State legislators go unpaid as California reverts to dysfunctional type

Jun 23rd 2011 | LOS ANGELES | from the The Economist print edition

WHAT a lot of history California has been making this month. For the first time since 1933, the (Democrat-controlled) state legislature has the power to enact a budget with a simple majority, thanks to a ballot measure voters approved last year. So it passed a budget on June 15th, meeting the constitutional deadline—also for the first time in years. But the next day Governor Jerry Brown, himself a Democrat, vetoed that budget—apparently the first such veto in California’s history. The budget was not balanced, he said, and contained “legally questionable manoeuvres”.

His fellow Democrats scolded him. Mr Brown scolded them back, and the Republicans to boot. The Republicans were already scolding everybody, and saw no need to stop. Joining this free for all, the state’s independently elected state controller, John Chiang, decided to stop paying legislators. The new budget rules require withholding salaries from legislators for every day that a budget is late, he said. But our budget was not late, the legislators objected. Your budget had gimmicks and was not even balanced, Mr Chiang told them. He will get sued for his pains, it goes without saying.

Mr Brown’s Republican predecessor, Arnold Schwarzenegger, used to call the ritualised drama that is California’s budget process a “kabuki”. But Japanese kabuki plots only start ridiculous and complicated, before speeding up and resolving themselves with a cathartic bang in the fifth act. California will be lucky if it follows such a script. Indeed, Mr Brown’s second spell of governorship now runs the risk of failing in its first year.

Here is how the year has deteriorated so far. In January, facing what was then a deficit of more than $25 billion, Mr Brown proposed to solve half the problem by cutting spending and the other half by extending some temporary taxes. For the cuts, he expected support from his fellow Democrats. For the revenues, he did not ask for support from hostile Republicans, merely for their consent to put that question before voters in a special election, which requires a two-thirds majority in the legislature. The Democrats duly enacted their part, the cuts. But the Republicans refused to agree to put the revenue question to voters. A handful of them almost broke ranks, but then retreated into the safety of their caucus.

All through this the polls, which at first showed support both for the governor and for his proposed tax extensions, have been turning against Mr Brown. This undermines the strategy of going for a special election, even if he could still get one, since voters would probably reject the revenues anyway. Meanwhile, the economy and tax receipts have grown just enough to make Mr Brown’s argument look weaker and to shrink the remaining budget hole—to about $10 billion—but not nearly enough to solve the problem.

So there they are. The new fiscal year starts on July 1st, and California had no budget as The Economist went to press. Standard & Poor’s, a rating agency, says that California’s credit, at A- already the worst among the 50 states, is “at a crossroad”. Voters are angry. So are legislators. So are the governor and his wife, though presumably not their new dog, Sutter. That, though, is about the only bright spot.

from the The Economist print edition | United States

Merck Can’t Recoup $473 Million in U.S. Taxes, Court Rules

By Chris Dolmetsch and David Voreacos - Jun 20, 2011 1:41 PM PT 

Merck & Co.’s Schering-Plough unit isn’t entitled to a new trial after a judge rejected its claim to $473 million of federal income tax refunds, a U.S. appeals court ruled. 

Schering-Plough, which was acquired by Merck for $51 billion in November 2009, sued the Internal Revenue Service in federal court in Newark, New Jersey, in May 2005 to recoup the taxes, which the IRS assessed in 2004 after an audit.

Schering-Plough argued that funds it received as the result of two interest-rate swap transactions weren’t taxable as proceeds of loans from foreign subsidiaries and that the company was being treated unfairly by the IRS, which hadn’t demanded the same taxes from other companies that were in similar situations.

U.S. District Judge Katharine Hayden ruled after a five-week non-jury trial in 2008 that Schering-Plough failed to prove it deserved a refund, and in April 2010 she denied the company’s request for a new trial. The U.S. Court of Appeals in Philadelphia upheld Hayden’s ruling today, saying the transactions were loans and that the IRS may treat taxpayers differently.

“If taxpayers could routinely challenge tax assessments by pointing to others who had not been compelled to pay under similar circumstances, the IRS would be swamped by collateral litigation of this kind rather than being able to focus on whether the taxpayer actually complied with the law,” Judge Juilo M. Fuentes wrote for a unanimous panel.

Merck, based in Whitehouse Station, New Jersey, said in a statement that it’s “disappointed” by the ruling. The company said it is reviewing the decisions and considering its options.

The case is Merck & Co. vs. U.S., 05-cv-02575, U.S. District Court, District of New Jersey (Newark).

Debunking the Prop. 13 debunkers

Opinion L.A.

Observations and provocations
from The Times' Opinion staff

June 6, 2011 |  7:09 am

Jon Coupal, president of the Howard Jarvis Taxpayers Assn., responds to Steve Lopez’s June 1 column, "Debunking the myth of Prop. 13." If you would like to write a full-length response to a recent Times article, editorial or Op-Ed piece, here are our FAQs and submission policy. 
In his latest attack on Proposition 13, columnist Steve Lopez retreats to the ivory tower for moral support. When a USC demographics professor tells Lopez that support for Prop. 13 is based on myth, and that blocking tax increases is pathetic, dishonest and a long-term disaster, Lopez accepts the professor's words as gospel.
The only "myths" to debunk about Proposition 13 are those promoted by the tax-and-spend lobby and public employees unions, which would like you to believe that the state's landmark 1978 initiative to limit property tax increases has "devastated" California's education system while at the same time not providing any real benefits to homeowners and renters today.
First and foremost, Proposition 13 did not dictate how our government would spend property tax revenues. It simply set a property tax rate of 1% and limited annual tax increases to no more than 2%.
Proposition 13 is not responsible for shifting the responsibility of education funding from the local level to Sacramento. Years before Proposition 13 passed, the California Supreme Court ruled in Serrano vs. Priest, an equal-protection case, that school funding must be equalized for all California students. That meant education funding could not be based on property tax receipts, because wealthy neighborhoods with high property values could spend more per student than poor neighborhoods with lower property values. The funding of our education system based on varying property tax receipts was found unconstitutional, but you never hear the Proposition 13's opponents discuss this ruling or its implications.
You also never hear them talk about the fact that spending per pupil has actually increased 30%, adjusted for inflation, since Proposition 13 passed in 1978, according to research by the Howard Jarvis Taxpayers Assn.
Second, everyone benefits from Proposition 13. The moment California homeowners get the keys to their new home, they benefit from the law's protection -- and not just when the home value soars or if they've lived in their home for decades. Proposition 13 protects Californians from potential annual percentage increases in their tax bills in the double digits or more. For example, just a few months before Proposition 13 passed in 1978, then-Los Angeles County Assessor Alexander Pope announced that many parcels of property would see assessed valuations increase by as much as 100%. 
Proposition 13 saved many homeowners and businesses by simply setting the tax limit to provide stability. It allowed property owners to budget for their future and gave them protection from runaway taxes that would have forced many to sell their homes.
Government also benefits from Proposition 13, protecting it from severe yearly swings in revenue, including when the real estate market crashes and results in huge decreases in property value. The value reserve built into the system lets government predict revenues coming in, although, unfortunately, that doesn't prevent many politicians from spending above and well beyond that amount.
And renters also reap benefits. Without Proposition 13, you can be sure that higher business property taxes on apartment buildings would be passed on, in the form of higher rents, to working families and seniors living on fixed incomes.
The truth is, the system works. Critics such as Lopez say commercial property owners receive more benefits from Proposition 13. But since the measure passed, the assessed value of homeowner property has grown at an average of 8.1% per year, and assessed value of non‐homeowner property subject to Proposition 13 has grown an average of 8.4% per year, according to data from the California State Board of Equalization.
Finally, California property taxes are not among the lowest in the nation. Even with Proposition 13, we still rank higher than 36 other states when it comes to per-capita property taxes, according to the Tax Foundation. Without Proposition 13's protections, California taxpayers would fare far worse and property taxes would be at or near the top, just as we are when it comes to sales, car, gas and personal income taxes.
There is one thing Lopez and I can agree on: California politicians are too busy bickering and tinkering rather than doing their jobs. But instead of blaming California's problems on Proposition 13, it's time to focus on the real issues, such as runaway pension costs and unaccountable politicians refusing to rein in spending, while beleaguered California working families are forced to cut back.
-- Jon Coupal
RELATED:
Editorial: To fix California's budget, we need taxes too
Tim Rutten: It's time to pass California tax hikes legislatively
Editorial: A broken budgeting process
Steve Lopez: It's time to tinker with "untouchable" Prop. 13