The New HSR Dilemma

I’ve written several articles over the years critical of California’s high-speed rail debacle. The last one was in November 2017. I suggested that gubernatorial candidate Gavin Newsom might come to his senses and end the project. After all, he was once against it, but flipped lest he alienate his union supporters in the primary.

The election behind him, he did just that.

Sort of.

While effectively cancelling the biggest and most costly segments, he left the 150 mile Bakersfield to Merced connection untouched. Whether there will be enough funding to complete even that remains to be seen given the history of cost overruns and unreliable estimates.

I really do not think he cares. It is just to soften the blow to the project’s misguided fans and political allies who would have benefited from the money pit it was destined to become from the start. Governor Newsom will not be in office when even this segment hits the wall.

But let’s say it is completed.

There is yet another obstacle.

Proposition 1A stipulated that there could be no government operating subsidy- federal, state or local; the train has to run in the black. One has to question whether there is enough of a market in the Central Valley to generate asequate revenue to cover the fixed costs, not to mention the marginal costs. It is not as if fares can be raised willy-nilly to close losses. There is an inverse relationship between ridership and fares.

So what will happen when the train cannot legally operate?

A federal bailout?

Regardless of who controls Congress years from now, the taxpayers in the other 49 states will not be receptive to propping up the product of California’s recklessness. They have their infrastructure priorities, too.

Before Newsom fully commits to the Central Valley line, he should engage reputable analysts free from political influence to fully understand the market there. Up until now, the focus has been on the ridership from each of the end points – The Bay Area and Metro L A.

CAHSR is now a short line with a different set of demographics driving it.

Don’t let politics get in the way.


Come Fly with Me

The unfriendly skies over the Southeast Valley got a little unfriendlier on October 18th.

A much anticipated public hearing dealing with the noise of departing jets from Burbank Airport was held at the nearby Buena Vista Library.

About 200 people filled the auditorium, plus more by an open exit door.  Representatives from the airport were in attendance, along with LA City Council Member Paul Krekorian and Congressman Brad Sherman. It was apparent that a large majority of the audience hailed from Studio City.

No one from the FAA was there, a major disappointment, but had the agency sent someone, it would have been the equivalent of Custer riding into the Little Big Horn Valley.  A different valley, this time, but the results would have been the same.

I can understand not wanting to face an angry crowd which has already staked out a position vehemently opposing the increase in departing flights over their neighborhoods, but there are times when one has to face an angry public.  Interestingly, Mayor Garcetti, who seldom faces an unsympathetic group, tried doing that the day before in Venice regarding homeless shelters; perhaps the FAA read this article . By the way, Garcetti was criticized a few times at the Burbank meeting for his lack of involvement on this issue and for being away in general.

Just as the controversy over where to place homeless shelters, flight paths contemplated by the FAA are drawing a passionate response.

There were those who adamantly opposed all but a few flights over their neighborhoods. That point of view primarily came from the residents who live in the hills.  They cited the acoustical effects created by the canyons and hillsides.

Almost all opposed the overall shift in flights to the south of the 101 and called for dispersing the paths over a wider area.

Some stated that real estate values have been adversely impacted.  All other things being equal, that is true, but it is the “all other things” that also impact prices.  Who would have predicted that Porter Ranch would be experiencing a real estate boom only a few years after the Aliso Canyon gas leak? But that’s what was reported in Sunday’s Los Angeles Daily News. The gas field is still there and there is no guarantee against a re-occurrence. There are many factors that go into purchasing a home, certainly noise is one of them, but convenience, architectural style, view, amenities and even zip code enter into the decision.

I suspect even if the FAA agrees to disperse flights, there will still be an outcry from parts of the Valley not previously impacted, but would be if the pattern changed.

One person proposed having more (not all) flights depart directly to the north….and there are conditions that apparently require it.  The rationale being that most flights are heading to destinations in that direction.  I imagine the North Valley, Santa Clarita, Sunland and Tujunga would want to weigh in on that.

There were suggestions for planes to gain altitude at a faster rate so by the time they turned into residential neighborhoods there would be more elevation between them and the ground below.  But that could create more noise for those neighborhoods relatively close to runway 15.

Personally, I have observed some flights out of Burbank with sharper angles of ascent, so it can be done. It is worth noting, though, that planes use the most fuel (up to 25% of the total consumption), and produce the most harmful emissions, during takeoff, according to an article in an on-line publication of the Worldwatch Institute, an organization which deals with sustainability issues.   Does that mean a steeper ascent would create more emissions over a concentrated area? Something to consider.

If the flights paths were dispersed over the Southeast Valley, there is still a question as to the location of the turning points.  Remember, the planes are not flying straight, but in arcs. The timing of the turns would affect the noise level for many Valley communities  to varying degrees.

My statement on behalf of Valley Village opposed concentrations over any single neighborhood (including our own) and urged the FAA, within the framework of safety, to fine flagrant airport curfew violators; to set a timeline for the commercial carriers to replace older 737s with the new and quieter – also more fuel efficient – 737MAX series; and put an immediate freeze on additional flights until the results of an EIR can be evaluated.

Everyone has legitimate gripes, but it would require the Wisdom of Solomon to carve up the skies in a manner that would please the general public.

I have not seen King Solomon’s name listed in the FAA or Burbank Airport’s organization chart, neither is he on any ballot for elected office.

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.

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.