Hunt for Tax Cheats Is Curbed by Governor

Gov. Arnold Schwarzenegger is putting the brakes on efforts to give state investigators more tools to hunt tax evaders, following a period of aggressive enforcement that has generated billions of dollars for California coffers.

The governor has vetoed several bills that would allow agents to go after more businesses and individuals who cost the state millions by cheating on their returns, or not filing at all. He said the measures were flawed and would have unfairly burdened employers.

The resistance from the administration comes as some of the state’s most influential business and anti-tax groups charge that investigators have overstepped their boundaries and begun harassing Californians.

The organizations, including the California Taxpayers Assn., the Howard Jarvis Taxpayers Assn. and the California Chamber of Commerce, say officials need to find less invasive ways to reclaim about $6 billion in state taxes that are owed each year but not paid.

Supporters of the measures that Schwarzenegger rejected said they were common-sense reforms that would have closed loopholes that big businesses and wealthy individuals have been able to slip through.

“These vetoes basically say to these people that they can flout the law without repercussions,” said Lenny Goldberg, president of the union-backed California Tax Reform Assn. “Ordinary taxpayers can’t do that.”

The governor blocked efforts to increase penalties on retailers who filch the sales taxes they collect, and on companies that don’t collect taxes when they should. A proposal to help authorities garnish wages of convicted tax evaders for as long as their debt is unpaid also was vetoed.

State tax officials said another of the governor’s vetoes could allow some people snagged by the Internal Revenue Service for dodging taxes to avoid coughing up California’s share, costing the state tens of millions of dollars.

Republicans and business groups make no apologies.

“We need to encourage businesses to come to California,” said Assembly Revenue and Taxation Committee Vice Chairwoman Mimi Walters (R-Laguna Niguel). “If we start to penalize them for every little thing, we will push them out of the state.”

Administration officials declined to discuss the measures beyond providing the short veto messages the governor sent to the Legislature for each one. The officials said the vetoes reflected not an effort by Schwarzenegger to rein in tax investigators, but flaws in the bills.

Sen. Carole Migden (D-San Francisco) doesn’t buy it. Her bill, SB 323, would have increased penalties on retailers who collect sales tax but keep it.

“My measure merely stated that people can’t pocket the state’s money,” she said. “Who could object to that?”

The governor wrote in his veto message that the bill, which would have slapped retailers with a penalty equal to 50% of the unpaid taxes, “creates a rigid and overly severe punishment.”

The veto came after the Chamber of Commerce sent lawmakers and the governor’s office a letter opposing the measure. “There could be many benign reasons why a retailer inadvertently fails to remit sales taxes,” the letter said, adding that it would be difficult for businesses to prove that they didn’t intentionally defraud the state.

Migden said her bill would have given tax officials the authority to let businesses off the hook if they had a good excuse.

As for the proposal to garnish the wages of scofflaws until their debt is paid, Schwarzenegger said he was “supportive of the author’s intent to increase tax collections,” but the bill “does so at the expense of employers who have done nothing improper.”

The author of the bill, AB 853, Assemblyman Dave Jones (D-Sacramento), accused the governor of “letting people with significant tax debts off the hook.”

And Democrats said they were bewildered by Schwarzenegger’s refusal to sign a bill that would have required taxpayers to pay what they owe to California after an IRS judgment against them.

Such collections have long been the practice of the state Franchise Tax Board, California’s version of the IRS.

But a state appellate court recently ruled that the taxpayer doesn’t have to send in a check if the IRS judgment comes four years after the taxes were due. The court reasoned that Californians were protected under a state statute of limitations that tax officials said was never intended to apply to such cases.

The decision jolted the Franchise Tax Board. Officials there said it was common for tax evasion cases to drag on for years. They said the governor’s veto meant that the state would be unable to collect $30 million from known tax cheats.

The governor said in his veto message that it was “inappropriate and simply unfair to taxpayers to change laws retroactively.”

The move angered Democrats.

“I’ve never seen Republicans do so much to enable tax cheats,” said Assembly Revenue and Taxation Committee Chairman Johan Klehs (D-San Leandro).

Since Schwarzenegger took office two years ago with a vow not to increase taxes, Democrats have doubled their efforts to more aggressively collect the taxes already on the books.

Their push was given a boost early in Schwarzenegger’s tenure, when an enforcement measure signed into law during Gov. Gray Davis’ last days in office unexpectedly began to bring in billions of dollars.

The law gave taxpayers suspected of using illegal shelters a grace period to pay all they owed -- while increasing penalties for those who didn’t.

Thousands of invitations to join the amnesty were sent to individuals and businesses suspected of hiding profits. The initiative netted the state more than $4 billion.

That money flowed into California’s coffers amid deliberations over the 2004-05 budget, when lawmakers had a huge deficit to overcome. They used the money to avoid some cuts in healthcare, social services and other government programs.

Democrats used the momentum to pass another amnesty last year. That measure was broader; even companies involved in complicated tax disputes had to pay millions of dollars to the state before their cases were resolved or face stiffer penalties if they lost.

“There is a residue of bad feeling in the business community about that,” said Ron Roach, spokesman for the California Taxpayers Assn.

Roach said Cal-Tax, whose president sits on the board of a campaign committee allied with Schwarzenegger, did not submit official letters opposing bills the governor vetoed. But Roach said the association was pleased that they were all blocked.

One of the issues Cal-Tax has been most vocal about is the need to preserve California’s tax breaks for businesses.

For the second year in a row, Schwarzenegger declined to sign a bill that would have forced the state to take a closer look at the tax breaks it gives businesses and whether they are creating jobs, their intended effect.

The bill’s author, Assemblyman Mark-Ridley Thomas (D-Los Angeles), said state officials analyzed only how much the tax breaks cost in lost revenue -- not whether they stimulated the economy.

Schwarzenegger said current studies were sufficient and called the measure, AB 168, “redundant and unnecessary.”