The LA Times’ Evan Halper wrote a piece on Monday, ‘Group fights plan to fine tax cheats‘, regarding a tax refund penalty provision buried in Senator Lois Wolk’s otherwise worthy tax relief bill SBX8 32.  The focus of concern in this bill is a controversial penalty on misclaimed refunds.  Whether or not one agrees with the policy of a refund penalty, it is important that controversial policies stay out of a federal tax conformity bill.  The conformity bill, over 100 pages, must have consensus or its demise is certain.

Typically, controversial provisions are passed outside the conformity bill process, which is why items like the Health Savings Account and the Research and Development Credit conformities have not been included in past omnibus conformity bills.

If proponents of the bill are truly worried about total federal conformity, they should include all items related to conformity, like those above, or even eliminating provisions that do not conform, such as the California-only 20 percent “understatement penalty” for understatements in excess of $1 million, with no right to appeal.  This penalty, passed as part of a “dead-of-night” budget session, caused taxpayers to substantially overstate their taxes to avoid the penalty that may result from unexpected federal adjustments.  The proposed erroneous refund penalty has the potential to whipsaw taxpayers that have overstated their liability to avoid this egregious understatement penalty on the front end, and now, on the back end, must be extremely careful to ask for a refund that does not exceed what the FTB deems to be reasonable.

The merits of tax relief for troubled homeowners and innovative energy companies is good tax policy considering the state of our economy, but this bill merges needed relief with another penalty that innocent and, in many cases, drowning businesses can’t afford. If the author and its proponents want relief for homeowners underwater in their mortgages, renewable energy projects, and jobs, they would not be moving a bill, addressing those very important and noble efforts, that is certain to be vetoed based on the inclusion of a less than noble and political issue.

Instead, the proponents have called out manufacturers and every other major business group in opposition to the bill as ‘tax cheats’.  California manufacturers, who employ over 1.5 million workers, are losing ground every month in large part because of state policies that drive up costs and eliminate their ability to compete.  Now, we are in some way at fault for not trusting a state that can’t manage its own finances to somehow determine what is fair and reasonable in managing ours. To label this a ‘tax cheat’ plan is a stretch. Excuse me if we have concerns with a penalty placed on both ends of the tax process in a state that already carries the highest corporate taxes in the nation.  Seems to me to be set up for a pretty good gig for California.

Let’s pull this penalty policy out of the bill and bring back the many years of debate on conforming our research and development credit and others to federal standards. We can then discuss how each provision might hurt or help our economy.  Those R&D credits in particular could go a long way in ensuring that our next life-saving product or military defense design is invented and produced here in California. But for some reason that particular conformity doesn’t ever seem to fly.

When will we stop treating our coveted employers as tax cheats and start recognizing them as revenue generators that need to be able to compete in California? The LA Times missed the point on this bill and Sen. Lois Wolk offers more of what California doesn’t need: more penalties on employers.