May 30, 1993 - From the May, 1993 issue

Brad Sherman: State Tax Boards Shape Land Use

They may not be glamorous, but our tax laws set the framework for many of the economic decisions that shape local land use. And taking the lead in shaping those laws is Brad Sherman, Chairman of the State’s Board of Equalization. 

Sherman was elected to the Board in November 1990 and in March of the next year was selected by his colleagues to serve as Chairman. As Chairman of the Board, Sherman also serves as one of three members of the Franchise Tax Board. 

Sherman is a tax attorney and a CPA. As Chairman of the Board of Equalization, Sherman has been in the national media spotlight for his efforts against the state's so-called "snack tax." He spoke with The Planning Report on how our state's tax policies affect planning, land-use, 

and economic development. 

For those who aren't familiar with your activities, could you begin by describing the role and function of the Board of Equalization? 

I’ll describe both the Board of Equalization and the Franchise Tax Board since they're the Siamese twins of California tax administration. The Board of Equalization consists of four members selected by district, plus the State Controller. My district includes Santa Monica and San Francisco and virtually everything in between, including the San Fernando Valley. I expect my new district will soon include virtually all of Los Angeles County, and no longer include San Francisco. 

The Board of Equalization sits as the state's administrative body for sales tax, a host of excise taxes, and property taxes. We write the regulations on tax matters and oversee the general procedures and accuracy in counties' administration of property taxes. Finally, we're the state's administrative tribunal on tax issues. 

The Franchise Tax Board administers the state income tax and writes the state income tax regulations. That board consists of the State Controller, the head of the Department of Finance, and the Chair of the Board of Equalization (which I have been much of the time since I was elected in 1990). I have been pushing to make both boards more active in their oversight of the bureaucracy.

Is it true that the two boards may be merging? 

There's a lot of talk about merging them, but frankly, that wouldn't have a big effect What would have a big effect is if you abolished both of them and transferred all of their powers to the Governor, as has been proposed. Most elements of the business community have resisted that proposal because they understand that if you transfer this kind of power to the Governor's office, you're really transferring power to the bureaucracy. 

What steps are you taking to improve the business climate in Southern California? 

On the income tax side, I'm pushing something called double weighting of the sales factor - an issue so obscure and complex that no one ever tried to explain it outside of Sacramento before. It would decrease state income tax on those who manufacture in our state, and thus provide jobs in California, and increase income lax for those who exploit our markets by manufacturing elsewhere and selling in California. 

This would make us more competitive with other states. My focus is on bringing to California export-oriented businesses, which create goods or services in California for customers outside California. A single job in manufacturing may provide the economic base to support two or three jobs in the service sector. I've sponsored a bill on this that Senator Kopp has introduced. It's an idea whose time may finally have come. 

How about your proposals on sales taxes? 

We have got to prevent the ''fiscalization of land-use planning." It's not the cities' fault: it's the state's fault because we create the fiscal environment in which cities have to operate. Because we rely quite heavily on the sales tax in California, cities naturally look closely at sales tax revenues when they make decisions on development.

As you know, when cities try to maximize sales tax revenue while minimizing costs, they promote sales offices, automobile dealerships, and discount retailers. If you look around Southern California, it looks like a place where each city encouraged retailing while neglecting manufacturing. We have large shopping centers, beautiful shopping centers, empty shopping centers. Attracting retailing and excluding manufacturing may be in the interest of a particular city, but you can't build a metropolitan economy that way. 

How can you address that issue from where you sit? 

We have already taken some minor steps in applying the existing law, which says we have to allocate sales tax revenue to the location of the sale. We have amended our regulations so that those cities that accommodate warehouses for out-of-state companies will get the sales tax revenue for the sales generated out of those warehouses. This is part of our effort to match city revenues with city costs: if a city has to incur costs for road repairs, fire protection, and police protection to accommodate that warehouse, then it should get its fair share of sales tax revenue. 

But the amount we can accomplish through regulation is modest. I've proposed a change in our sales tax law that would get away entirely from allocating sales tax revenue based on place of sale and base the allocation among cities on two factors: each city's resident population and each city's workforce population. We'd then be allocating sales tax revenue so that if a city incurs cost, it gets revenue. The solution to the fiscalization of land use is not to hope the cities change their ways, but, rather, to build a system where the costs of a development and revenues from that development are likely to be in sync. 

What can you do in the property tax area? 

I’d like to make property taxes the basis of urban finance and use the sales tax to support the schools. Instead of allocating money to cities based on retail sales, you could allocate it based on the value of property. That way, if a new plant opened in a city, the city would also get the property tax revenue. Whether you use the revamped sales tax to finance municipalities or you assure that cities get the lion's share or the property tax, the goal should be to assure that cities that incur the costs get the revenues. 

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What's your opinion of Gray Davis' recent proposals to allow tax relief for businesses that agree to certain performance standards in return? 

He has some interesting ideas, but the concern I have is that it gets very expensive to reward businesses and investors for doing something good that they would have done anyway. It's tough to know when the state's action proves decisive and when the tax benefit is just icing on the cake. 

There's a lot of discussion about the poor business climate in California. How would you summarize your efforts in coordination with other efforts by the Governor and Legislature to change these perceptions? 

Slow. We are just beginning to get to the point where it's universally recognized by elected officials that we have a problem. I don't see a consensus building for making the tough decisions we have to make. I’m particularly concerned that the issue of regional planning is not getting a lot of attention, except for those who see it as creating an additional level of planning. 

What are the inhibitors to that consensus forming at a political level? 

We have become conditioned by 25 years of incredible prosperity to consider prosperity inevitable and growth as the problem. It's taken a while to realize that population growth may be inevitable but prosperity is not, and to recognize we have to do something. 

There's also a “cry wolf” mentality. The business community has said for years, "Give us what we want or we'll leave." And for years, they either didn't leave, or we didn't notice. Now when business threatens to leave, many in government are skeptical, but unfortunately, too many businesses are now following through on those threats. 

What are your forecasts for tax receipts in the next few years and how have those forecasts been received by the Legislature? 

Our ability to create such forecasts is not good: we are consumers rather than producers of economic studies. The forecasts we’ve collected are the ones you 're aware of, and it's not a pretty picture. The optimistic view is that we get to be the caboose on a slowly moving train. That is, the nation is coming out of its recession haltingly and when the other 49 cars move forward we'll move forward too. This is a very depressing thought for a state that's typically been America's engine of economic growth. 

I would expect that income and sales tax receipts will rebound in the latter part of 1994. That means the 1993-94 fiscal year will be a very tough one, especially since we've already raised taxes and cut services past the level thought tolerable. I support a two-year budget because I'm confident we'll be in somewhat better shape in the 1994-95 fiscal year than we are now. 

And for those critics, such as Zev Yaroslavsky, who say the two-year budget is a way of avoiding tough decisions, what's your reaction? 

I'll be anxious to hear from those critics what tough decisions they'd have us make. A two-year budget says we're ready to make the tough decisions based on the revenue we expect in the latter part of 1994. 

But doesn't it provide an incentive for one-time solutions such as selling airports or public property rather than making the structural changes necessary? 

The City of Los Angeles' budget may be able to focus on selling airports but the state doesn't own any major airports. There are accounting changes - what the press likes to call "smoke and mirrors" - which allow you to get through a crisis while saying your budget is balanced. We have to develop a level of taxes and services consistent with an economy only one or two notches above what we have now. 

Everything we can do is either very painful, either in general or to a powerful group, or is of only modest value and takes a long time to explain. I've gotten some legislators to focus lately on "complicated" subjects of modest importance, such as the tax proposals I've just described.

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