Uncertain future: budget, regime change will pose challenges.

• Author: Ascierto, Jerry
• Position: California Tax

"Some of you might be aware that we had a recall," Franchise Tax Board Executive Director Gerry Goldberg joked, as he began the CalCPA Committee on Taxation's annual liaison meeting with the FTB in mid-October.

While the impact of the recall election on California's budget crisis remains to be seen, the state's record deficit will continue to cast a shadow on the future.

The regime change probably means California is "not going to have any tax increases in the immediate future," Goldberg said. "And I think we're going to see the VLF [vehicle license fee] increase go away, and that creates a hole."

That hole amounts to roughly $4 billion, which is what tripling the license fee is expected to raise.

"We're either going to be borrowing a whole lot of money or cutting an awful lot of the budget," Goldberg said.

Budget Cuts Hit FTB

The FTB is feeling the pinch of those cuts, as it must trim its budget by $27 million. These cuts will require the FTB to eliminate certain workloads and redeploy staff to "Provision One" positions, which are revenue-producing jobs in the audit and accounts receivable management divisions.

The budget cuts may affect the FTB's ability to buy new equipment and force the agency to significantly reduce travel and personal service expenditures, Goldberg said.

Not Out of the Woods

Relying on a combination of heavy borrowing and spending cuts, the state budget still will fall at least $8 billion short next year, and $8 billion short each year through 2007, said Phil Spillberg, director of the FTB's Economic and Statistical Research Bureau.

"There is a continuing, structural deficit built into our system that is about $8 billion a year, and that assumes the restoration of the full VLF," Spillberg said. Without the $4 billion the VLF will bring in, the deficit will only increase.

Spillberg added that the solutions adopted for the current year's budget are comprised mainly of borrowing.

Abusive Tax Shelters

The FTB, coordinating its efforts with the IRS, is working to combat abusive tax shelters, said Winston Mah, chief of the FTB's audit division.

"We're looking at 400 taxpayers, with a potential of (collecting) $850 million," Mah said. "We're focusing on earlier years--1999 and 2000--and we're just beginning to look at 2001."

Mah also spoke about the Voluntary Compliance Initiative, part of a set of tax shelter laws enacted during the recent legislative session. The tax shelter laws:

* Create a variety of penalties and...