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CALIFORNIA SCHEMINGby
Tad DeHaven Jun 23, 2004 California expatriate Gil Hyatt is fighting the law and the law hasn't won--yet.
In fact, the law--in this case the California equivalent of the IRS known
as the Franchise Tax Board or FTB--is on its heels.
Back in the early 1990s then-Californian Hyatt decided to pursue his livelihood
as an inventor in neighboring Nevada. After all, it is a Constitutional right
to live in the state of one's choosing. But when Mr. Hyatt proceeded to earn
millions of dollars from one of his inventions after moving to Nevada, the notoriously aggressive
FTB tried
to snatch a piece of the pie.
Even though Mr. Hyatt properly filed a California "Part Year Income Tax
Return" for 1991, the FTB hit Hyatt with a "residency audit" almost two years
later. Claiming immunity from Nevada law, FTB auditors proceeded to physically
trespass on Hyatt's Nevada property, interrogate his neighbors and acquaintances,
and send intimidating letters to business associates that effectively spoiled
his reputation and relationships. As if this wasn't bad enough, the FTB has
determined that Hyatt owes California $7 million in income taxes plus another
$33 million in penalties and interest.
Mr. Hyatt promptly filed suit against the FTB for its actions but the FTB
attempted to block the suit via an immunity claim. Almost a decade later
the U.S. Supreme Court unanimously agreed that the FTB's immunity assertion
was nonsense and that Hyatt's case against the FTB could proceed. However,
although a battle for taxpayer rights was won, the war has not been.
The sense one gets from talking to Californians and reading news accounts
of FTB controversies is that taxpayer abuse is widespread. But individual
taxpayers like Gil Hyatt aren't the only ones complaining.
In January 2004, CFO magazine published
the latest results for their survey of corporate tax executives regarding
state tax environments. As has been the case in the previous surveys, California
ranks near the top as one of the states "that corporate tax officials love
to hate."
According to the survey participants, California has the second least fair
tax environment in the country. California is considered to be the second least desirable state in
which to locate or expand a business.
And, California earned the distinction of being behind only New Jersey
in having the country's worst auditors
when it comes to avoiding escalation of tax disputes. CFO's latest survey also reveals that
California has retained
its ill fame (held since 1996) as the most aggressive state in the country
in terms of auditing out-of-state companies. Old habits, like harassing
taxpayers beyond California's borders, die hard at the FTB.
California's uninviting tax rates are also fueling the FTB's overly aggressive
behavior. California's top marginal income tax rate of 9.3% is one of the
highest in the nation. And, on a rate basis, California has the second worst
tax climate in the United States according to the Tax Foundation. It apparently
hasn't dawned on Sacramento politicians that cutting taxes and reigning in
the tax cops would increase tax revenues
as entrepreneurs and companies locate to California and generate economic
growth that fills wallets and state coffers alike.
Unfortunately, cutting taxes is probably a moot issue right now given the
financial predicament California continues to face. However, there is nothing
other than a lack of political will preventing California politicians from
making a serious attempt to end--or at least constrain--the FTB's ability to
make California so blatantly hostile to taxpayers.
Assemblyman John Campbell has twice submitted legislation that would increase
oversight of the FTB's dealings with taxpayers while inhibiting the FTB's
ability (and incentive) to release private taxpayer information to the public.
Campbell's bill was killed both times in committee due to concerns from other
legislators that the bill's wording is too general and would overly constrain
the FTB. Campbell and his staff are not giving up and are currently revising
the bill's language.
Thus far a busy Governor Schwarzenegger has remained neutral on the taxpayer
rights issue. Hopefully Schwarzenegger's "California Performance Review" of
state government will eventually lead to FTB reform. Assemblyman Campbell's
FTB reform legislation already offers the governor a ready-made vehicle to
climb into. The governor's star power and historically high voter approval
ratings might be all that is needed to move Campbell's legislation out of
committee and toward enactment.
In the meantime, Gil Hyatt's case against the FTB is expected to go to trial
in August 2006. The governor's latest budget would provide $1.3 million to
the FTB to hire Nevada lawyers for the case (and a total of $3.8 million
over the next three years). The California Department of Justice has already
wasted over $4 million on outside counsel. One shudders to think about what
the FTB and DOJ have spent internally. Even worse, the state is facing a
potential liability of $200 million in damages. Before more good money is
thrown after bad, California politicians need to face reality. The state literally cannot
afford to allow its heavy-handed tax agency to maintain such a stranglehold
on taxpayers, wherever they may live.
Tad DeHaven is an Economic Policy Analyst with the 350,000-member National
Taxpayers Union. Related Links: |
