New Phone Tax vs Accountability

In 2006 the Internal Revenue Service decided that the federal excise tax on telephone usage would apply only to separately-billed local calls. Since the current 10 percent Los Angeles City telephone tax, imposed in 1967, contained a reference to the federal excise tax and since the tax is not restricted to separately-billed local calls, city officials became worried that the telephone tax may be determined to be illegal. Earlier this year, in an attempt to eliminate the potential illegality, the City Council rewrote the telephone tax omitting references to the federal rules. To the Council’s chagrin, a taxpayer filed a challenge stating that the Council failed to comply with Proposition 218, passed by the voters in 1996, requiring a public vote on every new tax. The fate of the tax will soon be decided by the courts in a pending ruling. Annual revenues from the tax currently approximate $270 million. These funds are allocated to the General Fund which pays for most city services. To make matters worse, with full knowledge of the potential loss of the $270 million in general fund revenues, the city recently negotiated a five year contract with six unions resulting in a 23 percent pay hike over the contract term to a majority of city employees. The pay hike is expected to cost the city over $200 million. To compensate for what appears to be poor fiscal management, the Council (anticipating that the courts will abolish the current phone tax) voted to place a 9 percent phone tax (presumably in compliance with Proposition 218 and without references to the federal excise tax) on the Feb. 15, 2008 presidential primary ballot. This tax is being cleverly marketed as a reduction in the existing phone tax from 10 percent to 9 percent when, in fact, it is a new tax. When the courts strike down the current 10 percent phone tax it will be zero percent. Thus the approval by voters of a 9 percent tax will create a new tax, not a reduction of the current tax. In addition to marketing a new tax as a reduction of a current tax, the Council is utilizing the “emergency” provisions of Proposition 218 to place the tax on the ballot in February. Proposition 218 prohibits the city from taking a tax to voters before a regularly scheduled municipal election unless it declares an emergency. Since the next regularly scheduled municipal election is in 2009, the Council decided to declare an emergency. Although Proposition 218 doesn’t specifically define an “emergency,” it would seem that an emergency would be an immediate catastrophic event such as a fire, flood, earthquake, terrorist attack, etc. It’s difficult to imagine that those who drafted the proposition intended poor fiscal management to be considered an emergency. Another apparent benefit of utilizing the emergency provisions of Proposition 218 is that the vote will be decided by a simple majority instead of two-thirds, which is the usual requirement for a tax proposition to pass. It is anticipated that the spokespersons that will be used to convince voters to pass the new tax are firefighters, police and other emergency service providers. These are the same groups that were used to scare people into voting against Valley secession and to cause the governor to withdraw his proposal for public employee pension reform. After all, who can resist the pleas of emergency personnel to enable them to keep us safe? Current scare tactics include warnings from the city’s budget analysts that the loss of the phone tax revenues could result in the elimination of 2,700 police officers or half of the fire department or 4,200 civilian city employees. Additionally, the city’s Chief Administrative Officer, Karen Sisson said it would be difficult to continue the police-hiring plan that has become a major initiative of the Mayor’s administration. What is this all about? Our trash fees were recently hiked from $11 to $28 per month to hire 1,000 new police officers. Now we are being told that the elimination of the phone tax will jeopardize these hires. What does one thing have to do with the other? The answer is that no matter what we are told money is to be used for, when it is deposited into the General Fund, city officials can and do use it for whatever they choose. This, of course, will include revenues from a new phone tax. Perhaps it is time for us to demand fiscal responsibility and stop providing more money. With the numerous spending categories in the budget of Los Angeles, there must be areas where spending can be reduced to cover the loss of the phone tax without eliminating emergency personnel. If we don’t force the issue we will never find out. Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie, Hoffer & Allison, LLP and vice-chair of the Valley Industry and Commerce Association (VICA).