Windfall to State May Be Fleeting

Corporations scurrying to meet a tax amnesty deadline deposited at least $2.3 billion into the state treasury over the weekend -- enough to erase a substantial portion of California’s budget shortfall.

The windfall could reshape the budget debate in Sacramento, bringing some relief as lawmakers ponder painful cuts in state programs to close a budget gap estimated at $8.5 billion.

The cash -- which state officials say they are still counting and ultimately may reach $3 billion -- came mostly through a controversial program that allows companies and individuals accused of owing back taxes to come clean and avoid facing tough new penalties as of April 1.

The California Taxpayers Assn., an anti-tax group representing corporations in the amnesty filings, said the companies would continue to fight in administrative hearings and in court to get their money back.

State officials concede that many of the corporations may win, and are trying to determine how much of the disputed cash is safe to use to close the budget gap. The money would be one-time only, and budget experts warn against using such funds for ongoing programs. But it could significantly reduce pressure on lawmakers and the governor to raise taxes or cut deep into programs as they near the July 1 deadline for approving a budget.

“The temptation will be to use it to balance the budget,” said Assemblyman Joe Canciamilla (D-Pittsburg). “The hope will be that the state will ultimately prevail and just won’t have to pay it back, or that the economy will improve and enough new revenue will come in to cover it.”

Assemblyman Darrell Steinberg (D-Sacramento), who last year chaired the lower house’s budget committee, predicted the money would be used to help restore some funding to education.

“If there is one area where that one-time money should be spent, it is K-12 education,” he said. “Maybe for this year, it can help solve one of the major stumbling blocks between the governor and the Legislature.”

“It’s a positive sign,” said Assembly Speaker Fabian Nunez (D-Los Angeles). “But we have to see if it’s a real windfall or just some companies trying to protect themselves against potential liability.”

State Controller Steve Westly, who sponsored the program, called the sudden influx “extraordinary ... something every Californian should view as good news.” Still, he said, “I am calling for prudence.... We have a mountain of cases, a mountain of checks. This will take us some time to review.”

News of the money caught lawmakers by surprise. As of early last week, only $70 million had trickled in from the latest amnesty program; they had projected that it would generate about $250 million this year.

But the last-minute surge of cash echoed last year’s windfall from a different amnesty program for those accused of using abusive tax shelters. Lawmakers had anticipated that program would generate $90 million. Instead, $1.4 billion came in.

“I am so overwhelmed by the success,” said Assemblywoman Judy Chu (D-Monterey Park), who wrote the bill for the current amnesty program. “Even if half of the money was returned through the appeals process, that would still be $1.5 billion.”

The amnesty program permitted taxpayers who had been delinquent in the past to update their returns and disclose unreported income or reconcile overstated deductions. The new penalties equal 50% of interest due on any unpaid taxes.

Many of the taxpayers who deposited checks are involved in a lengthy appeals process; their cases could take up to three years to resolve. Meanwhile, the money remains in the state treasury.

The names of taxpayers participating in the program are confidential. Leading up to the deadline, several major corporations joined a lobbying effort against some provisions of the program. Among them were Apple Computer Inc., Cisco Systems Inc., General Electric Capital Corp., Intel Corp. and Citigroup Inc.

A number of trade groups also became involved, such as the American Electronics Assn., California Realtors Assn., California Manufacturers & Technology Assn., Silicon Valley Manufacturing Group and professional tax lawyers and preparers.

Anti-tax groups argue that the amnesty law was too broad, leaving corporations that did everything they could to follow the law exposed to hundreds of millions of dollars in potential penalties. Larry McCarthy, president of the California Taxpayers Assn., predicted that most of the money that came in over the weekend would ultimately go back out the door.

“This is money coming largely from legitimate businesses that have a legitimate dispute with the government,” he said. “They paid the money under protest to protect themselves.... It is embarrassing that we can’t be any more precise about how to handle taxing corporations.”

The association had lobbied tax officials to change the amnesty rules to protect corporations it said were doing their best to follow the law. But Democrats opposed making such changes, warning it would allow too many big taxpayers that have not paid all they owe to slip through the cracks.

At a meeting of the three-member Franchise Tax Board last month, Gov. Arnold Schwarzenegger’s finance director, Tom Campbell, was alone in supporting changing the amnesty program to give corporations pursuing a legitimate dispute with the government protection against the new penalties.

“These kind of numbers certainly get your attention,” said H.D. Palmer, a spokesman for the state Department of Finance. “But before anybody starts popping champagne corks, we believe a substantial amount of this money will go back to the people who are paying it.... A number of companies we believe were simply buying a short-term insurance policy.”

Palmer said the administration had projected that about $330 million would come in through the program. “To get nearly 10 times that amount in two days, we don’t think is sustainable,” he said.

But, Palmer said, “you tell people in this building that there is $3 billion more and their eyes get really big, as does their appetite to spend it.”