MOORLACH UPDATE — More Taxes With SB 567 — May 18, 2017

Yesterday’s Senate Governance and Finance Committee heard a tax bill that treated those making taxable income of one million dollars or more as villains. Yet, 17 percent of California’s taxpayers contribute 87 percent of the personal income taxes!

The state of Connecticut is learning what happens when you increase taxes on the rich. Their top 100 taxpayers reduced their taxes by 50 percent in 2016 over 2015. The monopoly party will realize that millionaires are mobile and can move. But, by then, it will be too late. And the tax revenues will not increase, they will decrease. The detailed tax analysis is provided by Bloomberg in the first piece below (also see https://youtu.be/q2raqHzQUcU).

As a side note, it’s not always a good idea to oppose a bill authored by the Chairman of Appropriations. Let’s see what my discussion and vote will generate. Let’s hope that the bill’s author, who is also the Chair of Approps, will vote affirmatively on my bills, currently on the suspense file, based on their merits.

I’m honored to be one of eight immigrants in the California Legislature (see MOORLACH UPDATE — Budget Reserve Cap — May 5, 2017 may 5, 2017 john moorlach). So, the idea of the proposed May Revise Budget including funding for defending and protecting undocumented individuals is very difficult for me to stomach. The Hill, out of Washington, D.C., records my concerns in the second piece below.

The third piece is from the OC Register. Phil Greer and Chriss Street were very close. Now it looks like they are two Bettas, put in the same fish bowl, likely to fight to the death. For a classic UPDATE on this matter, see MOORLACH UPDATE — Term Limits — February 5, 2012 february 6, 2012 john moorlach. For more, see http://articles.latimes.com/2007/aug/28/local/me-street28.

California Bill Won’t Target Tax Rules for Multinationals

By Laura Mahoney

https://www.bna.com/california-bill-wont-n73014451168/

A California senator has dropped plans to change the state’s tax treatment of multinational companies with foreign affiliates, but is pushing a bill to end three other tax provisions he calls loopholes for the wealthy.

S.B. 567, by Sen. Ricardo Lara (D), passed the Senate Governance and Finance Committee 5-2 on May 17 after Lara deleted provisions to end California’s water’s edge election. The election, in place for 30 years, allows multinational companies to exclude their affiliates that are beyond the “water’s edge” of the U.S. from the reported income tax base upon which California may levy the corporation tax.

Opposition to the provisions “was just insurmountable,” Lara told Bloomberg BNA after the committee hearing. “We will revisit it in the future.”

Lara proposed to phase out the water’s edge method as the seven-year election expires for corporations using it. Those corporations would have shifted to the worldwide combined reporting method, which is what corporations that don’t elect to use the water’s edge method now use.

The election is California’s most expensive corporate income tax expenditure and its phaseout would have increased state revenue by $1.5 billion a year by the 2019-20 fiscal year, according to the Franchise Tax Board. About 15,000 corporate returns used the water’s-edge method in 2013, the most recent year for which return data is available, according to the California Department of Finance.

The water’s edge method is the required or default method in 25 of 29 states that require combined corporate income reporting, according to Bloomberg BNA data.

Executive Pay

Without the water’s edge election provisions, Lara is pushing for:

  •  elimination of a provision that allows people who earn more than $1 million a year and inherit California property to set the basis in the property at the fair market value at the time of a decedent’s death, allowing heirs to avoid tax on the property’s gain in value, for a state revenue gain of about $8 million a year;
  •   an increase to 40 percent from 10 percent the amount of assets that must remain in a charitable remainder trust and ultimately transfer to a charitable purpose to qualify for a tax exemption, with a state revenue impact the hasn’t been determined by the FTB yet; and
  •  elimination of the ability of corporations to deduct executive compensation of more than $1 million, for a state revenue gain of about $100 million a year.

The three provisions would make California inconsistent with federal law.

Sen. John Moorlach (R) voted against the bill, saying he doesn’t want California to stray further from conformity with federal law. He also took issue with Lara calling the provisions “loopholes,” and cautioned against targeting wealthy people who provide about one third of the state’s income tax revenue.

“I’m nervous about the rule of unintended consequences,” Moorlach said.

Lara said tax proposals from President Donald Trump’s administration and Republicans in Congress that largely benefit the wealthy are a signal that California should break from conformity with federal tax policy.

“How do we allow our lower and middle income families to be able to compete against the 1 percenters who are using these shelters?” Lara said. “Ivanka Trump and Barron Trump are going to be okay. This is what we need to do now to protect ourselves.”

The California Tax Reform Association, the California Reinvestment Coalition and the Service Employees International Union support the bill. Dozens of business groups, including the Computing Technology Industry Association (CompTIA), the California Chamber of Commerce, and the Family Business Association of California, oppose it.

Chris Micheli, a lobbyist representing CompTIA, said the association wants Lara to eliminate the provision related to executive compensation, which has been part of the federal tax code since 1993.

“We are not aware of people abusing it, and we are deeply troubled by characterizing it as a loophole,” Micheli said.

The bill will be heard next in the Senate Appropriations Committee.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney

To contact the editor responsible for this story: Ryan C. Tuck atrtuck

For More Information

Text of S.B. 567 is at http://src.bna.com/oY6.

California proposes budget increase to fight Trump

BY REID WILSON

HTTP://THEHILL.COM/NEWS-BY-SUBJECT/FINANCE-ECONOMY/333770-CALIFORNIA-PROPOSES-BUDGET-INCREASE-TO-FIGHT-TRUMP

SACRAMENTO, Calif. — California will add a gaggle of new lawyers and bolster a defense fund for undocumented immigrants in the face of a raft of legal battles with the Trump administration, under a new budget proposal offered by Gov. Jerry Brown (D).

The new proposal, the result of months of negotiation with Democratic legislative leaders, comes after Attorney General Xavier Becerra (D) requested additional funding for his office. It would add $6.5 million to Becerra’s budget, and another $15 million to provide legal defense services to immigrants fighting deportation orders.

The money is a drop in the bucket in California’s $120 billion-plus annual budget. But it reflects a Democratic legislative majority that sees itself as the tip of the resistance spear, and an attorney general who shows little hesitance in challenging the federal government.

In his first several months in office, Becerra has challenged the Trump administration over its order blocking immigrants and refugees from six Muslim-majority nations; a threat to block Justice Department law enforcement grants to cities and states that act as sanctuaries for undocumented immigrants; and a delay of energy efficiency rules.

"We need to have the talent in place, the personnel," Becerra said in an interview in his office Tuesday, overlooking the California State Capitol a few blocks away. "It’s a little disturbing, more than surprising, to see how rapidly the Trump administration is trying to abandon or undo what is constitutionally not only required, but in some cases permitted."

Becerra said he had reached out to Attorney General Jeff Sessions and to Homeland Security Secretary John Kelly to discuss the immigration-related orders specifically. He was sharply critical of President Trump and his allies, who he said have pursued unconstitutional policies.

"Donald Trump is not just a dangerous and unprepared occupant in the White House. What’s more dangerous is the people who are serving as accomplices and should know better, but are standing by as he does these crazy things," Becerra said. "So much of what the Trump administration started doing turned out to be unconstitutional."

Republicans in California’s legislature say Democrats are going too far to prove themselves as members of the resistance, to the potential detriment of the relationship between state and federal levels of government. Sen. John Moorlach (R), the ranking Republican on the state Senate Judiciary Committee, said the new proposals were a "misappropriation of funds."

"Being antagonistic towards the federal government is counterproductive," said Moorlach, whose family immigrated to the United States from the Netherlands. "There are a lot of immigrants, like myself, that are not amused, in fact offended, that undocumented immigrants are getting subsidized legal assistance."

But Republicans are in the minority in California’s legislature and cannot block legislation, leaving it to Democrats to negotiate with Brown over budget levels.

And the liberal Democratic majority in California’s legislature is eager to take on Trump, on as many fronts as possible. The legislature took the unusual step earlier this year of hiring former Attorney General Eric Holder as their own legal counsel.

"We’re going to use every tool in the tool box to protect our citizens. That means we’re going to take a page out of Texas’s playbook," state Sen. Mike McGuire (D) said in an interview. "The threat [from the Trump administration] to our livelihood, to our economy, to the state budget are very real."

Becerra said he was disappointed and disturbed by new federal sentencing guidelines, laid out by Sessions last week, that instruct prosecutors to seek the harshest possible punishments for drug offenders. Those guidelines stand juxtaposed to bipartisan efforts on Capitol Hill to overhaul the criminal justice system, a program backed by big donors including liberal George Soros and the conservative-libertarian Koch brothers.

The guidelines are especially troubling in California, one of eight states where voters have legalized marijuana for recreational use.

"This is the 21st century. We should not be talking about criminalizing marijuana. We should be talking about regulating marijuana," Becerra said. "I think it’s just a shame that we would think the best way to address serious violent crime would be to start going after folks for small quantities of marijuana."

Former county treasurer awarded $10 million in malpractice suit against Newport Beach lawyer

By LOUIS CASIANO JR.

A jury awarded former Orange County Treasurer-Tax Collector Chriss Street $10 million last week in a malpractice lawsuit against his former Newport Beach lawyer and City Council candidate Phillip Greer.

The lawsuit, filed in 2011, said Greer skipped meetings and breached his fiduciary duty while representing Street in a fraud case a year before.

In 2010, Street had been ordered to pay more than $7 million in damages for mismanaging a trust. He was the court-appointed trustee for End of the Road Trust, which was the successor to the bankrupt Fruehauf Trailer Corp. Street was in that role from 1998-2005, when he was forced out by creditors.

Street was accused of wasting money on failed business ventures instead of protecting the assets of the trust he was hired to liquidate. Court records show he used the trust to pay for resort stays, Botox treatments, a traffic citation for his Ferrari and for a $750 dinner at Spago.

The Orange County Superior Court jury sided with Street on Thursday, May 11, awarding him $7.5 million for professional negligence and another $2.4 million for fraudulent representation.

“I do feel he’s been completely vindicated,” said Street’s attorney Russel Myrick.

Greer’s Costa Mesa-based attorney, Steve Young, said his client plans to file an appeal, saying Street never proved he would have won the first case if not for Greer.

“Mr. Street never demonstrated that he didn’t do the things that he was found liable for … which to me is the first step before you ever point your finger at someone else,” Young said.

Greer’s biggest blunder was missing a pretrial conference that resulted in the judge accepting the facts put forward by the plaintiff and failing to produce documents or witnesses during the trial, Myrick said.

“Therefore before the trial even began, the court accepted the opponent of Mr. Street’s version of events,” Myrick said. “The trial was over before it began. This was a complete failure to provide a defense. It was blatantly obvious that it was malpractice.”

Young contends Greer’s absence at the pretrial hearing made no difference since Street testified in a bankruptcy court that the facts were true. His client provided a solid defense, Young said, adding that attorneys facing accusations of malpractice are in serious trouble regardless of the merits.

“Jurors unload on attorneys because they blame them for having interrupted their lives with a juror’s summons,” he said. “Juries absolve doctors in medical malpractice cases because they have to go to doctors. They cream lawyers because they never see themselves needing a lawyer.”

State Sen. John Moorlach, R- Costa Mesa, who was Street’s predecessor in the Orange County treasurer job and endorsed him in 2006, called for his resignation. The verdict effectively ended Street’s re-election bid that year.

Street was unsuccessful in two appeals.

“The case requires that Street prove but for Phil Greer, he would have had a different result,” Young said. “He never did that.”

Greer, a 19-year resident of Newport Beach, ran against Will O’ Neill and Fred Ameri for outgoing former Councilman Keith Curry’s seat in District 7 last year. O’Neill won with 49.9 percent of the vote. Greer came in second with 26.6 percent.

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