California Court Upholds 1% Tax on Millionaires

Last Wednesday, the California Court of Appeals ruled on Jensen v. California Franchise Tax Board, and rejected challenges to Proposition 63. For those of you who are not familiar, the proposition imposed a 1% tax on California taxpayers who earn more then a million dollars per year to fund mental health services. You can check out the following highlights of the ruling courtesy of the Tax Prof, or download the full text here.

We find no constitutional infirmity in the challenged portions of Proposition 63. An income tax may be rationally based on a taxpayer‟s income level and ability to pay, and there is no need to show that a particular taxpayer personally benefits from a tax assessed for the public good. Taxpayers earning more than $1 million annually do not comprise a “suspect class” requiring a strict scrutiny constitutional analysis. Further, Proposition 63 is valid even if it is not a constitutional amendment. ...

We are unaware of any case authority holding that wealthy individuals form a “suspect class” deserving of a heightened degree of scrutiny. Suspect classifications include race, gender, national origin or illegitimacy. Wealth generally confers benefits, and does not require the special protections afforded to suspect classes. Wealth has “none of the traditional indicia of suspectness: the class is not saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” (San Antonio School District v. Rodriguez, 411 U.S. 1, 28 (1973).) ...

The Taxpayers are mistaken in thinking that taxpayers in a particular tax bracket cannot be singled out for an income tax to benefit society at large. ...

The tax imposed by Proposition 63 is not arbitrary merely because a person earning $1,000,001 is subject to the tax, while a person earning $999,999 is exempt. The government has leeway in “drawing lines” below which individuals are exempt from a tax. ...

The Taxpayers perceive themselves as victims of a populist movement to “soak the rich.” The desire of the majority of the electorate to tax a minority of citizens based on their earnings is not a basis for overturning an income tax. The courts “do not substitute their social and economic beliefs” to supplant the judgment of the enacting body.

Thousands of Businesses Need to File State Tax Returns

From Business Wire.com:

The Franchise Tax Board (FTB) today announced it has begun contacting more than 35,000 companies that did business in California in 2007 but failed to file a state tax return for that year.

The FTB annually reviews more than 5 million income records from government agencies and financial institutions and matches them against tax records filed to determine whether some businesses have yet to file. As part of this annual effort, FTB collected approximately $31 million last year from businesses that failed to file tax returns.

Businesses contacted by FTB will have 30 days to file their delinquent tax return or show why one is not due. If no action is taken, the FTB will issue a tax assessment that may include penalties and fees. With the state`s automatic seven-month extension, companies doing business in California are provided up to 10 and one half months to timely file their California state tax return.

The failure to file tax returns is one part of the tax gap that is defined as the difference between taxes owed and taxes paid. California estimates its annual tax gap to be $6.5 billion per year.

For those receiving notices, information is available by calling 866.204.7902. Callers should be prepared to provide the 15 digit notice number.

Applications For Home-Buying Tax Credit To Be Cut Off Today

The application deadline for the popular $10,000 California homebuyers tax credit is today. The California Franchise Tax Board had extended the number of applications they would accept, and there are now 75 spots left for California taxpayers who are eligible for the credit. However, according to the Sacramento Bee the California Franchise Tax Board announced this morning that they would no long accept applications past midnight tonight. Check out a clip of Sac Bee’s coverage of the last minute change below.

Early Wednesday, the FTB said it has received 11,925 applications for the popular tax credit - 75 short of its 12,000-application limit.

The state tax agency said last month it would take 2,000 extra applications for the credit because many received are duplicates, invalid or incomplete.

The tax credit program launched March 1 to move statewide home builders' excess, unsold inventory, proved more popular than expected. The FTB said it has already issued 4,808 certificates for nearly $45 million worth of credits. Officials expect to process and award all the credits by the end of August.

Home builders have shifted their focus to efforts to add $200 million more to the original $100 million allocation. But that's proved more difficult than expected in a rancorous budget climate. Some economists have criticized further allocations as a stimulus for home building when the state's larger problem, they argue, is an excess of unsold existing homes.

The California Building Industry Association, a trade group for residential builders and suppliers, maintains that each $10,000 tax credit adds $16,000 to state government revenues and $3,000 to a local government because of the economic activity generated.