Failure to Repeal California Yacht Tax Loophole Mars Otherwise Bipartisan Day Dealing with California’s Budget Crisis

But the debate on this, and the opposition of most elected Republicans to it is very telling. Mind you, this is a loophole that Republican Governor Schwarzenegger proposed be plugged in calling the legislature into an emergency session.

First the background on this. Then some of the actual debate that took place today on the Senate floor which is simply amazing.

The tax battle over yachts and private airplanes has been fought for years and we’ve had this loophole eliminated only to see it revived. When you buy a yacht in California, as when you buy all sorts of other items here, you pay a sales tax. If you buy it outside California and bring it into the state, you pay a “use” tax—effectively the same as a sales tax. There was a requirement that those who purchase these vehicles out of state could not bring them into the state within 12 months or this use tax would have to be paid. This provision expired June 30, 2007 and the period of time was reduced to just three months.

The 12 month period was to discourage tax avoidance on expensive purchases such as yachts through offshore delivery arrangements in which delivery takes place outside the state’s waters and the yacht is berthed for a few months in Mexico or another location outside of the state. For these, the saving from tax avoidance can be tens of thousands of dollars, easily outweighing the additional transaction costs of keeping it out of state.

The Legislative Analyst’s Office found in a detailed 2006 report that the law had resulted in a sharp decline in out of state usage exemptions and an increase in in-state taxable sales. The LAO also found little evidence of any change in the sales of yachts and the like. The LAO recommended that the 12 month period be made permanent.

So, here’s the debate—taking place right after medical, dental services, and other programs for children were cut and cost of living increases delayed for the blind, aged, and disabled poor who qualify for Social Security.

Republican Senator Dick Ackerman started off opposition on the Senate floor: “First of all, it is a tax increase. Unfortunately, it follows the trend of some of our colleagues who want to tax the rich. As we found, taxing the rich in California does not work—they have many other alternatives.

“The LAO has not completed all of her research, not have I but it’s pretty sure that we’ve lost a lot of jobs, we’ve lost a lot of working class jobs in ship yards, maintenance, rehabilitation—all of the those things that generally occur when someone buys a boat. So it does have a significant negative impact on the state of California.”

How closing off an avenue so that the rich can avoid paying taxes that the rest of us pay is a tax increase is beyond me—and even arch conservative Republican Senator Tom McClintock admitted when he spoke that it was not a tax increase. The LAO actually reported there was little if any adverse effect in 2007 when a detailed report was issued.

Republican Senator Dennis Hollingsworth: “While it may sound like a good idea to you to try and poke fun at Republicans and say they’re just trying to defend rich yacht owners—and it may look good in the press to you—the fact of the matter is that this very shortsighted to the extreme. There’s a saying that there’s nothing more mobile than the rich and their money. I’m going to modify this and say there’s nothing more mobile than the rich and their toys. They’ll find a way around this, they’ll buy them out of state.”

So far, he’s admitting how bad his position looks. And making an argument that it’s impossible to tax the rich—I guess the rest of us should just pay it since the super rich will avoid it. Let the poor and the rest of us eat toys, as Marie Antoinette would say. And the nonsensical argument that they’ll buy them out of state—even though the LAO found that they didn’t—and he seems to be not understanding how a use tax works—they’d have to keep their toys out of state for a whole year.

“It’s going to mean an actual loss of revenues to the state of California. If that doesn’t concern you, because it means an actual loss of income—because it ought to—it’s going to mean a loss of jobs for the working people that we represent. Not the rich people, they’ll find a way around it. The working people, the immigrant who sprays fiberglass on a boat will lose his job…. Those are the people who are going to be affected by this, not the rich. This is going to hurt the families and working people that all of you say you’re representing. Let’s look out fo rthier jobs.”

More trickle down. More crocodile tears for workers who he and other Republicans would not vote to increase the minimum wage for. Very convincing.

Democrat Sheila Kuehl: “I think the 23rd District is either the richest or the second richest district in the state. And if you drive along the Pacific Coast Highway, I have to admit it that you might see some yachts and some huge sailing draughts and some gorgeous homes—and you might think that my constituents had been calling me and telling me—please , please, please don’t make me pay any taxes on my yacht. No, actually, my constituents think that it’s somewhat horrible to cut $500 million out of education. They like their schools. They think it’s horrible to be disenrolling children from Healthy Families while at the same time you say, please don’t tax my yacht.

“And let me just reassure you that it’s not me making fun of Republicans. One of the members of the Republican’s own part in the other house, I believe, was quoted in the paper as saying that these people are tax cheats—and voted for this closing of a loophole.”

Democrat Darrell Steinberg: “In this time of crisis, we don’t have time for what I call old saws. And here’s two that I have heard today that I felt compelled to get up and at least make a comment on:

“Millionaires will leave the state. Here’s a fact. In the early 1990’s when Governor Wilson and the legislature raised taxes on the wealthy, it was a temporary tax increase. And if you look at the number of millionaires that lived in California right before that tax increase and the number of millionaires after it expired, the number of millionaires went up. Fact. Check it out.

“Second old saw: Repealing the yacht tax will drive jobs out of California. That’s a typical argument. But member, as all of us have been stating here today, it is a matter of choices. I agree that job creation is crucial—economic development is crucial to maintain our tax base. I’d rather put the $30 million into a bipartisan effort to merge career technical education and the new green economy. I’d rather put the money into mitigating the 10% cut in medical rates that we just passed so that we could create more employment opportunities in the health care industry. This doesn’t stand in isolation—“this is a job killer”—Take the same amount of money and put it into a productive economic use that will create jobs and do a whole lot more for California.

Republican Tom McClintock: Senator Steinberg may be right. Let’s grant that the number of millionaires did not go down. That’s not the whole matter. It is the people who work for those millionaires. Their earnings went down.”

McClintock then proceeded to make the argument that the tax increases Republican Governor Pete Wilson pushed to deal with the massive state deficit in the early 1990’s worsened state revenue collections because in those years of recession after them tax revenues went down. He accused the Democrats of engaging in “ideological class warfare.”

Democratic Senator Denise Ducheny, the Budget Committee Chair, closed the debate, and dealt with McClintock’s cause and effect analogy—noting that after taxes were decreased—the repeal of half of the vehicle license fee by Governor Schwarzenegger, for example, revenues went down.

The Senate debate today indicates we have a lot of work to do to refute myths cherished by the right and repeated enough times that they convince some they are true. Next week, I expect there will be a lot of pressure on Assembly Republicans to vote to end this yacht loophole when Speaker Fabian Nunez brings it up for a vote as he has promised to do. One capitol insider reported that "Cuts only" Republicans are beginning to squirm. Two Republicans voted against the cuts in judges, because they would affect their districts. Three Republicans voted against the Medi-Cal and health care cuts.

The budget will be the major story of the year. The relatively small, but important question of tax fairness and the debate today shows part of the divide. Painful as some of the cuts were that were made today—at least we have a few months’ breathing room to sort out the even uglier and more difficult problems we face.