CVIndependent

Fri04262019

Last updateTue, 18 Sep 2018 1pm

Tax reform may not be much more than a glimmer in the eye of Republicans in Washington D.C., but their promise of lower rates and closed loopholes appears to be already affecting state and local finances.

Exhibit 1 comes in the form of a disappointing haul for California tax collectors this summer: In June, the most recent month for which figures were available, the state took in $361 million less than lawmakers planned for in the state budget.

While there are plenty of reasons for revenues to miss their projected mark—an unexpected economic cold snap, perhaps, or a forecasting model miss—the fiscal sleuths at the Legislative Analyst's Office suggest that something else could be afoot. They wrote in a recent report that “high-income taxpayers may be deferring income and/or tax payments to late 2017 or even 2018 in anticipation of a federal tax cut."

It’s a phenomenon that may be sweeping the nation: States such as New York and Massachusetts, both of which levy state income taxes, report lackluster receipts.

The evidence for California is incomplete, but compelling.

For one, state sales taxes actually came in higher than expected. So did withholding receipts—the money that gets taken out of your paycheck. That rules out the possibility that the state economy has taken an unexpected dip.

What came in under expectations are the estimated payments, made four times per year, that high-earners pay on income from capital gains, businesses, interest payments and dividends. Corporate tax payments also came in below the forecast.

More importantly, says Justin Garosi, an economist at the Legislative Analyst’s Office and one of the authors of last month’s report, estimated payments are only up 3 percent since last June, despite the S&P 500 stock index booming over 15 percent over the same period. Corporate America and Wall Street have had a blowout year, so where are their tax payments?

“For wages and salaries, it is generally not possible to have your employer delay a paycheck, so it gets recorded in 2017 instead of 2016,” said Garosi. But those who earn a living by, say, selling stocks, often have the luxury of picking their payday. These taxpayers also have the option to simply fork over whatever they paid last year as an estimate on current earnings and then make up the difference later, explains Garosi.

 “The puzzle we were talking about is that stock prices are up big over last year, but estimated payments aren’t,” he said. “This suggests that a lot of people are paying what they paid last year, even though they expect to eventually have more liability in 2017 than in 2016.”

One reason to do that: You expect to pay a lower tax rate next April.

It’s still too early to say whether that’s exactly what’s going on. The state’s high earners may be holding off on cashing out for a variety of reasons. More detailed information—about which types of taxes are being paid by which groups, and when—won’t be available until at least 2018.

“Even if we did have complete data on capital gains income, we couldn’t be certain how much the level of gains was affected by expectations of federal tax changes,” said state Finance Department spokesperson H.D. Palmer.

But what’s clear is that the stock market is soaring, and estimated payments are not, a trend that “would support the notion” that deferral is taking place, he said.

This wouldn’t be the first time this year that the premonition of lower taxes has been blamed for throwing a wrench into California finances. When it comes to taxes, expectations can be just as important as reality.

In the weeks after the election, the market for California municipal bonds—which are tax-exempt and fund most local development projects—took a dip. Some investment experts saw this as a sign that—with possible tax cuts on the horizon— the appeal of low-return but tax-free investments had worn thin. Prices have since come back up, but may dive back down if Congress gets serious about tax reform.

Similarly, affordable-housing developers across the state began complaining earlier this year that they were having a harder time raising cash from investors. These projects often are supported by the state’s Low Income Housing Tax Credit program, which allows banks and other big investors that put money into below-market housing projects to write off a portion of their tax bill.

But the election had a profound effect on the state housing market, said Matt Schwartz, president of the California Housing Partnership Corporation, a state-created nonprofit that provides financial and policy consulting on affordable-housing issues. He said in deals the corporation helped oversee or advise, within a few weeks of the election, prices dropped by more than 25 cents per dollar of credit. Investors indicated a diminished appetite for tax-saving investments.

Those prices have since come back up, but only slightly. He said offers are still 10 to 15 percent below the pre-election high. 

“We know of at least $10 million (worth of projects) where local governments pretty much had a gun put to their head and were told that they had to step up, or hundreds of homes ready to start construction would just fall apart,” he said. “Every one of those lost percentage points is huge in terms of how many fewer affordable rental homes will get produced.”

But investors can only make the argument that tax reform is on the way for so long. Nearly seven months into the current term, Congress has been short on major legislative accomplishments—a fact highlighted by its failure to repeal the Affordable Care Act. Rewriting the tax code, or just cutting top rates, can’t be done overnight.

As for the state’s finances, the future may be bright. If, in fact, high earners have been holding back on the hope of a friendlier tax code, the good news for the state is that these taxpayers can’t kick the can forever. “As high-income tax filers eventually take gains from investments and businesses and make delayed tax payments, these eventually would show up in state revenue collections,” wrote the Legislative Analyst’s Office.

No matter what happens in Washington D.C., the state of California could see a big payday next April.

Ben Christopher is a contributing writer at CALmatters.org, a nonprofit, nonpartisan media venture explaining California policies and politics.

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In the early years of the Obama era, then-Sen. Jim DeMint embodied a series of contradictions in the American character.

The hard-jawed and bitter-faced South Carolinian was simultaneously a theocrat, a cynic and a salesman. What he sold, as salvation, was hate and fear. He realized before the rest of us that it does not matter what politicians say or do, as long as they can demonize their enemies, turning them into villains that the American people can love to hate.

DeMint came from the fundamentalist, mill-village town of Greenville, nestled in the piedmont at the foot of the Blue Ridge Mountains, not far from the North Carolina border. BMW and Michelin have recently turned the town into a somewhat more cosmopolitan place. But 20 years ago—when I finally escaped—it was a town that produced dire, dour and yet grimly visionary people, a severe, joyless place whose preachers obsessed over hell fire and the enjoyable things other people may be doing to hasten it.

DeMint galvanized the Tea Party with this shtick, but he could only take it so far: It was a little too grim for the American Sucker. DeMint played the part like a great character actor—Harry Dean Stanton playing Ronald Reagan. Trump came along and brought a little P.T. Barnum to the act, taking DeMint’s gruesome view of America at war with itself and carnivalizing the carnage, in the same way televangelists like Jimmy Swaggart made the hell-fire sermons they heard in small Southern churches palatable to the masses on television.

“The bigger government gets, the smaller God gets,” DeMint said in a radio appearance in 2011. Trump echoed this in May when he told a crowd at the fundamentalist Liberty University, “In America, we don’t worship government; we worship God.”

Perhaps DeMint was savvy enough to know he would do better as a vicar or an éminence grise, providing ideas to the crown rather than being the front man: The Greenville in him was still a little too mirthless to break through to the next level. He left the Senate on Jan. 1, 2013, to take over the ultra-conservative think tank The Heritage Foundation.

During last year’s presidential election, the foundation remained largely silent on Trump, putting DeMint in a perfect position to help guide the seemingly shocked and ill-prepared transition team. It provided policy papers, personnel and a list of Supreme Court nominees, deeply influencing the beginning of the Trump era.

So it was a shocker—and sort of admirable—when the Heritage board ousted DeMint in May, with influential members arguing he had dulled the intellectual edge of the foundation by making it too activist.

After his Heritage ouster, the former senator went to work for the Convention of States Project. This is a group that wants to invoke Article V of the Constitution to call for a convention to amend the Constitution.

Article V outlines two ways to add an amendment to the Constitution—and one of them has never been successfully employed before. Each of the 27 existing amendments has been proposed by two-thirds of both houses of Congress and ratified by three-fourths of the states. In the other way, two-thirds of the legislatures of the states can “call a convention for proposing amendments.”

The conventional, previously used way is politically impossible at present, and to a man like DeMint, undesirable. But the alternate way, relying on the states as it does, is almost too perfect an ideological vehicle. DeMint calls the Convention of States the next stage of the Tea Party, which wanted to limit federal power. It makes ideological sense for him to latch onto state legislatures’ ability to change the Constitution to limit federal power.

But the crazy thing: It might actually be possible. Two-thirds of 50 is 34. That’s how many state legislatures would have to request a convention. Republicans hold both houses in 32 states. If a convention relying on state legislatures would ever work for the right, it would now.

Twelve states have already requested a convention to amend the Constitution. Over the last few weeks, DeMint was lobbying hard in North Carolina to make it the 13th. It passed the Senate, and failed in the House, which later voted to reconsider it.

One of the big problems is the possibility of a “runaway convention.” The Convention of States argues that such a convention could be limited to a single topic: limiting federal control. But because a constitutional convention has never happened, no one knows how it will go.

As for the desire of DeMint and his crew to limit federal control: They want to institute congressional and Supreme Court term limits; mandate a balanced budget; and eliminate federal regulations. While it seems like such a focus may be opposed to the Trump regime, it fits in perfectly with its stated goal of the “deconstruction of the administrative state,” as Steve Bannon put it.

And Trump’s new voter commission—headed up by Kris Kobach, a dour Kansas extremist who is the perfect DeMint counterpart—might make the possibility of a new states-driven, conservative-leaning constitutional convention even more likely. The Trump/Kobach commission is requiring states to give voter data to the federal government (although many have refused), claiming, sans any evidence, that widespread voter fraud cost Trump the popular vote. Many fear there is an alternative motive to this data collection—namely, that it will be used to further restrict voting.

The state-level dominance that Republicans presently enjoy is due in large part to gerrymandering, and successful attempts to limit the votes of minorities and others who might vote Democrat. (The pusillanimous posturing of the Democrats doesn’t help.) If they are further able to control the turnout, Republicans will be more likely to gain even more states, increasing the likelihood of a constitutional convention.

The contradiction gives yet another glimpse into today’s so-called conservative movement, and is reminiscent of Attorney General Jeff Sessions’ own hypocrisy—he claims to be pro-states’ rights, but is rejecting state decisions to legalize cannabis and is trying to force states to comply with big-government mandatory minimum sentencing. Conservatives are speaking out of both sides of their mouths, saying they want to strip power from the federal government, but using the federal government’s power to do so, by first attacking citizens’ voting rights.

Democracy in Crisis is a joint project of alternative newspapers around the country, including the Coachella Valley Independent. Baynard Woods is editor at large at the Baltimore City Paper. Send tips to This email address is being protected from spambots. You need JavaScript enabled to view it.. Twitter @demoincrisis. Podcast every Thursday at www.democracyincrisis.com.

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