Solving San Diego's business tax troubles

This month, City Auditor Eduardo Luna released a revenue audit report for the city of San Diego, identifying how local government taxes and fees are collected and verified. For a city that budgeted more than $886 million in major revenues and lease payments this fiscal year, accurately counting every dollar is a difficult task, but one that clearly is not being done.

Luna's report made two major discoveries that are relevant to local taxpayers: that San Diego's Business Tax Compliance Program does not have written policies or procedures for the work it performs, and it could be doing more to audit revenue. Routine revenue audits were dismissed by the city treasurer as "not cost effective" due to the low amount in play (94 percent of businesses only pay a $34 business tax each year), and the department preferred comparing data from other government finance agencies for compliance verification purposes. This strategy seems more of a result of the limited resources available to do the job; the program's sole field compliance inspector position was eliminated under the most recent round of budget cuts, which according to the mayor's office "will reduce research of businesses being out of compliance." Worse yet, Auditor Luna notes that the remaining three Compliance Program employees spend most of their time resolving taxpayer appeals and grievances, rather than actively verifying the compliance of business owners. It should be noted that these appeals and grievances are likely brought on by the city itself, for its inability to fundamentally distinguish between people who owe money and those that do not.

Though cross-comparing government financial records sounds like a solid approach to collecting delinquent taxes, in San Diego it has recently been used in a blundering fashion. Last year, more than 41,000 notification letters were sent en masse to individuals who reported self-employed or contractor income to the state of California, but lacked a current city business license. These letters identified supposed owed back taxes, late fines and other penalties that could range in the hundreds or thousands of dollars; however, the overdue balances were later revealed to be widely inaccurate. As Councilmember Sherri Lightner pointed out in a later May 2009 memo to the City Council, "The treasurer reports that 75 percent of those notified are actually in compliance and do not have to pay the fee." City law in fact allows for many exemptions to the business tax, particularly for infrequent contractors, which apparently was overlooked by the treasurer's office in its hasty collections attempts.

Short staffing and misplaced priorities at the treasurer's office may also be having an effect on how the city of San Diego officially determines if a delinquent business is still active. This author obtained a copy of City Hall's response to a simple public records act (PRA) request made last December that inquired about how delinquent business license accounts are handled. Sources state that the city treasurer classifies delinquent businesses that are nonresponsive to a few mailed letters as being in a "canceled" status -- which for the city's collections purposes mean "nonexistent." However, it is very likely that many struggling business owners, particularly independent contractors and self-employed individuals, simply ignored notification letters detailing large overdue balances (which we now know are mostly false), and are now unlicensed entrepreneurs in their own homes, working in the informal economy. Just exactly how the treasurer's office determines if businesses are canceled still remains unclear; in the PRA response, the city avoided directly answering the question, and pointed to language in the Municipal Code which provided no answers. However, the city treasurer's office did identify 6,236 canceled accounts -- which, if sifted through and successfully brought into compliance, could provide thousands of dollars in city revenue.

If the city lacks the resources to verify if a person has to pay taxes or not, or if a business is still open, then local leaders should seriously reconsider how it structures its Business Tax Compliance Program. Rather than make Program employees spend their time reconciling false statements of tax liability, why not direct their energies towards improving enrollment in a business-friendly approach? Last January, Councilmember Carl DeMaio announced his support for a tax amnesty or tax relief plan for beleaguered business owners and self-employed workers in this difficult economy, which received wide press coverage. However, few media outlets relayed that tax reform advocates also picked up more bipartisan support at City Hall.

As part of her May 2009 recommendations for changes in the Fiscal Year 2010 budget, Democratic Councilmember Sherri Lightner proposed a Business Tax Compliance program review, and alleviating financial pain for first-time business tax delinquents. Citing the large volume of constituent correspondence she received on the issue, she suggested that the treasurer's office instead warn first-time offenses before levying any penalties, and require payment of only the outstanding business tax and zoning fee, waiving any additional fees beyond cost recovery. Kudos is in order to Councilmember Lightner for standing with San Diego taxpayers on this important issue.

What's at stake is more than just a $34 annual tax -- it's the perpetuation of a punitive and unfair system of business fees and penalties that the city appears more and more dependent on. City documents revealed that only a portion of the stated "Business Tax Revenue" in Luna's report is in fact business tax receipts destined for the General Fund -- nearly half of revenues are tax processing fees, special program set-asides and penalties.

Next week, the City Council's Budget and Finance Committee will review the citywide revenue audit report. Let's hope that taxpayers will have some tough questions asked on their behalf.

Vasquez is the senior policy analyst at the National University System Institute for Policy Research.

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