State Says Bush Tax Plan Could Slash Revenue

President Bush’s proposal to eliminate the tax on the dividends that companies pay to shareholders could cost California as much as $1.5 billion a year, threatening to deepen the state’s fiscal crisis, according to the Department of Finance.

The warning comes as Gov. Gray Davis prepares for Friday’s unveiling of his plan for dealing with the state’s record budget deficit, which is estimated at $34.8 billion over the next 18 months.

It is based on the assumption -- supported by at least some outside experts -- that should the federal government do away with the tax on dividend income, it could become bureaucratically impossible for California to do anything other than to follow suit.

That’s because the information that the tax is based on might no longer be gathered by the Internal Revenue Service, and state finance officials say they lack the resources to put their own data-collection system in place.

“It would open the door for noncompliance,” said Connie Squires, program budget manager at the Finance Department.

Not everyone buys that premise, however. Republicans say that California wouldn’t be affected by the Bush plan, and they contend that the Davis administration is using the issue simply to deflect attention away from a gaping budget hole that was dug under its watch.

The Finance Department’s concerns are backed up by an analysis released Wednesday by the Center on Budget and Policy Priorities, a think tank in Washington.

“States would have no option to continue taxing dividends once the federal government has ceased to do so,” the study says. “The information necessary for reporting and compliance would not exist, and thus states would have no choice but to exempt dividends from taxation.”

Should California be forced to abandon the dividend tax, it stands to lose more than twice as much revenue as any other state, according to the study.

It found that states would lose a combined total of $4.5 billion annually as a result of such a cut.

California accounts for more than $1.1 billion of that amount. New York is the next-hardest-hit state, the report says, facing a potential $550-million loss in revenue.

Officials at the Department of Finance projected that the loss in revenue would be even greater -- as much as $1.5 billion a year.

California is threatened with such a large blow partially because of its size, but also because its fiscal structure is so heavily reliant on the stock market earnings of taxpayers.

“This is not the kind of help California was hoping to get from the federal government,” said Assemblywoman Jenny Oropeza (D-Long Beach), chairwoman of the Assembly Budget Committee. “It would add another billion dollars-plus to a very deep hole we are trying to dig ourselves out of.”

For their part, Republicans say that such comments exaggerate the difficulty that California would face in collecting the tax without the help of the federal government. In fact, they maintain that it could be applied with ease.

Assemblyman John Campbell (R-Irvine), vice chair of the budget committee, noted that the tax on dividends would be just one of many in which California’s reporting requirements differ from those of the federal government.

“The direct effect on California of the federal government passing this law would be absolutely zero,” he said. “Every year the federal government passes new tax laws, and every year California conforms to some, but not others.”

He scoffed at the suggestion by finance officials that out-of-state companies simply would stop reporting the dividends of shareholders once the federal government no longer required it.

“I don’t think AT&T; is going to stiff California by not sending out a required form,” Campbell said. “This is totally political. The Davis administration is trying to say the budget problems they created are somehow the fault of the Bush administration, when the Bush administration has nothing to do with it.”

Yet Sen. Gil Cedillo (D-Los Angeles), chairman of the Senate Revenue and Taxation Committee, said that Californians should brace for even more budget problems if the Bush proposal passes.

“This will have a direct impact of us losing as much as $1.5 billion” annually, he said. “If you don’t have the data, you can’t collect the taxes.”

Other Democrats added that if the president’s proposal ends up taking that much out of state coffers, there will be all the more pressure on lawmakers to replace the dividend tax with some other levy on the wealthy.

“It’s borderline criminal to me that we continue to ask those who cannot afford to give anything to give,” said Assembly Speaker Herb Wesson (D-Culver City), “while we ask nothing of those who can afford it.”