Plug State Tax Loopholes
It’s a tax loophole you could drive a Mercedes through, or a motor yacht or a Learjet, at a cost to the state of California of $55 million a year. Buyers of vehicles, from econobox cars to RVs costing as much as a house, can legally avoid the state sales and use tax by taking delivery outside the state -- in sales-tax-free states such as Oregon -- and parking them for 90 days. The exemption was meant to protect people who moved to California soon after buying a vehicle. Instead it mostly serves Californians able to wait 90 days to take delivery of a new car, plane or boat.
A bill by Assemblyman Lloyd Levine (D-Van Nuys) would close this obvious loophole by generally requiring that the vehicle remain in the state of purchase for a year instead of 90 days. Amazingly, the bill, AB 694, is stalled in the Senate by protests that it amounts to a tax increase. The protesters include yacht brokers, airplane makers such as Cessna and Gulfstream, and the Howard Jarvis Taxpayers Assn. -- along with a large enough minority in the Senate to block passage. The Legislature can grant a tax deduction, credit or exemption by majority vote, but can only repeal it by a two-thirds vote.
It is impossible to know whether tax credits, particularly those given directly to businesses, create new jobs or other tangible benefits because the state doesn’t demand any measure of success.
Problems like these were the topic of recent meetings between tax officials and an Assembly group trying to improve oversight of the state budget and tax systems. One consensus from the meeting was that future legislation should spell out what is expected from any tax deal and provide some way of measuring the benefits. AB 990 by Assemblyman Mark Ridley-Thomas (D-Los Angeles) would, for instance, require the governor to report annually on all tax deductions and credits, with estimates of the lost revenues. Whatever the method, the state needs a way to repeal tax breaks when they don’t do the intended job.
State officials estimate that all tax credits, exemptions and deductions add up to as much as $35 billion a year lost to state coffers. That includes breaks that won’t be repealed, including the home mortgage interest deduction and charitable-donation deductions. But there are easier targets, including the mortgage interest deduction for vacation homes.
The state Board of Equalization lists billions of dollars in sales tax exclusions, including snacks, classified as an exempt food at an estimated $500-million-a-year loss. A past attempt to tax candy created an uproar and was given up. Better sense should prevail now. The sales tax base should also be broadened to services such as accounting, which would allow the overall rate to be slightly reduced.
Legislators have feared tinkering with any tax since Proposition 13 passed in 1978, but loopholes such as the 90-day rule cry out for plugging. Members of both parties in the Assembly study group under Democrat Darrell Steinberg of Sacramento deserve support for shining light on exclusions and exemptions that make it harder on other taxpayers. Loopholes amount to waste and abuse just as certainly as do misspent contract funds or workers’ compensation fraud.