Windfall for state - but maybe not

Tax amnesty program yields a huge influx of cash, much of which may be given back

By Alexa H. Bluth, Sacramento Bee, April 5, 2005

California received a stunning $3 billion more than expected in corporate tax receipts in March - $2 billion-plus of which came in a single day on the last day of a tax amnesty program for individuals and businesses - but Gov. Arnold Schwarzenegger's budget office cautioned Monday that the state likely will not get to keep much of it. "These kind of numbers certainly get your attention, but before anyone starts popping champagne corks, it's very likely that a substantial portion of this revenue spike may end up going right back to the people who paid it," said H.D. Palmer, spokesman for the governor's Finance Department.

The rush of payments is related to the recent tax amnesty program, officials from the Franchise Tax Board and state Controller's Office said Monday.

Businesses that have disputes with the state's Franchise Tax Board apparently went ahead and paid the taxes in question to avoid penalty increases that kick in at the end of the amnesty program, officials said. The companies are not admitting fault and, if they eventually win their cases, Palmer said the state would be forced to refund the contested taxes. "Companies are essentially buying a short-term insurance policy," he said.

Plus, even if the state prevails in some of the cases, the earnings would signify a one-time influx in cash, rather than a new, ongoing source of revenues.

Although the money is in dispute, resolving the cases could take one to three years, said Russ Lopez, spokesman for state Controller Steve Westly.

That means a large pool of cash in the state treasury for years, and it could prove particularly tempting as lawmakers and the governor negotiate a 2005-06 budget in the face of a multibillion-dollar shortfall.

Schwarzenegger in January proposed a $111.7 billion plan that would boost overall state spending by 4.2 percent but proposes to hold back growth in education, social services and state workers' pay to help fill a projected $9.1 billion budget gap.

His budget proposal will change again in May, however, when the state updates its revenue picture with April tax receipts. Palmer said it is still unclear how the latest influx of receipts will affect the governor's May budget revisions.

Westly also said it will be some time before the state can determine how much it can keep of the influx - which has been deposited into the general fund and is available for spending.

"This is not time to go spend the additional money. We do not know how much we will have," he said. "This is a mountain of cases, a mountain of checks. This will take us some time to review."

Westly said the influx does signify that the tax amnesty effort has been a success, despite lackluster response throughout most of the program.

The two-month tax amnesty program was designed to allow Californians to settle old tax bills without added penalties. Back taxes not paid by the deadline are subject to higher penalties.

Although the board had hoped that the program would eventually yield about $672 million, far more had been collected by midweek, more than double the amount included in the governor's budget proposal.

The state had received 80,000 amnesty applications, 73,000 from individuals and the rest from corporations, as of Friday, board spokesman Patrick Hill said.

He said the number will change, because the board is still processing applications. The applications must have been postmarked by Monday.

Hill said the board had not determined how much, if any, of the windfall could be counted directly under the amnesty program.

But Westly said that the rush of money at the end of last week shows that the state will collect far more than expected.

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Last modified: April 5, 2005

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