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There’s an air war brewing over the southeast San Fernando Valley.

In recent months, the FAA has altered departure patterns from Burbank Airport to take advantage of new technology (known as Next Generation Air Transportation System, or NextGen), designed to provide better separation of incoming and departing aircraft, as well as improve efficiency.

Many residents along the Studio City hillsides and adjacent neighborhoods have reported increased noise as some departures have shifted to a more southerly path, which takes them south of or over Ventura Boulevard.

I recall the outcry back in 1987 concerning a proposed addition of gates. There was a hearing at a local school attended by residents of Valley Village and adjacent areas.  They were concerned about the increased noise levels which would result from the expansion. My wife and I, at the time new to the neighborhood, were there, and shared the same concerns.

Since then, there has been a definite reduction in noise due to improvements in engine technology; however, it is still very noticeable.

The Studio City Residents’ Association is opposing the changes, as is Studio City for Quiet Skies, a coalition of residents. They claim their quality of life has been adversely affected.

They are asking that the FAA return departure paths back north of the 101, an area the organizers describe as a “natural noise corridor.”

It is rather audacious of them to describe the neighborhoods around the 101 in that manner, as if Studio City deserves special consideration over the rest of the southeast Valley.  If anything, SCRA and SCQS are throwing some of their own residents under the bus – or perhaps I should say, under the plane – those living generally north of Colfax Meadows have long been subject to some of the same noise levels as Valley Village and North Hollywood.

As a frequent flyer from Burbank Airport and a resident of Valley Village, I can say with certainty that many flights still traverse the skies north of the 101 or directly parallel to it. From the air, I have a clear view of my street as my flight banks to the north soon after we clear the runway. Details of the terrain below are close enough to be evident. From the ground, I can watch SWA parallel our street.

Valley Village Homeowners Association has informed our elected officials that we favor a shift of  departures to the south. Letters were sent to Representatives Sherman and Cardenas, and to Councilman Krekorian and City Attorney Feuer. We stressed that no one area should bear a disproportionate share of the noise;  that our interests are every bit as important as Studio City’s.

It is worth noting that Councilman Paul Krekorian and City Attorney Mike Feuer co-signed a letter to the FAA in support of the SCRA and SCQS position, but did not consider the overall impact to the greater community; that there would be some relief for other residents.

When we asked their offices if they could write on behalf of Valley Village, they said FAA issues are not within their scope.  That is a true statement, but why did they involve themselves then?

Burbank Airport, despite the inherent noise associated with airport operations, is a net asset to the Valley.  When it comes to flying regionally, it is the hands down choice over LAX for all of us this side of Mullholland.

This is not to say there are no concerns regarding the airport – for example, we must pay attention to the plans for the new terminal, advocate for soundproofing of schools, where needed, throughout the East Valley.

The FAA has the legal authority to implement flight path modifications in the interests of safety and efficiency, regardless of public or political input.

Perhaps, then, this conflict is all moot, but sharing the noise is only fair.

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Give the senator credit. He keeps trying to peddle his “tax modernization” bill, altering subsequent versions to deal with the opposition or disinterest it has received so far. His rationale is that today’s state tax structure does not reflect the current nature of the economy, one that is based more on services than in the past, and is far more volatile due to its growing reliance on personal income tax.

According to the state’s analysisBeginning on January 1, 2020, SB 993 imposes the tax (on the receipt of the benefit of a service by a business in California) on a “qualified business,” defined as “a person, corporation, partnership, sole proprietorship, limited liability company and limited liability partnership engaged in business to provide a product or service for the purpose of producing income taxable under federal income tax law.”

The rate business will pay starts at .75% in 2020 and climbs to 3% in 2022, thereafter.

The current sales and use tax on goods will be reduced by .5% in 2020, then to 2% by 2022.

The state revenue impact has not been estimated.

Senator Hertzberg told an audience at a recent community breakfast that the end result would be revenue neutral.  As I reported earlier, it is advisable to check his math, since he considered additional taxes of $10B per year that would have been generated by his original bill to be revenue neutral.

SB 993 is as complex as any tax legislation can be, so any projection as to its revenue impact is premature, except perhaps in Hertzberg’s mind. If he has run the numbers -even at the 30,000-foot-level – that supports its neutrality, then why not share them?

Sales and use tax revenue has decreased from 61% of the general fund back in 1950, to 20% today, and the service industry has grown much larger than the agricultural and manufacturing sectors. But data published by the California Department of Finance show sales and use tax revenue has grown from $2B per year in 1970 to $37B today. So, while a much smaller share of the pie, it is a much larger pie. How big a pie do we need, or can we afford?

Let us not forget that service companies pay income taxes, too, along with sales taxes on purchased goods.  The growth of this sector, then, has increasingly contributed to the state’s treasury over the years.

So to say California’s tax collections have been limited by the shift in the economy’s constituent parts is misleading.

Understanding the sources of tax revenue is also important.

For example, take Subchapter S corporations. These are hybrid entities resembling partnerships but limit liabilities (as C corporations do). The net income is passed directly to the owners, not through declared corporate dividends.  The pass-through eliminates double taxation associated with C corporations (on the corporate tax return and again on the individual shareholders’ personal returns to the extent of dividends).

Partnerships and sole proprietorships also pass earnings on to the owners in a similar fashion, also avoiding double taxation.

The use of pass-through structures has increased significantly since 1980: in 2013,  U.S. income earned in the pass-through sectors accounted for 51% of total business income (C and S corporations plus sole proprietorships and partnerships), compared to only 21 percent in 1980, per the US Department of Treasury, Office of Tax Analysis Working Paper prepared in 2016.

As you can imagine, this muddies the waters in any kind of tax revenue source analysis. One needs to carve out the pass-through income reported on individual returns to compare apples to apples over time. Knowing the commercial portion of personal income is critical in assessing the effect of applying sales tax on services sold by businesses.

A sales tax paid on services received by S corporations and other pass-through entities  will effectively fall on the individual taxpayers who own them. Although they will be receiving a tax break related to their personal purchases under SB 993, they will absorb the impact of the services tax from their businesses. Not all business owners or S corporation shareholders are rich. As a result, Hertzberg’s plan could end up hurting middle-income residents.

Before levying a sales tax on services, one should consider if the companies require a disproportionate share of the state’s resources.  Do, let’s say, architectural firms require  more roads, power and water than those in manufacturing or agriculture?  We shouldn’t be applying additional taxes simply because there is an opportunity to do so. There should be demonstrable correlation.

We also need to understand how much in the way of state income taxes service companies have contributed relative to all sources over time…and how much more the share will grow. It does not make sense to discourage their business customers from buying their products, but that’s what the sales tax will tend to do, as well as add to users’ costs, particularly businesses without the resources to develop in-house alternatives.

The state can smooth out the volatility in revenue by carefully managing the reserve fund, socking away the surplus from good years, and drawing them down when things head south. Sacramento already has the means and process to do that. This would be preferable to layering another tax, one which will be very difficult to administer, on top of the existing structure. It just takes some competent management.

The benefit to the residents of lowering the sales tax on personal purchases of goods could be short-lived. County and city governments may see it as an opportunity to propose additional local sales taxes. The thinking being that few would mind paying an additional quarter-point or so if they are receiving a 2% break.

I am not saying a services sales tax is inappropriate in all cases, but let’s not make the service sector a piñata for the politicians to break open and grab the goodies.

 

 

The only thing as bad as Congress impulsively passing a tax reform bill, is conjuring a half-baked, equally impulsive countermeasure.

But that is precisely what State Senator Kevin de Leon and Assembly Member Autumn Burke are proposing with SB227 and AB2217.  The latter is a recent development.

Both bills allow taxpayers to donate to charitable entities sanctioned or controlled by the state in return for tax credits on their California returns.  SB227 would have contributions funneled through a state entity named The California Excellence Fund. AB2217 would have qualified charitable entities pass 90% of the donations to the state’s general fund. The entities would issue “Golden State Credits” to the donors, who in turn would use then to reduce their tax liability to the state….and also deduct them as charitable contributions on their federal returns.

The bottom line is that a very high percentage of the donations end up in the state treasury.

The sponsors are counting on the precedent of similar programs in a number of states being condoned by the IRS.  However, many of these are essentially one-off credits and not part of a wide-ranging policy, as would be the case in California.

In the grand scheme of things, existing tax credit donations are relatively small, and were virtually irrelevant under the old tax law.  It did not really matter if one took a charitable deduction in lieu of one for state tax  – the total deductions, all other things being equal, were the same. Note that SALT deductions were not allowed if the taxpayer was subject to the AMT.

But if California, New York and other high income states implement workarounds allowing higher income taxpayers to re-characterize state tax payments as charitable deductions across the board, rest assured the IRS will take a hard look.

If the states do not back down, the issue will end up in the courts and taxpayers who avail themselves of the credits would be at risk of owing penalties and fines if the IRS prevailed.

New York passed a version of the workaround which is similar to California’s (it also passed another that involves a payroll tax…not an approach California is pursuing).

If de Leon and Burke were smart, they would wait to see how New York’s plan is received by the IRS, then modify California’s accordingly, rather than subjecting the state’s higher income taxpayers to audits.  That could be the last straw that will send more of them to Nevada.

 

 

 

Last Friday, I attended a community breakfast sponsored by Senator Bob Hertzberg at Vitellos in Studio City’s Tujunga Village neighborhood.

Among the subjects he covered was his latest attempt at state tax reform.

Yes, latest.

Soon after he took office in 2015, fresh from a hiatus from the legislature, where he had served as Speaker of the Assembly, he introduced SB8: the Upward Mobility Act. It was a plan to restructure taxes, an admirable objective, except it was not revenue neutral – not even close.   Try about  $10 billion per year in additional tax revenue. At the breakfast, he made a point that I had criticized SB8 for that very reason, a true statement.

But where would the additional revenue come from?  A  component would have applied sales tax to many services, regressive to say the least.

The bill went nowhere.  Even Governor Brown objected to it in no uncertain terms:

Politically, the idea of applying the sales tax rate to professional services would look like an attempt to “burden the ordinary folks.” 

The plan “may be logical with some green-eye-shaded accountants, but I don’t know that from the political point of view that is very viable”.

On February 5 of this year, Hertzberg introduced SB993, the Middle Class Tax Relief Act. He assured the audience…and me, in particular…..it was revenue neutral.

I would have taken him at face value, after all, there is very little detail available and it does appear the sales tax on services would not be as far reaching as SB8’s.  But in the same breath, he adamantly denied that SB8 would have increased taxes.

I reminded him of what he stated when SB8 was introduced, “Projected revenues from SB 8 would be in the range of $10 billion that would be apportioned in the following way: $3 billion for K-12 schools and community colleges, $1 billion each for the two university systems, $3 billion for local governments, and $2 billion for a new earned income tax credit for poor families.”

Noble objectives, indeed, but not revenue neutral.

So, the senator needs to define what he means by insisting his latest legislative proposal will be revenue neutral.

If it is, then let’s give it consideration.

But we need to check the math.

 

Trash Windfall

Much has been written and said about the City of Los Angeles’ implementation of the ill-conceived exclusive trash franchise arrangement.

The news has focused on the unreliable service, excessive customer bills and lack of response by the haulers who have been granted monopolies.  Most certainly, more will be said.

But there has also been criticism of the mayor and city council for not owning up to their part in this costly fiasco.

Just not enough, and also missing a major point.

Yes, the trash monopolies are costly, but only to the residents,  The haulers are making money…..and so is the city; about $35 million per year in franchise fees.

As I mentioned in a previous article, at a recent meeting of the Valley Village Homeowners Association, the RecycLA representative told us that the fees were needed to administer the program.  I found that extremely difficult to believe and followed up with the City Controller’s office.  You can count on getting a straight answer from Ron Galperin and his staff, and I learned that the fees were going to the general fund, where there are no restrictions.

It really amounts to a virtual windfall to the city as the management of the solid waste program is already funded from the Citywide Recycling Fund, the revenue for which is provided under AB 939, the California Integrated Waste Management Act of 1989. It was the first recycling legislation in the country to mandate recycling diversion goals.

Basically, then, this makes the franchise fee a windfall for the city, if not a backdoor tax.  Even though it is paid by the haulers, common sense dictates it is baked into their pricing structures. $35 million is too much for them not to recoup from their captive audience. It is an incentive to bill the customers for anything related to trash, maybe even the rodents who most certainly dine on accumulated uncollected waste. So the city is skimming off the top at the expense of the already beleaguered commercial property occupants.

At last week’s hearings at City Hall, only Councilman Mike Bonin dared to suggest that the fees be returned to those complexes and businesses hard hit by the price gouging.

To add insult to injury, the haulers reap the cash from the sale of recycled materials, while customers face the prospect of having to pay fines for over-filling blue bins because of missed pickups.  Talk about double-dipping.

Unfortunately, the brunt of the effort to push back falls on the customers. They are the ones who must document the unacceptable level of service, along with erroneous and inaccurate billings, not the city.  They do not get paid for their efforts, unlike our council members for doing little more than threatening the haulers.

Contract law will make undoing the damage a potentially costly affair in itself, especially considering the 10-year duration of the deal.  All the more reason for reserving the windfall and returning it to those who have suffered because of it.

 

I don’t like surprises that adversely affect personal finances……anyone’s.

The recently approved tax bill had a few, particularly the elimination of personal exemptions and capping state and local taxes.

It’s not as if I am against such measures, but it is thoughtless and reckless to spring them suddenly.  Turning individuals’ finances upside down overnight complicates lives.  Fundamental changes of this nature should be transitioned over years, allowing people time to adjust.  That’s not much to ask for from our government.

It’s not just Congress.

Exclusive franchises for trash hauling were approved by the City of Los Angeles in 2014. The contracts were awarded in late 2016,  (activated in mid 2017), effectively pulling the rug out from under average citizens much in the same way the tax bill did.

While HOAs and commercial owners expected problems, the magnitude caught many off guard. Budgets had to be adjusted and costs passed on to residents already saddled with high housing costs.

If you have followed the news, there were 28,000 complaints filed by residents concerning poor service, and costs double or triple those under their previous contracts. That’s what happens when you replace competition with monopolies.

Seven companies each have pieces of eleven zones.  On a positive note, that is not as restrictive as the five crime families that controlled the rackets in New York City, as depicted in the Godfather. Could there be a little muscle in play as time goes on? Any offers anyone can’t refuse? Tony Soprano, the fictional waste disposal mobster of the former hit HBO series, would be proud.

For the scheduled January 17th  meeting of the Valley Village Homeowners Association, I asked Councilman Paul Krekorian’s office to send representatives from RecycLA and Waste Management, the exclusive hauler for the community. I was pleased to see them there, however, no one from Mr. Krekorian’s own staff attended. It’s worth noting that the Councilman voted for the franchise arrangement, along with twelve of his colleagues.

Please note that the Valley Village Homeowners Association is a community organization, not a condo HOA. Membership is available to all residents.  The Association works closely with Neighborhood Council Valley Village.

There were around 60 people in attendance that night, about a dozen of whom  represented condos, landlords or other affected stakeholders. They did not pull punches with their questions, but did keep them civil.

I was amused by how the RecycLA rep responded when an individual made a reference  to “30,000 complaints” filed.

She quickly responded, “There are only 28,000!”

She added that many of the complaints overlapped as some were received from the same complexes.

I reminded her that for every complaint – on any subject – there are usually several more that do not surface. Also, many renters may not have felt the impact yet, but will when their leases are up for renewal. I fear, though, that renters will not be as organized in their opposition. I think the city is counting on that.

Nevertheless, the fact that 28,000 people made the effort to complain is impressive, especially in a city known for  its apathy on local issues.

It was pointed out that the city did not consider the structural limitations many commercial properties face.  Most were constructed many years ago before landfills and the general environment became issues. For example, there are buildings which use trash chutes and do not have the physical capacity to separate recyclables. Timing of pickups also causes a problem.  The franchisees cannot be counted on to arrive within a reasonable range of time.  Building managers are thus compelled to leave their bins near the streets for hours.  Trash continues to fly down the chutes.  Other bins are now necessary to prevent an unsanitary pile up on the ground, an added cost on top of the higher fees.

I take pride in recycling, but I live in a single-family home, so it’s easy.  By contrast, not enough apartment and condo dwellers are likely to make special trips to dispose of  recyclables.  For all the talk about reducing the need for landfills, the exclusive franchise system does too little to encourage individuals to make the extra effort and use the blue bins. Having once served as a condo HOA board member for a 250-unit complex, I can assure you that effecting change among individual owners is as difficult as herding cats.

When asked who will keep the proceeds from the sale of the recyclables, neither the RecycLA nor Waste Management representative could answer, but promised to get back to us.

No response as of today.  It was not a difficult question.

When asked about how the $35-million franchise fee earned by the city would be used, we were told it was needed to administer the program. I suspect an inordinate share of it will go towards staffing – it is difficult to imagine the program requiring much in the way of new equipment or costly software. If this is true, there must be some well-paid positions.

I followed up with an e-mail asking for a breakout of how the franchise fees would be spent. I received a reply stating RecycLA LA would get back to me. You would think at least a budget would be readily available. After all, $35 million is a lot of money. One would assume there was a detailed plan in mind when the fee was established. I copied City Controller Ron Galperin and Councilman Krekorian on my request.

Others expressed dismay that the city nixed a non-exclusive alternative which would have created a citywide pool of haulers.  This plan was supported by former City Administrative Officer Miguel Santana.  It would have facilitated competition and created environmental benefits, a real win-win.

Awarding the franchises for 10 years under an exclusive arrangement was perceived as a slap in the face, especially given the mercurial nature of the fees charged by the haulers, many of which are in dispute. Who wants to deal with that for the long-term?

Competition would have forced the market to sift through various pricing structures, assuring that the fairest and most sensible ones would rise to the top.  Instead, residents have no leverage, and the 10-year duration will effectively crowd out any new players.

Perhaps the response that rolled eyes more than any other was when we were told the exclusive franchise system was, after all, no different than DWP’s role in managing the city’s utilities.

So, what’s the final score?

The city skims $35-million per year.

The haulers rake in more fees.

The residents pay much more.

A viable alternative was rejected.

What could be wrong with that?

We trust the mayor and City Council know what’s best for us…..don’t we?

 

 

 

 

Chaos in 2018

Whatever Kim Jong-un does in 2018, it will likely not impact Americans as much as the new tax reform bill, the Tax Cuts and Jobs Act. That’s not to understate the potential for disorder the Rocket Man might be capable of unleashing, but most experts would agree he has not reached the point where he can blackmail the United States and his neighbors in Asia.

But the IRS can make the transition to the new tax rules a painful exercise for many. You see, as with all tax legislation, Congress writes the rules, but the IRS has to interpret and implement them through what are known as Treasury Regulations. Of course, the courts are the ultimate arbiters in disputes between taxpayers and the government; so, what we see now, may not be quite what we get.

I will focus on two of the most pervasive changes affecting Californians: the state and local tax deduction and mortgage interest.

Already, confusion is endemic regarding the $10,000 cap on deductions for state and local taxes, which covers property tax as well as state income tax.

As of the day I am writing this article, the IRS has not definitively ruled on whether prepayments of property taxes will be deductible on the upcoming 2017 tax returns. Taxpayers who ordinarily incur state and local taxes measurably higher than $10,000 are beating a path to the local tax collector’s office to pay next year’s installments – a use it or lose it strategy.

It is reasonably safe to assume that if the 2018 installments represent taxes assessed for 2017, the prepayments will be deductible, but no absolute guarantees. It might be less clear for those whose property taxes are impounded by a loan servicer.

Some have contemplated even significantly withholding more state income tax from their final paychecks this year, but those incremental payments will clearly not be ruled deductible, I can think of ways the IRS might audit for that, but having the resources to do so is another issue.

What about any state tax refunds? These are normally taxable if you itemize deductions under the 2017 rules.

Recoveries of state income tax overpayments may or may not be taxable, at least to some degree.  Let’s say you are preparing your 2019 Federal return (in 2020). The state and local tax deduction  was reduced by $9,000 in 2018 because of the cap and you received a $3,000 refund in 2019 for an overpayment on 2018 state income tax, none of it should be taxed because you had received no benefit for it.  But if the refund were $9,100, $100 would be taxable.

However, a refund of a 2017 overpayment would probably be fully taxable on your 2018 return because you were able to fully deduct the tax from your 2017 federal return.

The mortgage interest deduction is even muddier. The deduction is now limited to the interest paid on up to $750,000 in principal balances related to the acquisition, building or improvement of  primary and second homes. No longer will you be able to deduct the interest on $100,000 on borrowings related to non real estate purchases secured by your home, known as home equity debt.

To the extent you had acquisition/building/improvement balances prior to December 16, 2017, they are grandfathered under the current $1 million cap, but there is no such protection for  home equity.  That deduction is lost starting with your 2018 return.

Many people were probably claiming too large an interest deduction under the old rules because they failed to accurately track the use of their borrowed funds.  However, the IRS lacked the resources to aggressively audit for this.  The lower cap makes the job of the IRS even more demanding. Whether they ramp up and extend the reach of their audits remains to be seen. My guess is that it will not be a priority for 2018, but mortgage data will be accumulated and analyzed with the goal of developing an audit plan for subsequent years.

If you are currently engaged in a  home acquisition,  the change doesn’t affect mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018. So keep your eye on the calendar and make sure your contract is in order.

As I pointed out in an earlier article, this bill does not represent tax reform  Until we have a system that makes compliance and enforcement much easier, then  all Congress is doing is reshuffling the same old deck of worn out cards.