THREADING THE LOOPHOLES
Saying they wanted to help Gov. Arnold Schwarzenegger in his search for "waste, fraud and abuse" in state government, Assembly budget writers conducted a series of eight hearings in that pursuit. They found some potential savings in predictable areas of concern: a new cottage industry of Medi-Cal fraud in which middle-class families hide assets in order to get government-subsidized nursing home care, shoddy accounting that allows overpayments to child-care providers to go undetected, a freewheeling fiscal attitude in the Corrections Department that results in routine, budget-busting overspending.
But the majority Democrats also found something else that meets their definition of waste and abuse — tax loopholes that have gone unexamined for years and result in a publicly subsidized windfall of tens of millions of dollars annually to those citizens who benefit.
One outgrowth of the Democrats' waste, fraud and abuse hearings is a recommendation that the Legislature annually review every loophole that has been carved into the state Tax Code over the years. "We are ready and willing to do oversight of tax expenditures, so they receive the same type of annual review as any other expenditure," said Assembly Speaker Fabian Nunez, D-Los Angeles.
On the Democrats' proposed chopping block for this year: the repeal of a sales-tax exemption for vehicles, vessls and aircraft purchased out of state. Known as the "yacht" loophole, it has been exploited largely by boat owners who purchase yachts out of state then wait a leisurely 90 days before bringing them home to California — thus avoiding a 7-plus percent sales tax, which at $7,000 per $100,000 in sales price, can add up on luxury items. The Democrats' proposal is to extend to one year the period that a vehicle, vessel or aircraft purchased outside the state must remain outside the state to qualify for the tax loophole. Estimated revenue to the state: $34 million.
Also likely to be proposed for elimination is a teacher tax credit established by former Gov. Gray Davis at the height of California's dot-com tax revenue boom. Although it's difficult, at a time when the state remains desperate to fill all its classrooms with fully credentialed teachers, to call a tax break for teachers a "loophole," it does give one class of taxpayers a tax break not available to most folks. Eliminating it would result in $170 million additional revenue to the state.
It will be interesting to see whether tax loopholes will fit into Schwarzenegger's definition of waste and abuse.