12 to the BNRT, thereby neutralizing the effect.
13 It still leaves the larger question of what are
14 the consequences here for labor. And that, we have to
15 think very, very broadly about what we’re doing. We have
16 to think about the whole package here. We have to include
17 what we’re doing with the income tax. We have to include
18 what we’re doing with the retail-sales tax and with the
19 corporate tax. So that’s a very, very complicated issue.
20 I know in my mind still, I’m very much open on this.
21 Thanks.
22 MR. EUPHRAT: If I could get a point of
23 clarification on something you just said. On the
24 subcontracting, let’s say we have a subcontractor that’s
25 in another country -- in Japan or something like that --
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1 and performing services there. So you’re saying the
2 BNRT would apply to the services performed in that other
3 location?
4 COMMISSIONER COGAN: No, if they performed
5 those services for your company, right, and sold those
6 services to you in San Diego, then those services would
7 be subject to the BNRT, just as if you purchased those
8 services --
9 MR. EUPHRAT: Okay, because they’re going to
10 source revenue in California because of the apportionment
11 factor?
12 COMMISSIONER COGAN: Yes, right.
13 MR. EUPHRAT: Okay, gotcha.
14 CHAIR PARSKY: Carl, did you want to add
15 anything to that?
16 MR. JOSEPH: No. I was just curious. You know,
17 you talked about you did the comparison between now and
18 then. Did the analysis take into account the current
19 expensing provision for capital purchases as opposed to
20 having to capitalize?
21 MR. EUPHRAT: No, it didn’t, although I don’t
22 think that would change the answer really significantly.
23 We are a real capital-intensive industry. And
24 clearly, that would help mitigate it to some degree. But,
25 you know, we do have existing credits and NOLs and things
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1 like that, that are pretty significant, that help us out
2 quite a bit.
3 And even without that, though, I would say my
4 own rough estimate, just because of the ratio of labor
5 to gross receipts in our particular industry, and the
6 fact that we’re a low-margin industry, even with the
7 expensing of the capital equipment and so forth -- which,
8 again, clearly applies, if that’s the way it evolves but
9 not enough to offset the negativity of it.
10 COMMISSIONER BARRALES: Question?
11 CHAIR PARSKY: Yes.
12 COMMISSIONER BARRALES: Jim, thank you for your
13 testimony here. I appreciate the effort that you’re
14 taking on. You’ve been following the Commission from the
15 beginning.
16 So, number one, from your perspective, for
17 NASSCO, the business net-receipts tax basically -- it
18 creates a disincentive to hire people in California, in
19 essence, because it increases your tax bill -–
20 MR. EUPHRAT: That’s correct.
21 COMMISSIONER BARRALES: -- at least as to labor
22 costs?
23 MR. EUPHRAT: Yes, right.
24 COMMISSIONER BARRALES: Do you have any
25 suggestions for the Commission in terms of whether, within
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1 that system of a business net-receipts tax, credits or
2 other ways to deal with that, and/or have you had other
3 thoughts about other systems that have been discussed --
4 expansion of sales tax or things that might work out
5 better for a manufacturing company?
6 MR. EUPHRAT: Sure, yes, I’d be happy to talk
7 about that.
8 First, within the context of a BNRT, the
9 transition issues would be critical for us. Obviously,
10 I’ve indicated we have some significant balance-sheet
11 issues, tax assets, if you will, that I would hope that
12 any system would at least provide a -- ideally, I’m going
13 to say -- a value that’s commensurate with the current
14 life of those NOLs or credits.
15 Second, I would say -- there are a host of
16 other transition issues that are potentially complex. I
17 think Eric mentioned, you have timing issues with regard
18 to both deferred revenues and deferred expense items.
19 Those can be fairly complex.
20 As a shipbuilder, we fall under code section
21 460, which deals with long-term contracts. And there’s
22 some fairly complex income deferral and expense deferrals
23 that come under that mechanism. And I’m sure you’re
24 familiar with some of those regulations. It’s not --
25 MR. JOSEPH: It’s complicated.
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1 MR. EUPHRAT: It is. And so I just mention that
2 there are lots of complexities. And, candidly, my own
3 view is that this needs much more study, much more time
4 than the Commission has been given to make sure that
5 there are not unintended consequences.
6 You know, some of the big-picture economic
7 concerns that I have are that when we’re trying to look
8 at volatility, I think it’s important to look at a
9 dynamic forecasting or modeling regime as opposed to a
10 static analysis. Because I appreciate and share the goal
11 of the charter purpose, I guess, as one of the goals, is
12 reduce volatility. However, if the tax system that is
13 put in place isn’t properly modeled out to reflect
14 potential negative consequences, you may assume a static,
15 or minimal decrease in manufacturing activity, and there
16 could be a loss of major manufacturing type employers or
17 a decrease in that activity that could be very adverse.
18 So now if you ask the second part of your
19 question, what am I thinking that could be preferable in
20 terms of other paths to go down? And I would say, you
21 know -- and there’s nothing that’s without controversy --
22 but in my own view, if there’s a feeling that the service
23 side of the economy is not being sufficiently taxed
24 proportionate to activity, then I think I would much
25 rather see just a straight sales tax on services. I think
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1 that the existing frameworks are in place to handle that.
2 And, again, not without controversy, but I think that
3 would be preferable.
4 And I’ll say, you know, my own personal view,
5 if we’re looking for other tax areas, I would probably
6 think about, you know, a gas tax, carbon tax, that type
7 of thing. Again, obviously, quite controversial.
8 However, I think in terms of both the
9 environmental and economic incentives and lack of harm
10 to the overall economy, I think that that could be
11 preferable to a BNRT. All these depends on rates and
12 I think the fairness and all that has to come into play.
13 Part of my concern, which I didn’t mention on
14 BNRT, is that I view it as a relatively regressive tax.
15 And if you look at the volatility of the overall revenue
16 stream, I think a lot of that has to do with more the --
17 although clearly the corporate income tax side is
18 volatile, but I think it’s as much or maybe more on the
19 capital gains on the personal income tax side. And that
20 doesn’t seem appropriate, in my mind, to go after the
21 business community to deal with that side of the
22 volatility issue as much, because businesses and jobs
23 are so central and key to the long-term economic health
24 and prosperity of the state.
25 CHAIR PARSKY: I just want to come back on one
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1 thing you said.
2 MR. EUPHRAT: Sure.
3 CHAIR PARSKY: You view the business
4 net-receipts tax as relatively regressive.
5 MR. EUPHRAT: Yes.
6 CHAIR PARSKY: In comparison to the sales tax?
7 MR. EUPHRAT: No, in comparison to an income
8 tax.
9 CHAIR PARSKY: Right. So if we, in lieu of
10 recommending a business net-receipts tax, expanded the
11 sales tax, that, in and of itself, would be more
12 regressive?
13 MR. EUPHRAT: Well, I’m not sure. In my mind,
14 it would probably -- the regressivity would probably be
15 similar between a BNRT expansion or a sales-tax expansion.
16 I have don’t have any hard data on that.
17 CHAIR PARSKY: I think if you put your
18 economist’s hat on, maybe not your tax hat on, I think
19 there would be open debate about that subject.
20 MR. EUPHRAT: Clearly, clearly.
21 CHAIR PARSKY: But that’s the challenge.
22 MR. EUPHRAT: Yes.
23 CHAIR PARSKY: A challenge that has been faced
24 by the Legislature. A challenge that’s faced by this
25 Commission.
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1 We are very sensitive to the regressive nature
2 of certain taxes. But if the choice, in terms of
3 including a big sector of our economy, a sector that
4 benefits from the government services that are provided,
5 if the choice is expansion of the sales tax or the
6 creation of this form of tax, I think there would be a
7 number of people that would say that this is less
8 regressive. Maybe not totally, but less regressive than
9 the sales tax.
10 MR. EUPHRAT: No, I appreciate that. I realize
11 I don’t have any hard data on that. That’s just -- I did
12 try to find some, actually; and I found some neutral data
13 but nothing clear.
14 CHAIR PARSKY: Thank you very much. We really
15 appreciate your coming forward.
16 MR. EUPHRAT: Okay, well, thank you for the
17 opportunity again.
18 CHAIR PARSKY: All right, next, Energy.
19 We have Jeff Barnett.
20 First of all, I want to thank you, Jeff, for
21 coming forward, and to thank your chief executive officer,
22 Ted Craver, who I’ve talked to a number of times. He is
23 very interested in helping this commission. And I really
24 appreciate both his input and your presentation.
25 MR. BARNETT: Thank you.
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1 I have submitted some comments, so I’m just
2 going to briefly go through these. And I’m going to be
3 happy to address any questions that you’ll have of me.
4 It will be much like you’re thanking us, we
5 also want to thank you, Mr. Chairman, and the other
6 commissioners and those who are supporting you in this
7 effort. I know this is a very big effort and one that
8 is extremely important for us and for the state of
9 California.
10 As a way of background on Edison International,
11 it is a parent company of two major subsidiaries:
12 Southern California Edison and the Edison Mission Group.
13 Southern California Edison is an electric
14 utility, and its rates are regulated by the California
15 Public Utilities Commission and the Federal Energy
16 Regulatory Commission. It serves more than 13 million
17 customers in more than 180 cities in Southern California.
18 And then Edison Mission Energy is a
19 non-regulated competitive energy electric-generation
20 company. And it’s located in 14 states, and also has a
21 presence here in California.
22 One thing we want to convey here on the front
23 end is that we really support the principles that were
24 laid out by the Governor in the Executive Order that
25 created the mandate for this Commission. And I know your
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1 efforts are to satisfy those. I know that’s very much
2 a tightwire exercise to meet all of those. But we do
3 think those are the right objectives at the start of this
4 process.
5 Your scope, as we’ve talked this morning,
6 you’re broader than this net-receipts tax, but the
7 comments I’m going to be presenting here are narrowly
8 restricted to the business net-receipts tax. And it’s
9 based on what our understanding is, on what we heard in
10 open hearings and the materials that have been submitted
11 to us.
12 The electric industry, whether we’re talking
13 about Southern California Edison, which is regulated,
14 or talking about the activities with the Edison Mission
15 Group, which is not, is highly capital-intensive. And
16 just to give some frame of reference -- and this is
17 actually in our submitted comments -- Southern California
18 Edison plans to spend about $20 billion to maintain the
19 reliability of its electric grid in the next five years.
20 So that’s a significant amount of capital that will
21 go -- or planned to go out the door here in the fairly
22 near future.
23 We use or rely on the capital markets to finance
24 these capital expenditures, and debt-financing is a major
25 source of capital.
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1 We understand, based on the materials that you
2 have provided to us, that the interest expense is not
3 included as one of the deductions or an item of purchase,
4 and that would have a significant impact to us.
5 And based on this morning’s discussion, it’s
6 clear that you’re still evaluating the application of
7 this to the financial industry. But if it were to apply
8 to the financial industry, we would think that since the
9 interest-income side of that to the lender would be taxed
10 under that model, that we would, in effect, be able to
11 exclude, as the borrower, that interest expense. And
12 that’s just an observation to point out.
13 The other part of the net-receipts tax that
14 we see has an impact on us, vis-à-vis the income tax, is
15 the fact that internal labor costs would not be deductible
16 from the base. And we have a very significant amount of
17 employees in the state of California -- over 16,000 --
18 and our labor, where benefits are included -- are in
19 excess of $1.5 billion. At least that’s the 2008 data.
20 So a removal of that as a deduction would be something
21 that would expand the base for us.
22 And we understand that the Commission is still
23 evaluating whether or not benefit costs would follow the
24 labor costs and not be deducted or would that be a
25 carve-out exception.
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1 We would support the notion of having the
2 employee benefit costs be deducted from the base, even if
3 the labor costs are not -- internal labor.
4 Being a very highly capital-intensive business,
5 we will benefit from the rapid write-off of the assets,
6 and that will create a significant timing benefit for us.
7 The magnitude of that benefit is going to be a function
8 of whether or not it’s an immediate write-off or it’s
9 something more akin to the federal MACRS depreciation
10 system.
11 We do have some concern that if you were to go
12 down the path of the immediate write-off of these capital
13 assets, whether or not that would put us in a situation
14 we would have these excess purchases over gross revenue,
15 where we would have the ability to recover that excess in
16 the future. And right now, based on the materials that
17 have been submitted, there is a provision for a five-year
18 carryforward. And we do have, again, some concern that
19 maybe a five-year would not -- in periods where we’re
20 investing heavily in new capital investments, may not be a
21 sufficient carryforward period. So we would respectfully
22 request the Commission to take that into consideration in
23 your efforts here in putting something together for the
24 Governor.
25 The rate, it was still a –- that’s unsettled,
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1 and we understand why, and I know it’s been conveyed by
2 many in front of you that when you broaden the base, any
3 small change in the rate can have a substantial impact.
4 And we, again, just want to convey the point that that is
5 something that does give you concern, that a legislative
6 change in the future to the rate will have a -- could have
7 a more dramatic effect.
8 We are approaching this evaluation of the BNRT
9 and as other details around the other items come out, in
10 the same manner as we have done in the past related to
11 either federal or state income tax changes, and that is,
12 to look at what the economic impact is. And taxes are no
13 different than any other business cost. And we work very
14 hard within the legal parameters to reduce that cost to
15 the business.
16 And I know that we -- this was brought up just
17 a short while ago around the “shift” issue -- we don’t
18 think you’re going into this exercise with a view of
19 consciously shifting the liability or the relative tax
20 burden from one industry to another; but we are concerned
21 that something like that could happen out of this
22 exercise. So that’s something that we’re looking very
23 closely at when we evaluate this, the overall proposal.
24 The ultimate evaluation, from our perspective,
25 really is at this point incomplete or extremely
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1 preliminary in the sense that we don’t have all the
2 pieces. And it’s difficult without having all the pieces
3 to understand where it all comes out in the end, in terms
4 of the liability under the current tax regime, vis-à-vis
5 what it would be under the proposed changes that would
6 come out of this Commission that ultimately could make
7 their way into legislation.
8 But we do, again, have an interest as part of
9 that to look at it, to ensure that our industry, which
10 we think is adequately taxed today, would not take on a
11 higher burden.
12 Again, another area that has been addressed in
13 part of my presentation is around the transition rules.
14 And the transition-rule comments have focused primarily
15 on NOL carryforwards and capital-loss carryforwards or
16 other related carryforward tax attributes. We’re also,
17 though, concerned that when you enter into the transition
18 period, we will have assets that were acquired in this
19 pre-transition period, that we will not have recovered as
20 a deduction from the corporate income tax base. And we
21 feel that the transition -- at the end of the transition
22 period, for any investments that we made prior to the
23 transition date, that were made under the expectation
24 that under the corporate income tax we would have full
25 recovery of those costs as an offset to our income, that
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1 we should be entitled in that transition period to be able
2 to recover the value of any undepreciated portions of our
3 capital assets.
4 And so we would, again, respectfully request
5 that the Commission take that into consideration as one
6 of the tax attributes that needs attention in terms of
7 making sure that taxpayers are not permanently harmed
8 from the past activities in transition to the new.
9 And that’s the extent of the comments.
10 We, again -- Edison International -- appreciates
11 this opportunity to be able to discuss our view of this
12 and be able to respond to your questions.
13 CHAIR PARSKY: Thank you very much.
14 John?
15 COMMISSIONER COGAN: Jeff, thanks very much. A
16 very thoughtful testimony. I appreciate it.
17 You raise the issue of the treatment of employee
18 benefits that I want to focus on for a minute.
19 Now, normally, many people think of employee
20 benefits as part of compensation and should be treated no
21 differently than labor compensation and, therefore, would
22 be nondeductible in a BNRT.
23 But there’s another way to think about it,
24 which I really want to focus a bit of attention on and get
25 your reaction, and maybe get Phil’s and Carl’s, and that
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1 is, one of the problems we’re trying to avoid with the
2 BNRT is the cascading of taxes through the various stages
3 of production. A tax upon a tax upon a tax. And so by
4 the time you get to the final product, that final product
5 embeds an awful lot of taxes that nobody pays any
6 attention to. And they’re very, very distorting.
7 And so the rule under a BNRT is something like
8 this: That the inputs that you get to deduct, are inputs
9 that have already been subject to taxation. And that’s
10 a way that a BNRT would avoid double-taxing, okay.
11 And so it seems to me in the case of some
12 employees benefits -- let’s take health care -- if a firm
13 purchases a health plan from a company, then the BNRT
14 would be applied to that health-care company’s gross --
15 or net receipts. And, therefore, it would have already
16 been subject to taxation by the time its used by, say,
17 Edison. And if we don’t allow it to be deducted, then
18 we have levied a tax upon a tax. And, therefore, if I
19 think of health-care services as a good or a service
20 that’s purchased, it has already been subjected to the
21 BNRT at a previous stage, and, therefore, under the BNRT
22 should be a deductible expense, no different than any
23 other purchased good or service that’s been previously
24 subjected to taxation.
25 Maybe I can get your thoughts, and then if staff
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1 have some, I’d be interested to hear.
2 MR. BARNETT: Well, I think you made a good
3 distinction, in that if you look at it from the pure net
4 business-tax perspective, that to the extent that any of
5 the employee benefits were, in effect, acquired from an
6 outside third party, that outside third party would have
7 paid tax already. And then the disallowance of that as a
8 deduction would constitute a double-taxation of that item
9 by having that then be taxed to the firm hiring those
10 employees -- or the firm who has hired those employees.
11 COMMISSIONER COGAN: And even with a -- even
12 if a firm is self-insured, to the extent that its
13 payments for health care to its employees is going to an
14 entity that’s subject to the BNRT, then the same logic
15 would apply; would it not?
16 MR. BARNETT: I agree.
17 CHAIR PARSKY: How does the staff feel about
18 that?
19 Not how you feel about it, but what your
20 thinking is.
21 MR. JOSEPH: How does it make me feel?
22 CHAIR PARSKY: And this is not the staff making
23 any recommendation. It will be the Commission. But let’s
24 engage in a dialogue on this subject because I think it’s
25 a very important subject.
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1 We’ve heard from a number of health-care
2 providers and others that have made this point. And I
3 think John has highlighted it exactly right.
4 COMMISSIONER COGAN: Phil, the question is –-
5 Phil, it’s really a question about, what’s the proper tax
6 policy .
7 MR. SPILBERG: Right.
8 COMMISSIONER COGAN: Not are we going to grant
9 some special exemption to some particular good or service.
10 MR. SPILBERG: Right. And I think that one way
11 of thinking about this is that, is it a purchase by the
12 business or not, in the case of the health care. And to
13 the extent that it is, in fact, a purchase from another
14 business, I think it would be in the realm of something
15 that would, in essence, be deducted.
16 And in terms of self-insured service, fringe
17 benefits, in that kind of situation, again, what you have
18 is that the firm is actually purchasing something from
19 somebody else.
20 COMMISSIONER COGAN: Right.
21 MR. SPILBERG: So I think that would be
22 deductible.
23 CHAIR PARSKY: Carl, any thoughts on that
24 subject?
25 MR. JOSEPH: Well, the only thing that I would
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1 add is that the other things that we’ve talked about --
2 wages, for instance, you don’t get a deduction for wages,
3 and then the taxes are paid on wages at the personal
4 income tax level, and that’s okay.
5 There is a little bit of that here, in that
6 these things are not taxed at the personal income tax
7 level. They’re treated as nontaxable benefits for
8 purposes of the individuals who are receiving the
9 insurance. But other than that, I mean, I agree, I don’t
10 see much difference between that and other purchases from
11 other firms.
12 MR. SPILBERG: And as far as the personal
13 income tax side of this equation, that I look at as a
14 personal income tax issue. I mean, there’s nothing
15 inherent about the personal income tax that would not
16 permit the inclusion of that as income.
17 COMMISSIONER COGAN: Right. We should consider
18 that as part of our decisions on the PIT.
19 MR. SPILBERG: Exactly.
20 COMMISSIONER COGAN: Great. Thanks very much.
21 COMMISSIONER PRINGLE: I just want to make sure
22 I understand that.
23 There would be a distinction then between
24 buying health-insurance coverages and employee benefits
25 versus making a 401(k) contribution; right?
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1 MR. SPILBERG: That’s right. In the case of
2 the health insurance, it is, in fact, a purchase.
3 COMMISSIONER PRINGLE: So it really is the
4 physical purchase then, as opposed to the investment
5 or deferral?
6 MR. SPILBERG: That’s right. In the case of a
7 401(k), it is, in fact, just a payment of wages but in a
8 way which is deferred in terms of recognition for tax
9 purposes.
10 COMMISSIONER PRINGLE: So I think I properly
11 stirred up Mr. Cogan.
12 CHAIR PARSKY: Yes, Cogan will be talking to
13 you.
14 COMMISSIONER COGAN: Another way to think about
15 that employee benefit – and I’m not disagreeing with
16 you –- but another way to think about that employee
17 benefit is that: Gee, it’s really a PIT issue. We
18 should think about it as a PIT issue, and we can -- the
19 income should only be taxed once. And we’re either going
20 to tax that -- the proceeds of that 401(k) at
21 distribution, or we’re going to tax them up-front as
22 personal -- as income. So if we want to tax it once and
23 only once, I guess I’m not really sure if that’s not
24 the --
25 MR. SPILBERG: Let’s just take a look, and let
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1 us just think about the 401(k). And the question is --
2 well, again, under an income tax, you would, in fact, tax
3 both the value-added and the earnings from capital. So
4 in the case of 401(k), it does become taxable when the
5 distribution occurs. So it is just a question of timing.
6 CHAIR PARSKY: I think this is a valuable
7 discussion because I think there has been confusion in
8 the public market as to how all employee benefits, in a
9 big category, might be treated under just the BNRT, which
10 is the subject here. So I think this is a good
11 clarification.
12 Thank you very much. We really appreciate your
13 presentation.
14 MR. BARNETT: Thank you, Mr. Chairman.
15 CHAIR PARSKY: Okay, we have both Small Business
16 and Professional Services in one. I guess, three
17 participants: Small business, lawyers, and others.
18 Why don’t we go across and you all introduce
19 yourself?
20 Hatef, why don’t you start? And then we’ll go
21 across.
22 MR. BEHNIA: Hi. I’m Hatef Behnia. I’m a tax
23 partner at Gibson Dunn and Crutcher.
24 CHAIR PARSKY: I happen to know that firm.
25 MR. LIPPE: I’m Greg Lippe. I’m a CPA. I’m
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1 managing partner of a firm in Woodland Hills. I’m also
2 a business owner because I’m the founder of that firm.
3 And I’m chairman of the Valley Industry and Commerce
4 Association which is a business advocacy group. And
5 lastly, I am a board member of a bank, but I’ve never
6 been involved in a dry-cleaning business.
7 CHAIR PARSKY: We can show you some good ones.
8 It’s all right.
9 MR. KELLER: Yes, good morning –- or good
10 afternoon. I’m Marty Keller. I’m the --
11 CHAIR PARSKY: We’re running about 15 minutes
12 behind.
13 MR. KELLER: Not too, too bad.
14 CHAIR PARSKY: We’re working on it.
15 MR. KELLER: I’m Marty Keller. I’m the Small
16 Business Advocate for the State of California.
17 CHAIR PARSKY: Well, just by way of
18 introduction, I think one of the obviously major concerns
19 that the Commission has had about the establishment from
20 a business net-receipts tax and its objective of bringing
21 into the tax base services is how lawyers, accountants,
22 as well as other small businesses that might not be
23 subject to the sales tax would react.
24 And again, we’re here to talk about the business
25 net-receipts tax, but I think it’s impossible to come to
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1 a conclusion about it without taking into account
2 adjustments that might be made –- or would be made in the
3 personal income tax and the sales and use tax, as well as
4 the corporate tax.
5 In whatever order you’d like to make comments.
6 MR. BEHNIA: I think given that the law practice
7 contributes the least to the economy, I would suggest that
8 we start with the small business and move on.
9 CHAIR PARSKY: I’m sure your partners would
10 appreciate that.
11 COMMISSIONER COGAN: Did you use the words “law
12 practice” and “contribute” in the same sentence?
13 CHAIR PARSKY: Marty, do you want to start?
14 MR. KELLER: Thank you, Mr. Chairman.
15 I did have the opportunity and privilege to
16 speak to you on Wednesday. And we had quite a lively
17 session with Mr. Greenstreet, who brought you an actual
18 case study, looking at the issues. And so I won’t spend
19 a lot of time going over what I said before, just to
20 highlight that first for the members that weren’t there,
21 the Small Business Advocate’s job is to help small
22 businesses deal with state government. And there are
23 three and a half million small businesses and there are
24 two people in my office. So we are quite busy all the
25 time.
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1 We focus on a number of issues, economic growth,
2 economic development, working with local EDCs, and with
3 the State Business, Transportation, and Housing Agency on
4 their plans.
5 We work on regulatory issues. We help
6 individual businesses deal with problems that they may
7 have, or we help look at macro issues at the regulatory
8 level.
9 We work on state procurement issues. We just
10 do a whole range of things. But our job is to basically
11 advocate for the businesses to the policymakers on the
12 issues of concern that they may have.
13 Recently, the Governor appointed me to his
14 Economic Stimulus Task Force, and we’ve been holding a
15 number of events, outreach events around the state to
16 help small businesses figure out where the money is and
17 where there may be possibilities for them. And I only
18 raise that to you to reiterate what I said to you on
19 Wednesday, which is the key thing that small businesses
20 are interested right now in is finding adequate capital
21 to finance their daily operations, and those who look to
22 grow, to find the investment capital necessary to help
23 this economy grow out of its doldrums.
24 We had the opportunity to help the Governor host
25 a conference on small business here in Los Angeles last
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1 November. And the small businesses who attended came up
2 with a number of recommendations. And they did have one
3 on taxation, which I mentioned on Wednesday, which was to
4 eliminate the minimum franchise business tax. And they
5 were willing to do that in a revenue-neutral kind of way,
6 and they were willing to work with the Legislature on
7 that. And that’s obviously the approach that the
8 Commission here is taking on that.
9 Just a couple of points to reiterate. I really
10 appreciated what the mayor had to say about this macro
11 issue. And we talked a lot on Wednesday, looking at the
12 micro issue, looking at this from a business-to-business
13 context. And you also did that a lot today in the
14 previous testimony. But I think it also, from the point
15 of view of small business, is important to look at the
16 macro impact on the economy. And your last witness
17 talked about that. It is your balancing act here.
18 But for small businesses who are looking to
19 escape the doldrums of this economy, they’re looking to
20 expand -- those companies who are looking to expand, to
21 be able to get the investment capital they need and to
22 hire the employees they need, having a stable economy, in
23 an economy that’s growing is really critical to them --
24 recognizing that the issues that you’re dealing with may
25 have an impact on that.
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1 Nonetheless, what I hear over and over and over
2 again, is requests for stability and the ability for them
3 to have a sense of where they’re going to grow into,
4 what’s the structure, particularly with respect to taxes
5 and regulations that they’re going to be growing into.
6 So it’s important for small businesses to
7 understand what you are proposing here, to see that within
8 the nest of all of the different measures -- again,
9 you’ve addressed this quite thoroughly on Wednesday and
10 you’ve addressed it again today -- to look at the net
11 impact of all these measures.
12 I just wanted to point out a couple of things
13 again, to put some context on this from the point of view
14 of small businesses on a macro level, which is that, as
15 I said, there’s roughly three and a half small businesses
16 in the state. Of those, about 800,000 are employer firms
17 and the rest are sole proprietorships. And that’s
18 according to SBA data as of 2006.
19 The Department of Finance is estimating that
20 90 percent of the businesses that -- and we’re defining
21 “small business” for the state purpose here as a hundred
22 employees or fewer -- that the Department of Finance
23 estimates that 90 percent of these businesses have less
24 than $500,000 in gross receipts, presumably then would
25 be exempt from the BNRT. So that’s part of the macro
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1 issue that we have to look at, is who is affected, as we
2 have looked to flatten the tax base and lower the rates.
3 Secondly, just to point out with respect to
4 the sole proprietorships, that -- which is roughly
5 $2.6 million, the IRS data that we’ve been able to look
6 at, say that the average gross receipts of those is
7 $60,000 or less. So we’re looking, again, as we look at
8 the broad picture of the number of firms that would be
9 affected by this, those are some data to keep in mind.
10 At the same time, 98 percent of firms are a hundred or
11 fewer with respect to the employment. So small businesses
12 do, obviously, comprise the vast bulk of our economy.
13 We heard earlier today from the entertainment
14 industry that the entertainment business, like all the
15 other businesses that we hear from, actually comprise
16 small businesses to a large extent, although we think of
17 the major studios and so forth. But really, again, the
18 vast majority of the industries that we deal with,
19 regardless of the principal players, are supporting a
20 huge network of small businesses as suppliers and users.
21 So I just wanted to point those issues out.
22 Some of those are a reiteration from what I said on
23 Wednesday. But from the point of view of small
24 businesses, the issue of the economy itself, the
25 stability, and then the fairness of any kind of new
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1 approach so that small businesses’ competitive advantage
2 is enhanced rather than reduced.
3 So these are just some overarching themes that
4 I wanted to share again with the Commission, and thank
5 you for the opportunity to point some of those things out.
6 CHAIR PARSKY: Thank you.
7 MR. LIPPE: I’d like to go next.
8 CHAIR PARSKY: Go ahead, Greg.
9 MR. LIPPE: Okay. What’s happening here is that
10 it appears that the tax -- the BNRT -- will shift the
11 burden of taxation from the large corporations to the
12 smaller companies, because the majority of small companies
13 are pass-through entities. And what this is going to do
14 is, it’s going to require a double-taxation on the
15 pass-through entities, both at the entity level and then
16 again when it passes through at the individual level. So
17 as you had mentioned, you know, you don’t want to tax
18 twice. This does it, okay.
19 Now, in addition to that, the -- I’m going to
20 go through the presentation from the beginning, if it’s
21 all right.
22 The concerns that I have are a number of things.
23 One is jobs. You know, it’s great that the goal is to
24 broaden the tax base, improve tax competitiveness, and
25 stabilize tax revenues are in there. Those are good
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1 goals. But another goal would be to create jobs, not to
2 disincentivize jobs. And I’ve got several examples.
3 One, if a company is considering the possibility
4 of automating, which would eliminate a number of jobs,
5 but the equipment is too expensive, they might not do it.
6 However, the BNRT allows them to deduct the purchase of
7 that equipment, but it doesn’t allow them to deduct the
8 compensation to the employees. So, therefore, it could
9 eliminate jobs.
10 Outsourcing to other states and countries.
11 Now, I understand what was said about the nexus laws,
12 bringing the other companies from other states in.
13 However, the law that creates a nexus is a new law. It
14 hasn’t been tested. It may turn out to be without
15 legality.
16 Additionally, if you are to outsource to a
17 foreign country, that foreign country would -- the
18 revenue from the company and the foreign country would
19 not be creating nexus here because of the water’s-edge
20 protection. So if it was a foreign company that was an
21 affiliate of a U.S.-organized company, then you would not
22 have -- you wouldn’t get that protection.
23 Let’s see -- another thing, owners of companies
24 outside California, they could set up numerous entities
25 outside California, and they could all be just under the
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1 exemption level. So if each one of these entities made
2 just under $500,000, they’d be exempt. So you could wind
3 up having a significant amount of outsourcing going on
4 with a lot of different entities in a lot of different
5 places and, therefore, just basically kill the jobs here.
6 One thing I would recommend is that if it was
7 decided to have this tax, that there be a phase-in above
8 the exemption threshold. The reason being that if
9 somebody were earning $499,000 and then the following
10 year they went up to $501,000, they’d always get hit with
11 potentially $10,000 in tax for $2 more of income. I think
12 that would probably be a better idea to phase it in.
13 I think I’ve covered it.
14 CHAIR PARSKY: Hatef? As a private citizen.
15 MR. BEHNIA: As a private citizen, I wanted to
16 thank the Commission for having me here. I commend you
17 for all the hard work and certainly don’t envy all the
18 efforts and frictions you’ve had to put up with. In
19 fact, I think by the end of this process, you will not
20 be loved by anyone other than tax lawyers. So that’s
21 why -- in fact, I was going to make a strong argument at
22 the beginning --
23 COMMISSIONER COGAN: I wasn’t sure they were
24 capable of love.
25 MR. BEHNIA: Well, I hope at the end of this,
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1 that you’ll have some affection from me, at least. In
2 fact, I was going to make a strong argument why all law
3 firms should be exempt from any tax, but I thought you
4 would all laugh at that, so we’ll move on.
5 I think that no matter what I say today,
6 somebody will become upset. So I’m going to keep my
7 comments at a more abstract level, sort of dealing with
8 the matter as a tax lawyer. And in that spirit, I thought
9 I should really start with sort of a pretty practical
10 administrative issue, which is -- and I’m going to assume
11 that some sort of this proposal goes through so we’d sort
12 of deal with the consequences and the issues that the
13 Franchise Tax Board itself has to deal with.
14 So the first question is, since the sales tax
15 will go away at the state level but we’ll have it at the
16 city and local level, we’ll still need somebody to
17 administrate. Today, the State Board of Equalization is
18 the party or the State agency that adjudicates all the
19 sales-tax issues. And I recommend that it continue to
20 do that, even though the State has no -- potentially no
21 interest in sales tax after this proposal anymore. I
22 assumed that was presumed, but I just thought I’d point
23 it out.
24 I think on a -- and I’m going to make some
25 observations that I hope helps you in sort of thinking
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1 through the issues here. I think if you look at where
2 we are today, we have a sales tax and an income tax. So
3 we have double-taxation, there’s no issue about that.
4 And we made the judgment a long time ago that we are only
5 going to tax tangible personal property and not services.
6 So every year that goes on -- and, again, I’m speaking
7 against interest here -- but every year that goes on by
8 keeping that arrangement, means that our judgment is that
9 that’s a good judgment, that’s a good decision, okay. So
10 that’s okay, and that’s sort of an economic and political
11 issue. But we ought to be aware of what we do by action
12 or inaction.
13 So the first consideration here -- I mean, the
14 door is being opened, and I finally have myself given up
15 a few years. I thought that it was inevitable that some
16 sort of tax would be applied to services. But I think
17 what we should consider there, politically and
18 economically, is that this would be the first time a
19 major tax would be imposed on services. And so a lot of
20 people would be emotionally and economically very upset
21 about it because -- and I make the case of accounting
22 firms, law firms. You know, in a typical large you firm,
23 up to 50 percent of your gross receipts are paid as
24 compensation. So that’s a big chunk of tax that -- it’s
25 not just -- and remember, it’s not just the fact that
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1 it’s labor-intensive, it’s just that it’s the first time
2 that you’re going to impose -- it’s as if you did the
3 sales tax but not tried to make it a little nicer. And
4 I concede that this tax is much nicer than the sales tax
5 if imposed on services, but…
6 So the first thing that will happen is that
7 they’ll say, “Why?” And the second thing they’ll say,
8 “Well, but look at us, we have to pay so much in
9 compensation.”
10 I do want to focus on that point, that
11 compensation is not allowed as a deduction. So, first,
12 we contrast that with self-employment and an independent
13 contractor, okay. So -- I’m sorry, with self-employment
14 as an independent contractor and an employee.
15 So assume that you were going to look at a
16 value-added tax in its broadest form. As goods and
17 services move through the chain of commerce, if you will,
18 value is being added. Value is being added by employees
19 as well. They go from day one where they have no money;
20 by the end of the year, they’ve exerted sweat and earned
21 money. Okay, so if you wanted to apply a value-added tax,
22 you would consider and have the entire stream of commerce
23 be subject to it, as each party adds value.
24 Now, if -- I assume that that’s politically
25 undoable to impose a value-added tax on employees unless
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1 you were to get rid of the income tax. And that’s a
2 totally separate issue.
3 So for now, let’s assume that we were not going
4 to impose a tax on employees. Okay, so given that we
5 don’t want to do that, if we also allowed a deduction for
6 businesses, for the compensation, in effect, the value
7 added by the employees goes untaxed. So by the decision
8 we make not to exclude compensation paid to employees,
9 we’re saying to the employer that, “You’re going to bear
10 this tax. You’re going to bear the tax for the value
11 added by the employees. Whereas you don’t bear the tax
12 for the value added by independent contractors.”
13 I’m pointing this out as an asymmetry that I
14 think you ought to consider. I have a couple of things
15 I’ll propose later, but I think this is a definite
16 asymmetry. So it imposes a bigger burden, okay. And by
17 virtue of what it is, it imposes a much bigger burden on
18 service-extensive industries.
19 I do remind you of what happened in Florida.
20 I think if you want to push this idea, you ought to make
21 sure that it’s sold properly to all the businesses. I
22 think the media and advertising basically managed to
23 eliminate, on a retroactive basis, the Florida tax. I
24 think it was 1989. So, again, you know, just to keep
25 it in mind, an employee is not subject to this net
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1 employment tax.
2 Now, you say, well, taxes are borne by
3 individuals and society, and that’s a fair point. The
4 question is, when you impose a tax on a business, who is
5 going to bear it? Well, it will be the owners, the
6 suppliers, the employees, the customers, and various
7 parties.
8 Who really bears it in each industry? It’s a
9 complicated question that I think all your economists
10 have already addressed. I think they’re different supply
11 and demand curves, and depending on the market you operate
12 in. So I think that’s a difficult question.
13 I think at the beginning there will be some
14 chaos, but ultimately there will be an equilibrium, and
15 maybe lawyers will get poorer and maybe somebody else
16 gets richer. But I think that’s a hard consideration
17 for you guys. I understand that.
18 So given that for the first time you’re hitting
19 services, service providers with the tax, then the next
20 thing they’ll say is, “Wait a minute, so if I was a
21 manufacturer and I operated on a thin margin, I won’t --
22 basically my tax as a proportion, as a ratio to my
23 receipts is much, much lower than a law firm or
24 accounting firm or a media company or a number” -- I mean,
25 any professional business, because there, 30, 40, 50,
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1 60 percent of the expenses, if you will, are for
2 compensation paid to employees which, you know, get taxed,
3 in effect.
4 So I think this is a hot potato. I don’t know
5 what you’re going to do with it. But, you know, either
6 you sort of keep a pure system; and you say, “Well,
7 tough. Every time we change the system somebody is going
8 to be hurt.” And presumably -- I’m assuming you’ve
9 reached the judgment that this is better than a sales tax
10 imposed on services. Maybe you have, maybe you haven’t.
11 But for this discussion, let’s assume that all those
12 judgments have already been received. So I think my focus
13 is just, so what happens under this system.
14 I think that if you wanted to reduce the effect
15 of that, to some extent -- I mean, other than the question
16 of phase-in and so on and so forth, one could argue that
17 some businesses should have a lower tax rate, if you will.
18 I think this opens the door -- it’s quite a
19 slippery slope. Every industry will argue that you
20 should impose it on somebody else, like we saw today.
21 By the way, I’m the only one with who doesn’t
22 argue that because I’ll do better under either system.
23 There will be more tax work, or I won’t have to pay tax,
24 either way.
25 So I think that’s a possibility you can
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1 consider. It’s complicated because differential in tax
2 rates on their face is discriminatory, okay. But that’s
3 a possibility.
4 The other possibility is to say, “Well, we know
5 we’re hitting you with tax for the first time, but what
6 we’ll do is, at least we’ll try to make it
7 nondiscriminatory in the following way. We’ll look at
8 an average -- for all the taxpayers -- an average ratio
9 of payroll, if you will, to net receipts, and we’ll apply
10 that. So all the guys who are benefiting from that will
11 have a little additional tax, all the companies that are
12 being disadvantaged will have a little adjustment to sort
13 of make up for that asymmetry.
14 I think this is tough, and I think the other
15 proposal you might consider is that, you know, you do
16 impose it on employees, but eliminate the income tax
17 and so you sort of have a value-added tax across.
18 A couple other sort of difficult issues that
19 come up there is -- and I won’t -- I’ll express a very
20 theoretical view -- I think you might, as part of that,
21 consider eliminating all personal deductions, which I
22 think has always been a strange -- including mortgage
23 interest and so on. But people didn’t hear that from me.
24 And I won’t say one word about Prop. 13, because I assume
25 that’s untouchable either way.
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1 So I think that’s sort of the quick summary
2 about the issue of compensation.
3 I want to move to the question of investment
4 income and gain. I confess that as I read the proposal,
5 I wasn’t sure how that’s treated. But I think my best
6 reading was that if I’m an individual and I have capital
7 gains, interest, and dividends, those are not subject to
8 tax because -- and the rationale is that they have been
9 subject to a value-added tax at the entity level so when
10 I get it, it’s not subject to tax again.
11 And I’m also assuming that if the same thing is
12 true in a partnership or other pass-through entity, so
13 long as it’s coming from an entity that’s already been
14 subject to the net-receipts tax, that it should not be
15 subject to tax.
16 I think that that’s what I recommend in that
17 respect.
18 I think the questions get more complicated if
19 there’s some services involved between parties, you know,
20 much like you get in a hedge fund, and so on, I think
21 those are much more complicated issues. I think there’s
22 some federal analysis of all that, that might be useful.
23 But that’s -- I think that’s sort of a separate subject,
24 and I’m not going to address it today because it will
25 take about an hour by itself.
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1 So given that we’re going to not impose this
2 tax on investment income, if you will, of investors --
3 and, by the way, that’s supported by California law, that
4 says that investment income is not business income. And
5 so I think this is typed business income. Given that,
6 and given that we’re eliminating the corporate income
7 tax, then I think that, to be fair, there is really no
8 double-taxation, in my opinion. Because income tax is
9 income tax. I don’t think we should mix it up. Income
10 tax and sales tax have always been double-taxation.
11 So if you eliminate the sales tax and add this
12 tax, they’ll still be double-taxation. There will still
13 be double-taxation. Okay, so I think that’s -- unless
14 you eliminated one of them. But if you tax at the
15 business level and then the returns from that business
16 in the form of interest, dividends, and capital gains
17 are not subject to tax, then basically we don’t have
18 double-taxation of net-receipts tax. And, of course, if
19 you eliminate the corporate income tax, we don’t have
20 double-taxation at the individual income tax level. I
21 think those are very commendable goals and objectives
22 here. I mean, I think that’s -- we’ve talked about that
23 forever in the federal income tax context. And maybe if
24 California does it, maybe the federal government will
25 follow -- you know, from my ears -- from my mouth.
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1 So, let’s see. A couple of other points.
2 Again, you know, I understand there’s a lot of
3 issues with this scheme, and so I think it’s really gone
4 through, on what you guys should focus on.
5 I think it is commendable that interest is not
6 excluded from the calculation because everybody knows --
7 I mean, this question of deductibility of interest income
8 versus nondeductibility of dividends in the federal and
9 state income tax scheme have really wreaked havoc with
10 economic decision-making. In other words, there is no
11 reason -- absolutely no economic reason -- to favor debt
12 over equity from a federal income tax or state income tax
13 point of view. So I think that, at least, is a correct
14 step in that direction.
15 Of course, it’s painful because, again, people
16 who are for the first time being subjected to this tax
17 will say, “Wait a minute, I’m also paying so much to the
18 bank. Why are you taxing me on all of that?” That’s
19 another tough one, you know.
20 I hope you appreciate that my tone is much more
21 sort of abstract as opposed to trying to see which
22 industry comes out ahead and which one comes out worse
23 off. Because I think there’s plenty of studies you’re
24 going to see on that. And I’m just really making these
25 comments as sort of, if you will, a microanalysis of the
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1 provisions.
2 Two more things. Taxation of M & A
3 transactions. I wasn’t clear how that works. I’m sure
4 a lot of thought has gone into that. In this scheme, if
5 a corporation sells an asset as to which it had taken a
6 deduction -- because when it purchased it, it excluded it
7 from net receipts -- then I assume when it sells the
8 asset, it will have to pay, it will be included in the net
9 receipts. I think that’s -- I think that follows from
10 the principles I’ve heard today, okay.
11 So, now, I assume that instead of that, the
12 corporation takes this asset and contributes it to
13 another corporation or to a partnership in exchange for
14 an interest, these are transactions that, under current
15 California and federal income tax law, are exempt from
16 tax. In other words, they’re tax-deferred. So I’m
17 thinking that the same regime -- the same issue will
18 apply here because as the asset moves from the transferor
19 to the transferee, the transferee should not get a
20 deduction for it because he didn’t pay for it in cash.
21 And at some point -- and this was already taxed -- it was
22 already tax-deducted once so I’m assuming that sort of
23 that should be the result. In other words, no tax on the
24 transferor and no deduction by the transferee.
25 Ultimately, when it gets sold, it will get taxed again.
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1 So, again, as it moves through the stream, there will be
2 one tax.
3 It gets a little more complicated when you deal
4 with mergers, two corporations merge together. That’s --
5 in an economic sense, that is a sale or exchange of
6 assets between two companies, you can think of it like
7 that. I think the income tax law has always treated those
8 as tax-free transactions if the consideration that is
9 received in the merger is just stock of the corporation.
10 I think those kind of transactions need to be specifically
11 dealt with here or else you’ll make my life really happy,
12 okay.
13 I mean, you ought to assume that when these
14 provisions go through, there will be an awful lot of
15 talent that be working through and thinking through them
16 to see what can be done.
17 MR. LIPPE: I hope so.
18 MR. BEHNIA: I mean, that’s just how life is.
19 Okay, so the more specific, the more fair, the more
20 addressing issues of different taxpayers, I think the
21 better it will be.
22 Last, but not least, I noticed that it was
23 quite cavalierly stated there that this tax will create
24 nexus if somebody out of state is selling to a California
25 corporation or a California business.
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1 I suggest that that issue, you guys look at
2 much more carefully. There’s an awful lot of litigation
3 on that. And it absolutely, by no means, is settled that
4 that is the case. In fact, I think the law, as I
5 understand it today, is exactly the contrary. So in
6 other words, it’s not enough to create nexus in
7 California if somebody sells an asset to California.
8 Otherwise, we wouldn’t have all these tens of thousands -–
9 COMMISSIONER EDLEY: If it’s a sales tax. If
10 it’s a sales tax.
11 MR. LIPPE: There’s a new law. There’s a new
12 law coming in 2009.
13 MR. BEHNIA: No, no, no. There’s a new law
14 coming in. But what I’m saying, it has not been tested,
15 and I assure you -- I assure you -- there’s significant
16 constitutional arguments against those. In fact, it’s
17 happening in every state. I don’t think, as the case law
18 developed, I don’t think the state law can change that
19 under federal Constitution. We’ll see what happens.
20 Thank you very much for the opportunity.
21 MR. LIPPE: May I ask a question, since this is
22 informal?
23 CHAIR PARSKY: Absolutely.
24 MR. LIPPE: Why was it part of the proposal to
25 not allow the deduction of compensation, other than you
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1 needed to do something to be able to reduce the tax rate?
2 Was there a specific reason for not allowing compensation?
3 COMMISSIONER COGAN: Yes, because we’re
4 considering a value-added type of tax, is the way we
5 thought about it, and what’s being taxed is part of the
6 value-added.
7 So let me try to give you maybe a little bit
8 of an example, all right, to help people understand this.
9 This may not work, but let me try.
10 So let’s suppose we’ve got a farmer who has a
11 tree on his property, and he pulls a grape off that tree,
12 and he cleans it up, and he sells it to a winemaker.
13 Under the value-added type of tax, the guy has no inputs
14 at all. And so the amount that would be taxed would be
15 the price of the grape -- or the receipts from the grape.
16 Then the winemaker takes that grape, and the winemaker
17 turns it into a fine bottle of wine. What gets counted
18 as receipts is the amount of the selling price of the
19 wine, and what gets deducted under a value-added tax is
20 the price of the grape.
21 That vintner has created value in society of a
22 certain amount. And under the value-added tax concept,
23 what’s being taxed is part of that value. And that’s
24 sort of the logic of the tax.
25 MR. LIPPE: Understood. But when you do take
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1 a service industry, like an accounting firm, for example,
2 you know, 60 -- well, at least 35 percent of our cost of
3 sales is compensation --
4 COMMISSIONER COGAN: Right.
5 MR. LIPPE: -- and you are allowing for the
6 deduction of the same services purchased from an
7 independent contractor.
8 COMMISSIONER COGAN: But only because it’s
9 already been taxed. I think that’s the important concept
10 here.
11 MR. LIPPE: Got it.
12 COMMISSIONER COGAN: I think that’s really it.
13 All right, so we have to think about it that way. I’m
14 not disagreeing with you that this may end up being some
15 tax on labor. I’m not saying that it’s not so. All
16 right, but I’m just saying, you’ve got to think about it
17 a little bit differently than you have been.
18 Now, if I could come back, I want to say
19 something to Hatef about, you had said early on that you
20 thought that we -- you didn’t want to upset us by anything
21 you said. I want to make one thing absolutely clear, I
22 think for all of the commissioners, nobody has endorsed
23 this BNRT, okay. What we decided was that this idea has
24 at least -- it’s at least of sufficient merit to warrant
25 our detailed consideration. And it’s only after hearing
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1 from the comments that you all have made about the
2 concerns that you have and the things we haven’t thought
3 of, that we’re going to make a decision on this. But I
4 think there might be this presumption out there that the
5 Commission is going down this road, it’s made up its mind
6 and so forth. And I can assure you that that just is not
7 so.
8 Now, if I could, I want to direct one point that
9 you made, Greg, that I want to ask the staff about. You
10 made this comment that because of the water’s-edge
11 provision, that there is an incentive in the system for
12 outsourcing. Perhaps not to another company in the
13 United States, a large company in the United States, but
14 certainly with respect to a European company; correct?
15 MR. LIPPE: Right.
16 COMMISSIONER COGAN: So then the question
17 becomes, is there a way to deal with that outsourcing
18 incentive that doesn’t violate a WTO arrangement? Maybe
19 you could help me out with that, or –- and I don’t know
20 if the staff has thought about it.
21 Carl, have you thought about it?
22 MR. JOSEPH: Well, I think you asked the right
23 question. I mean, how can you do this in a way that’s
24 going to pass muster. And that is the problem. I mean,
25 clearly, in our system now, you know, before we had a
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1 water’s-edge system or election for that, we were
2 worldwide-combined and that raised its own series of
3 problems for international companies. But in the
4 water’s-edge system, there is a policy involved there
5 that basically answered some constitutional arguments
6 that were made back when worldwide-combined reporting was
7 being examined by the court.
8 It’s difficult to say that you can discriminate
9 against foreign commerce any more than you can
10 discriminate against interstate commerce.
11 MR. LIPPE: Yes, keep in mind that the nexus
12 law that brings the out-of-state in here may not hold
13 up, either. So I think the problem here is that it
14 definitely encourages outsourcing.
15 COMMISSIONER EDLEY: You also addressed the
16 pass-through. I think there was some confusion --
17 MR. LIPPE: The pass-throughs, yes.
18 COMMISSIONER EDLEY: There was some confusion
19 about that because the intention --
20 MR. LIPPE: Right, so there’s a double tax,
21 because --
22 COMMISSIONER EDLEY: Well, the intention is
23 that the individual would get a credit against their
24 income.
25 MR. LIPPE: Not a credit. It says a deduction.
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1 And a deduction is not -- so it’s not a dollar-for-dollar
2 credit. So there’s still a double –- a part of
3 double-taxation involved in there.
4 COMMISSIONER COGAN: Right.
5 Double-taxation, Chris, in the sense of the
6 income is being taxed.
7 MR. LIPPE: Right, the income is being taxed
8 twice.
9 COMMISSIONER COGAN: Right, right. And that
10 stems from the fact that we would have a BNRT in
11 conjunction with --
12 MR. LIPPE: At the entity level.
13 COMMISSIONER COGAN: -- an income tax.
14 Now, it’s true that you could make the same
15 argument with a sales taxes, right, a retail sales tax,
16 in some sense?
17 MR. LIPPE: But you’re still paying sales tax
18 out there. Well, the only sales tax that isn’t going to
19 be -- as I read it, there will not be sales tax to the
20 State -- well, wait a minute. You’re saying that because
21 I’m a consumer, I’m going to then use that money that
22 I’ve been taxed on to go buy, and I’ll be taxed there so,
23 therefore, it’s a double tax. Because earlier, it
24 sounded like people were saying -- were confusing things
25 and thinking that the sales tax was a tax levied on the
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1 seller company, and it’s not.
2 CHAIR PARSKY: No, no, we recognize that. But
3 under the sales-tax scheme --
4 MR. LIPPE: Right. But here, you’d be taxed
5 three times because, again, you get the BNRT, you get
6 the tax on the income tax when it passes through, and
7 then you’re going to take that money and you’re going to
8 go out and buy something and pay sales tax.
9 COMMISSIONER COGAN: Good point.
10 And so what we would like to do, of course, if
11 you’re going to add the BNRT on top of the existing tax
12 system, that would be a huge mistake.
13 MR. LIPPE: Exactly.
14 COMMISSIONER COGAN: And it would be triple
15 taxation.
16 MR. LIPPE: Exactly.
17 COMMISSIONER COGAN: And so clearly in this
18 context, you have to think about the BNRT in conjunction
19 with what we’re doing -- what we would be doing on the
20 sales tax and on the income tax.
21 MR. LIPPE: Correct, correct.
22 COMMISSIONER COGAN: But I think that’s an
23 extremely important point.
24 MR. LIPPE: Because what this really does is,
25 it takes away the whole benefits that were put in by the
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1 pass-through entities, it was to have one level of tax.
2 COMMISSIONER COGAN: Right, right.
3 CHAIR PARSKY: But, again, if for an individual
4 accountant or lawyer you have to look at the combination
5 of a reduction in the personal income tax rate --
6 MR. LIPPE: That’s right.
7 CHAIR PARSKY: -- the elimination of the state
8 sales tax rate, and the imposition --
9 MR. LIPPE: Right, you’d have to add them all
10 up and see how you come out.
11 CHAIR PARSKY: Exactly.
12 MR. LIPPE: And it appears that you’re going to
13 come out worse under this scenario.
14 CHAIR PARSKY: Well, anytime something is new,
15 the appearance is -- I guess would dig it a little deeper.
16 Let’s wait.
17 MR. LIPPE: Yes, you have to do the numbers.
18 Thank you.
19 CHAIR PARSKY: Curt?
20 COMMISSIONER PRINGLE: I mean, I actually want
21 to pick up on that point, because I appreciate today is
22 a BNRT discussion, and we hear mostly from business folks
23 on BNRT. And our job isn’t to propose one tax; our job
24 is to look at a package that we can put together.
25 And just by its very definition, as we’re
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1 evolving this package, if we only hear from business that
2 is only looking at the business bottom line, virtually
3 all business will be paying more.
4 MR. LIPPE: Uh-huh.
5 COMMISSIONER PRINGLE: Because at least a third
6 of the savings in this package, if not almost half, if
7 you look at personal income tax paid by individuals and
8 sales tax paid by individuals, the majority -- or at
9 least a third to a half of the benefit is derived to the
10 individual, not to the company. So if you’re saying that
11 BNRT is to pay for 100 percent of the benefits of the
12 eliminating the corporate income tax, of drastically
13 cutting the personal income tax from 20 to 30 percent,
14 and to eliminate all, if not a majority of the state
15 sales tax, those benefits don’t just ascribe to a
16 corporation’s bottom line, they go to corporate bottom
17 lines and all the personal individuals out there that
18 are engaged in any type of activity in the state, from
19 working to buying something.
20 So just by its very nature, if we’re just
21 hearing a BNRT discussion, we will only hear business
22 say, “We will be paying more.” And I get that, as a
23 nice, conservative guy raised by a dry-cleaner, I can
24 certainly see --
25 MR. LIPPE: Yes, it works for dry-cleaners.
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1 COMMISSIONER PRINGLE: I can certainly see
2 that. But that’s not our job, to look at any of these in
3 isolation. And it’s wonderful to hear the perspective of
4 how different industries are going to be challenged to
5 implement it. And I think that’s what we’re trying to
6 figure out, how to implement it. But I don’t necessarily
7 feel a major momentum away from a BNRT just because I
8 hear business concerned about it. My job is to look at
9 the whole package of state tax structure. Because
10 53 percent of the burden of the general fund is on the
11 personal income taxpayer today, I think that has
12 contributed to so much to the volatility and a
13 disproportionate tax burden, that I’m willing to look at
14 all of those things.
15 And for me, I need to put it into perspective
16 to hear the concerns of business and the challenges they
17 will face. I get it.
18 MR. LIPPE: I think the more important --
19 COMMISSIONER PRINGLE: I think our job, today
20 is to hear BNRT discussion, but our ultimate job is to
21 put a package together that addresses all of those issues.
22 MR. LIPPE: Sure. But you don’t want to
23 incentivize jobs to go elsewhere.
24 COMMISSIONER PRINGLE: Yes, but your examples
25 are good and enjoyable to hear, but I don’t necessarily
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1 agree with many of them.
2 For example, the idea that some outsourcing of
3 jobs would be created by multi-tiered companies that come
4 together and have, under-the-$500,000-receipts threshold
5 and create a whole bunch of them in Nevada, that doesn’t
6 make any sense to me.
7 COMMISSIONER EDLEY: Because they don’t get a
8 deduction of 4 percent or 3½ percent BNRT in their labor
9 bill.
10 COMMISSIONER PRINGLE: But, in fact, the flip
11 side of that is why, if that is the scam somebody wishes
12 to put together, why don’t they put it together in
13 El Monte? Because the point is that the $500,000
14 deductibility is -– the threshold is the same as if
15 you’re an in-state employer or an out-of-state employer.
16 So why would someone create a whole mechanism by which
17 they hire a whole bunch of employees in Nevada, when they
18 could do the same thing here --
19 MR. LIPPE: Yes.
20 COMMISSIONER PRINGLE: And I think part of what
21 we need to do is just say, how do we define “independent
22 contractors” and separate value-added, and to make sure
23 that that type of thing doesn’t happen in California?
24 But that’s not a driver for out-of-state companies being
25 formed and all the jobs running out of state, because
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1 that same type of mechanism is because we’re concerned
2 about small business. We’re talking about this minimum
3 threshold point, but that same minimum of threshold would
4 apply to a California-based company, just the same as it
5 applies to a Nevada-based company or a Chinese-based
6 company.
7 MR. LIPPE: But we do have to be concerned
8 about the out-of-the-countries.
9 COMMISSIONER PRINGLE: Out-of-the-country is
10 one thing. I don’t necessarily think your dry-cleaning
11 is to be taken out of the country. But the bottom line
12 is, you used the example that someone is going to set up
13 a whole bunch of out-of-state companies to do that.
14 MR. LIPPE: They can set up a bunch of local
15 ones, too. You’re right.
16 COMMISSIONER PRINGLE: But we can address that
17 issue, and it’s not a point by which jobs will just be
18 sucked out of California, because nobody would be doing
19 that.
20 MR. LIPPE: Your point is good. Thanks.
21 COMMISSIONER COGAN: Yes, with respect to
22 international outsourcing issue, you’ve hit on really the
23 right point here, and then Chris did as well. It depends
24 upon -- the incentive depends upon the rate. And if what
25 happens as a consequence of California -- let’s suppose
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1 we went down this BNRT route. If we ended up with
2 European-style VAT tax rates, we would create an enormous
3 incentive to outsource. Whether a 3 to 4 percent
4 differential would justify an economic decision by a firm
5 located in California now to outsource to Europe or to
6 China is --
7 MR. LIPPE: How sure you that the rate would be
8 3 percent and that it wouldn’t have to be 10 percent?
9 COMMISSIONER COGAN: So, so far from the
10 calculations that the staff has made -- and they’re very,
11 very preliminary -- that’s sort of the nature of the tax
12 that -- at least it’s been in that range. Don’t know
13 where it’s going to come out. It depends upon a lot of
14 these detailed discussions, right?
15 MR. LIPPE: Right.
16 COMMISSIONER COGAN: I mean, if you go with
17 expensing of capital equipment, if you say health-care
18 insurance purchases by firms on behalf of their employees
19 are deductible, then, of course, the rate is going to go
20 up a little bit. So if we say that for a small business
21 as the franchise tax part of this proposal, the
22 franchise business tax goes away, then the rate has got
23 to be a little bit higher. So the ultimate rate depends
24 upon a lot of the things that we’ve been talking about
25 today and on Wednesday.
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1 COMMISSIONER EDLEY: But nowhere near 10.
2 COMMISSIONER COGAN: Right, right.
3 MR. LIPPE: Sorry for taking so much time.
4 COMMISSIONER COGAN: I don’t think you would
5 get --
6 COMMISSIONER EDLEY: We could buy Montana,
7 though.
8 COMMISSIONER COGAN: And one final point with
9 respect to the whole package. I think what has really
10 encouraged us to look at this is because of the concerns
11 that Marty raised, you know, we have the highest sales
12 tax rate of any state in the union; one of the highest
13 income tax rates, personal income tax, of any state in
14 the union; the highest corporate tax rate. And so you
15 ask yourself, have we, through our system of current
16 taxation, created an environment that really discourages
17 economic activity in the state, and would we not be
18 better off if we went with a system that got rid of that
19 8.8 percent corporate tax rate, that cut personal income
20 tax rates for everybody down, that eliminated that sales
21 tax and replaced it with a broad tax that was on the
22 order of 3 to 4, 4 percent. I think that idea is what’s
23 motivated the Commission to go down this road. And all
24 the difficulties that you have raised with it are very,
25 very important and they may, in the end, dissuade us from
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1 going this route.
2 But you can see how attractive it is when we
3 look at the big picture for California as we go forward.
4 CHAIR PARSKY: And you couple that with the way
5 in which how dependent the general fund revenue has
6 become on the personal income tax.
7 MR. LIPPE: Sure.
8 CHAIR PARSKY: I mean, from what was, a number
9 of years ago, maybe contributing 20 to 25 percent is now
10 contributing 50 to 52 percent. And so those combination
11 of things -- I think John has articulated it exactly the
12 way all of us are thinking -- that’s what’s driving us to
13 consider this. And so it’s very important that the
14 entire package be looked at.
15 Jennifer?
16 COMMISSIONER ITO: Yes, my primary question
17 still remains this: What is the impact on all industries
18 and the potential for their restructuring in the
19 long-term? And in particular, not just around the
20 outsourcing and whether it goes in-state, outside the
21 state or internationally but, really, about what it can
22 do to employee-employer relations, especially for the
23 service-intensive, knowledge-based industries. Because
24 I just don’t see any incentive for -- I see a lot of
25 incentive for companies to go the route of independent
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1 contractors. And so that, for me, is a question about
2 what is the long-term impact. Because as we look at the
3 entire package, if we’re also looking at changes to the
4 personal income tax -- so if we’re looking at implementing
5 a business net-receipts tax and having an exemption for
6 small businesses, so we’re going to miss out on a lot of
7 that revenue. I’m assuming that a lot of these
8 independent -- if industries go the route of independent
9 contractors, a lot of those independent contractors will
10 then be exempt because they won’t have the net receipts
11 of half a million or more.
12 And then also, if we’re making changes to the
13 personal income tax and lowering that, again, that’s
14 going to result in lower revenue.
15 So I just want to be -- you know, put those out
16 on the table as that’s kind of my concern, and looking at
17 that as we evaluate this overall package, really looking
18 at what the long-term impact is going to be.
19 CHAIR PARSKY: Well, I think you point out very
20 appropriately that the revenue-estimating relating to a
21 new form of tax like this has got to be dealt with very
22 carefully.
23 One of the reasons that we are contemplating a
24 phase-in or a transition period is, in part, for that
25 reason and that we might consider starting a tax like
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1 this at a very low level, and maybe eliminating the
2 corporate income tax, and then phasing in, as this tax
3 goes up, so that we have a system that reflects what the
4 revenue-estimating really is, and for just that reason.
5 COMMISSIONER ITO: No, I understand that. But
6 I’m more worried about the longer-term impact. So if
7 this does create an incentive for companies, right, to
8 go farther, I think that’s a reality -- that’s something
9 that we need to be aware of. So I understand kind of the
10 revenue for the short-term, and I realize that there may
11 not be a lot of impact because companies won’t make those
12 adjustments within the first three years of this tax
13 going into effect. But I’m more worried about the
14 longer-term impact.
15 CHAIR PARSKY: Carl, did you have a comment?
16 MR. JOSEPH: Well, I just wanted to sort of
17 make a reminder that there is more from a legal
18 determination as to somebody being an independent
19 contractor than merely calling them an independent
20 contractor. You can choose to call somebody an
21 independent contractor and give them a 1099, but that
22 doesn’t necessarily mean from a legal perspective that
23 they are, in fact, an independent contractor.
24 You know, there’s lots of concerns such as
25 unemployment insurance and other areas where the law is
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1 quite concerned outside of the income tax context with
2 whether or not somebody is, in fact, really an independent
3 contractor. And in some businesses, you know, you don’t
4 really -- you want control over the activities of that
5 person. You do not want them to be independent. It’s a
6 business decision as opposed to a tax decision to need
7 to have employees versus all independent people. So I
8 just want to keep that out as a reminder.
9 CHAIR PARSKY: Ruben?
10 COMMISSIONER BARRALES: Yes. Well, the whole
11 issue of contracting out and creating jobs -– I mean, you
12 still create jobs if it’s in California. So I’m not as
13 concerned about that as I am, though, encouraging job
14 growth. And I guess I’m struggling with actually what,
15 in the business net-receipts tax scheme, encourages job
16 growth? I just don’t -- I don’t see anything that does
17 that. Other than if you truly -- as John elaborated on,
18 if you truly are able to reduce the personal income tax
19 and the sales tax and all that.
20 So it leads me to my question to the lawyer,
21 and it’s probably a legal term, and that’s why I don’t
22 quite -- you mentioned that the business net-receipts tax
23 is nicer than the sales tax a couple times. And I’m just
24 wondering what you mean by being “nicer”?
25 MR. BEHNIA: A couple of things. One is that
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1 it does consider expenses that were incurred in creating
2 value, if you will. So it’s not sort of -- the sales tax
3 is imposed gross -–
4 COMMISSIONER BARRALES: Right.
5 MR. BEHNIA: -- and there is no consideration
6 for sort of what went into the production of the good.
7 So I think -- and maybe this question is better
8 to an economist than to me -- but I think the idea of
9 value-added tax, is that you’re taxing each party on the
10 value it created. And -- and from an efficiency point
11 of view, a sales tax is imposed at the end. So there’s
12 a lot of opportunity for avoiding it. In fact, in cash
13 businesses, it’s quite prevalent.
14 With a net-receipts tax, which is a value-added
15 tax, I think in the chain of commerce, each party will
16 pay its share, and you try to make it fair in the sense
17 that it’s somewhere between a net income tax and a
18 gross-receipts tax. You’re giving them deductions for
19 important expenses but not for everything.
20 I think that the two big nondeductions, if you
21 will, one is for compensation -- and I think we talked
22 about the theoretical basis for that; I think that’s
23 still an important political and economic issue -- and
24 the other one is interest. And I think my view -- and
25 this is consistent with what the economists have
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1 written -- is that there’s no reason to favor interest
2 over dividends. In other words, how you finance your
3 business should have no bearing on how much tax you pay.
4 So from that point of view, if you look at the
5 net-receipts tax, it’s very much akin to an income tax
6 but much simpler, in a way. In other words, you don’t
7 have to worry about the depreciation issues and a lot of
8 other issues that are inherent there.
9 COMMISSIONER BARRALES: Yes, but in some ways,
10 a sales tax is nicer or easier to implement. There are
11 compliance issues, obviously, but…
12 MR. BEHNIA: Well, I think the principal
13 argument that I heard about and I read about was that
14 because you have multiple companies and they have an
15 infrastructure there to sort of pay tax and they’re not
16 going to pay the corporate income tax, this is substituted
17 there. And basically, the computation is relatively
18 similar, okay. So nicer in the sense that you’re
19 collecting it at each stage and you don’t have the
20 problems with the enforceability of the sales tax, in
21 that sense.
22 COMMISSIONER EDLEY: And/or concluding on
23 services.
24 MR. BEHNIA: Yes. One more thing. One more
25 thing. I think this is a perception, but I think, again,
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1 it’s an economic issue. The perception is when the tax
2 is imposed at the retail level, because the consumer is
3 going to buy something it needs, it probably is easier
4 to pass the tax on completely from an economic point of
5 view to the consumer, okay. Because now you’re only
6 dealing with one marketplace. It’s a demand curve and a
7 supply curve, just between two people.
8 I think as -- the other way, as you go down the
9 chain, I think you’re facing different supply and demand
10 curves for each of those industries. So for each of
11 them, the question is, can it be passed on to the
12 consumers, can it be passed on to the employees, can it
13 be passed on to the customers and suppliers, or does it
14 all have to be borne by the owner?
15 I think an economist will argue that that
16 creates a more efficient market because in each case,
17 the market will determine what’s the correct allocation
18 of resources.
19 I’m saying big words that I don’t understand,
20 but that’s sort of the argument, okay?
21 COMMISSIONER BARRALES: It sounds good.
22 MR. BEHNIA: So instead of facing one supply
23 demand curve, you’re facing multiple and that’s supposed
24 to make it more efficient. So in that sense, I mean
25 nicer.
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1 COMMISSIONER BARRALES: And, I’m sorry, I know
2 we discussed it before, but the Florida case was an
3 extension of sales tax, is that right, to services?
4 COMMISSIONER COGAN: Yes.
5 CHAIR PARSKY: Right.
6 COMMISSIONER BARRALES: Then it was repealed?
7 COMMISSIONER COGAN: They dropped it.
8 COMMISSIONER BARRALES: Yes, dropped. Thank
9 you.
10 CHAIR PARSKY: I want to thank all of you very
11 much -– thank you very much for coming forward and
12 helping us.
13 We still have a public-comment period, and we
14 have three speakers that have asked to speak.
15 First, Chriss Street.
16 MR. STREET: Mr. Chairman, Members of the
17 Commission, thank you for the opportunity to speak.
18 Chriss Street, Orange County Treasurer. I’m also the
19 former CEO of two New York Stock Exchange companies and
20 have a lot of experience in venture capital and in
21 restructuring companies. I do have a degree in
22 econometrics, so I’d like to keep my comments somewhat
23 on the economic side, but I’d like to finish on the
24 political side.
25 I have some observations from this morning’s
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1 presentation and issues I think that are probably going to
2 distract the Commission with the reality of California.
3 First of all, I think tax collection is very
4 stable in California. Now, the reason I think it is
5 stable is because property tax collection is a huge
6 percentage of the tax in California. I can tell you, in
7 Orange County, along with most other counties in
8 California, we had higher tax collection for the last
9 two years. For example, for the 2007-08 year, we were
10 up $305 million. For the 2008-09 years, I’m up
11 $192 million. The year that we’re in right now, 2009-10,
12 even with the disaster of real estate, for most people,
13 we’ll be down -- flat to down less than 1 percent. So
14 I think the issue that’s perhaps more variable here is
15 success.
16 Now, if one was to take and regress the trend
17 of tax collection, it would look pretty stable, the
18 longer you took a regression. But, of course, in any one
19 year, you can have great variability. This year, we
20 probably have $20 billion; next year, maybe another five.
21 Secondly, the current tax system is part of the
22 countercyclical mechanism of the economy. For example,
23 when the business goes down for most people, they’re
24 eligible because of profits in the past, usually, for
25 clawback of taxes. This becomes a funding mechanism and
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1 also helps to reduce the intensity of a recession. And,
2 once again, tax collection goes down so they get cash
3 back, their costs go down and, in fact, they turn around.
4 The public understands the current system and
5 is able to vote its preference through the initiative
6 process or through the normal political status. The
7 concept of a business net-receipts tax is probably very
8 attractive to politicians because, of course, it becomes
9 invisible to the voter. A sales tax, of course, is not
10 very invisible and, of course, generates tremendous
11 political input from the public.
12 Income and corporate taxes are relatively easy
13 to track through the existing technology that exists
14 today. One of the taxes perhaps that makes it more
15 difficult to track is discretionary valuation. And the
16 tax collectors in California, of course, have the issue
17 of unsecured property taxes. Now, many of you may know,
18 and I’m sure the Franchise Tax Board knows, that many of
19 our assessors over the last 80 years have actually gone
20 to prison because of some of those discretionary issues.
21 The business net-receipts tax would have a tremendous
22 opportunity for bribery and fraud.
23 Collection efforts also allow for different
24 kinds of treatment, especially when it comes to input
25 from political entities. This business net-receipts tax
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1 undoubtedly would end up having political influence. As
2 we’ve seen from the presenters this morning, it’s a matter
3 of whose bull is getting gored. Because I have this one
4 great need at this one point in time, I come in and get
5 my special treatment. And, of course, as I move on, I
6 now have a special treatment compared to the rest of
7 society.
8 Also, this effort of business net-receipts tax
9 would be tremendously intrusive into the personal
10 liberties of Californians. I can tell you that there
11 has been conversations going on with the Assessors’
12 Association and the Tax Collectors’ Association on what
13 kind of infrastructure would be necessary to collect a
14 business net-receipts tax. This would require a
15 tremendous amount of new people. These people would be
16 very much involved in the day-to-day business of our
17 citizens. For example, in California, for Orange County,
18 we have approximately three million citizens. Those
19 three million citizens, we have 235,000 unsecured tax
20 items, and about 885,000 properties which are on our
21 secured roll. So any effort to get involved in a business
22 net-receipts tax would require a tremendous amount of
23 intrusion into the day-to-day business.
24 Because although I’ve heard today people talk
25 about some outsourcing issues and perhaps arbitrage
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1 issues for moving it around, remember that most people
2 start their business when they have to, not because when
3 they want to. There is a tremendous amount of business
4 formation going on right now in California that will
5 result in a tremendous economic boom. It’s called, “I
6 got fired.” When you get fired at the age of 40 or 50,
7 most people find it very hard to get a job. And,
8 invariably, they think about starting a business and
9 they do start a business. They’re going to start that
10 business, once again, off borrowing against their house
11 or borrowing against their credit card.
12 An argument for the value-added tax is that
13 there will be an elimination of the bias from borrowed
14 money. As I’ve said, you hear a lot of conversations
15 going on about hedge funds, how they managed to manipulate
16 the system by creating capital gains instead of income.
17 I understand that this is a big issue. I think
18 that it’s a game. But, obviously, it’s the best
19 government money can buy for hedge funds, and they’ve
20 done a good job of it. But when you look at most
21 businesses you, once again, these are small folks. You
22 know, their idea of a multi-level corporation is their
23 brother, their sister, and their next-door neighbor.
24 This change in business net receipts I think
25 would discourage investment during the transition period.
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1 As many of you know, we have the investment tax credit
2 comes along probably every ten or 12 years and creates
3 some success. But in the six to 12 months prior to its
4 expiration, there is a tremendous amount of success as
5 people make that move. Any effort to introduce a
6 business net-receipts tax would be very jolting to the
7 economy and would destroy a lot of the investment
8 decisions that were made by companies who do not
9 recapture their money very quickly.
10 I’ve heard talk about high gross margin. Most
11 people who have a business have a really low gross
12 margin. I’ve heard 3 percent business net-receipts tax.
13 Most businesses in the real world are lucky to have a
14 3 percent margin. They turn that margin several times a
15 year so it looks much better. But if you hit them every
16 time at 3 percent, you’d pretty much do them in as far as
17 a margin line, I believe.
18 Over time, a large interest, once again, would
19 use this business net-receipts tax to sway the system in
20 their manner. I think it’s extraordinarily dangerous to
21 take the visibility of taxes out of the hands of the
22 public. As we’ve seen, the state of California’s
23 politicians clearly know how to use Excel. They get a
24 trend in property-tax collection. They simply extend
25 that trend to the moon, and you end up with spending like
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1 you’ve seen.
2 Orange County is an absolute expert in
3 irresponsibility. In 1994, Orange County filed for
4 bankruptcy based on irresponsible spending. At the time,
5 we had 18,000 full-time equivalents. Today, Orange County
6 has 18,000 full-time equivalents. The state of California
7 has 11.9 percent unemployment; and some numbers are
8 actually as high as 15 and 16 percent, depending on how
9 you do the arithmetic. And I see some people here
10 represent more diverse elements of the business.
11 One person’s laid off and out of the statistics,
12 you know, as “I can’t collect unemployment.” But in
13 Orange County, we have a 7.8 percent unemployment. I see
14 no one complaining because our law enforcement is weak.
15 As a matter of fact, three of the top most-safe towns in
16 America are in Orange County. I see no one talking about
17 our social services as being completely crumbling. You
18 don’t see a lot of really, really poor people walking
19 around Orange County because they have this thing called
20 a job.
21 And last, and perhaps more important, what you
22 do today could have a really important long-term effect
23 on the competitive nature of California. People are
24 looking at California, and they’re understanding that
25 what made this fantastically successful, has now turned
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1 a corner. California is competing with Rhode Island and
2 Michigan as the economic disaster of America.
3 What has been going on in California is this
4 endless sense that we can continue to spend at around
5 8½ percent, compounded, and revenue is increasing at about
6 4 percent, compounded. That little 4 percent doesn’t
7 sound like much -- kind of like your 3 or 4 percent
8 business net-receipts tax -- but over time, you end up
9 splaying it out. And now you’re in a situation where
10 these types of decisions have come home to roost.
11 California’s taxpayers want lower costs, and
12 they want smaller government. They want efficient
13 services and they want them to be very, very transparent
14 and understood.
15 I think that anything on the nature of business
16 net-receipts tax will be incredibly nontransparent and
17 could be incredibly more destructive than the current
18 system.
19 Thank you.
20 CHAIR PARSKY: Thank you very much.
21 Michael Shaw.
22 CHAIR PARSKY: It’s nice to see you again,
23 Michael.
24 MR. SHAW: Thank you again, Mr. Chairman,
25 Members of the Commission. I will be real brief because
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1 I don’t want to restate a lot of what I said on Wednesday.
2 But for those of you who were not able to be at the
3 meeting in San Francisco, which I think was very
4 productive, I wanted to restate a couple of things and
5 also provide you with the case study that we used in
6 discussing that. Joe Greenstreet, a CPA and a member of
7 NFIB, was there.
8 Our primary concerns are one of the ability to
9 pay. You know, I think it’s been stated already pretty
10 clear. If you have an income, right under the current
11 system, you pay a tax; if you don’t have an income, you
12 don’t pay a tax. Net business-receipts tax does not take
13 that into account. And, obviously, as is highlighted
14 in the case study that Mr. Greenstreet provided on
15 Wednesday, this business, a 30-year-old restaurant had a
16 loss in 2008 of $58,619. No income tax. Under the
17 business net-receipts tax, as we understand it, it would
18 be about a $17,419 tax liability. How is he going to
19 pay $17,000 with money he doesn’t have is the question.
20 Also as Ms. Ito noted, there is a concern over
21 the employee-employer relationship and the push to
22 independent contractors. And that creates a whole other
23 set of issues for a small business, in that the state --
24 between the state and federal laws, there are probably
25 half a dozen or more, close to ten different sets of
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1 criteria for determining who is and is not an independent
2 contractor. And so pushing people in that direction
3 through something like this a business net-receipts tax,
4 which we will assume for argument’s sake that that could
5 lead to that type of activity, would create a host of
6 other issues for small businesses, many which of which
7 start out as independent contractors, in that way. We
8 also have questions, and I believe we discussed this
9 briefly last week regarding payroll taxes. Benefits are
10 one thing. If you’re including that as part of
11 compensation and, therefore, excluding it from the
12 purchases deduction, is a policy choice. Obviously, in
13 California and across the nation, there is a great
14 crisis with regard to health care. And so that is a
15 political choice that will have to be made ultimately.
16 But payroll taxes are a different matter.
17 Payroll taxes are not a discretionary expense. Whether
18 or not to provide health care, 401(k) benefits, those are
19 things that a business can decide. But payroll taxes are
20 not optional. So we would strongly encourage, if you
21 choose to not include compensation, wages, and/or
22 benefits, that you would at least include the payroll
23 taxes, workers’ comp insurance, and other things that are
24 not optional in that category. Because if you want to
25 do business in the state, those are things you have to
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1 provide.
2 And that was all I had to say. But I wanted
3 to again thank the Commission for the time that they’ve
4 dedicated to this issue. And, of course, we do want to
5 recognize that the other potential offsetting reductions
6 in the personal and corporate income taxes are things
7 that -- and the sales tax -- they are things that we do
8 need to take into account.
9 And I think as we committed to do last
10 Wednesday, we are more than happy to look at these
11 examples and case studies in light of those issues and
12 try and provide a richer and more accurate projection of
13 how this overall change will affect small business.
14 And to that degree, of course, the sooner and
15 more in-depth information you can provide in terms of the
16 rates and the thresholds and those types of issues would
17 certainly speed that along.
18 CHAIR PARSKY: Thank you very much.
19 Our last public-comment speaker is William
20 Spillane.
21 MR. SPILLANE: Mr. Chairman, Commissioners,
22 thank you. A couple of general comments and then a few
23 specifically about the BNRT.
24 Generally speaking, does anyone here know of
25 anybody who spent $22 million on research on taxes in the
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1 last few years? Anybody? $22 million research?
2 We have. We hired the best minds in the country
3 and the best think tanks in the country to research taxes.
4 And once they did their research, the tax proposal wrote
5 itself, starting with a blank sheet of paper.
6 Nonpolitical. Nonpartisan. If somebody wants to make it
7 partisan, that’s their problem. We’re nonpartisan.
8 And as a matter of fact, some of our leading
9 consultants are on the left side of the aisle. Dale
10 Jorgenson of Harvard -- “Mr. Tax USA” -- did a lot of
11 research for us. A gentleman from Boston University,
12 Lawrence Kotlikoff is on the left side of the aisle.
13 The last think tank we hired to do our numbers,
14 because there were so many lies about the FairTax. Here’s
15 a book just to rebut some of the lies. Not all of them.
16 It would take three books to rebut all the lies about the
17 FairTax. So if you want an excuse to put your head in
18 the sand about the FairTax, they’re all in here. They’re
19 rebutted, but you don’t have to read the rebuttals. Lots
20 of excuses there.
21 So we could get Kotlikoff, we could get
22 Dr. Karen Walby here to talk to you. The commissioners
23 need and deserve to hear about this. It’s the solution
24 to the state’s and the federal government. It’s a simple
25 sales tax.
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1 The BNRT is too complicated. It’s the “full
2 employment act” for tax preparers and for tax attorneys.
3 It’s outrageous. It’s way too complicated.
4 You’re talking about tax loss carryforward for
5 essentially a sales tax? A VAT is a sales tax, a
6 complicated sales tax. And this is a complicated sales
7 tax over the moon. Thank you very much.
8 Now, anybody who has played any ball --
9 football, baseball, whatever -- knows that every good
10 coach learns from his opponents. And, boy, do we have
11 opponents. Every state around, every nation around --
12 we’re in a competition. So you learn from every opponent.
13 And when you’re down near the cellar, not quite in it --
14 and that’s where we are in California -- you learn from
15 the guy who is below you, in the bottom, but you
16 certainly don’t duplicate Michigan. You look to the
17 winners. Who is winning? Texas. Florida.
18 By the way, Texas created more new jobs last
19 year than all the 49 states combined. And if you will
20 rent a U-Haul truck to take you and your family from
21 San Francisco to Austin, it will cost you four times what
22 it cost for a return trip. Think about that. They’ll
23 charge you $2,500 or more.
24 I just had the fellow in the lobby double-check
25 my figures -- he came up with four times more -- to rent
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1 a U-Haul truck in San Francisco to haul your junk to
2 Austin, Texas, than it will cost you to rent a truck in
3 Austin, Texas -- the same truck -- for the same distance
4 back to San Francisco. Why is that? People are going to
5 Texas.
6 Now, I’ve lived in Texas. I’ve lived in
7 Florida. I’d rather live in California. But the jobs
8 are going there. Why? We’re screwing it up.
9 So please give us the time to tell you what
10 will solve the problem. And it’s progressive. We have
11 a mechanism to make it progressive. It’s called a
12 rebate -- or a “pre-bate,” we call it, because it’s an
13 advance. In California, it would be $90 for an adult,
14 $30 for a child. And it skews the tax rate like that.
15 It’s more progressive than our present income tax. It’s
16 beautiful. And it’s all in the letter that I gave you
17 about five weeks ago. And that starts out, “Don’t spend
18 good time after bad, or good money after bad,” in the
19 first sentence.
20 You’ve done an admirable job. You’ve worked
21 very hard. Let’s stick a fork in this turkey because
22 this gentleman, the CPA from Woodland Hills and the
23 shipbuilder from San Diego just really did a job on it.
24 So give up on this thing. Go to something far
25 superior, far simpler, far less costly, and it will bring
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1 jobs into California. Because if you’re an investor
2 somewhere in the world and you find out that there are no
3 taxes on investment in California, you’re coming here.
4 And unlike the BNRT, you’ll be able to export
5 your products with no taxes included. That’s what the
6 Europeans do to us. They have the VAT over there and
7 they export to us with no VAT included.
8 We have all of our embedded taxes in all of our
9 products because of corporate taxes and payroll taxes
10 included on all of our products. We ship it to Europe,
11 and they put the VAT on top of our taxes. Incredible.
12 We’re not competitive over there. We’re not competitive
13 here. Let’s get serious.
14 This will bring investment to California, it
15 will bring jobs to California, and California will no
16 longer be the caboose. We’ll be up there in the top of
17 the leagues with Texas and Florida and the others that
18 don’t have an income tax.
19 So please schedule a little time for the
20 FairTax, folks. Please.
21 Thank you.
22 CHAIR PARSKY: Thank you very much.
23 That will complete this public workshop.
24 Our planning group will get together at lunch
25 and a little bit this afternoon to try to summarize where
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1 we are.
2 I want to thank the public and certainly thank
3 all of our presenters here for a very informative
4 session.
5 Thank you all very much.
6 (The COTCE BNRT workshop concluded at 1:20 p.m.)
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REPORTER’S CERTIFICATE
I hereby certify:
That the foregoing proceedings were duly reported by me at the time and place herein specified; and
That the proceedings were reported by me, a duly certified shorthand reporter and a disinterested person, and was thereafter transcribed into typewriting; and
That the foregoing transcript is a record of the statements of all parties made at the time of the proceeding.
IN WITNESS WHEREOF, I have hereunto set my hand on the 1st day of September 2009.
______DANIEL P. FELDHAUS California CSR #6949 Registered Diplomate Reporter Certified Realtime Reporter
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