Tax Change Could Cost City as Much as $12 Million a Year

By Olin Ericksen
Staff Writer

June 8 -- Santa Monica may stand to lose as much as $12 million a year in revenue after the federal government last month allowed phone companies to withhold local taxes on long distance calls that may include mobile phones, The Lookout News has learned.

With the City Council set to adopt a tightly structured $445 million budget June 20, City Manager Lamont Ewell huddled with finance officers Wednesday to discuss the possible loss of a “major revenue stream” ranging from $8 million to $12 million and explore available options.

“What we will be meeting about is what are the local implications,” Ewell said before meeting with advisors. “We are looking at all our options.”

If the federal changes are enacted locally, City officials will consider several ways to balance the proposed 2006-07 Fiscal Budget, including borrowing money from Capital Improvement Projects to cover the gap, Ewell said. He did not say which projects could be targeted.

While the City also is considering “legal,” as well as other, alternatives, officials could face the difficult prospect of scaling back future budgets or increasing revenue if the City faces an annual shortfall.

The loss to the City, however, could be gain for taxpayers, who may qualify for refunds in their 2006 federal tax returns for three years worth of taxes, with interest, paid towards long-distance calls.

The Internal Revenue Service (IRS) issued a statement saying it is working on a simplified method for individuals to claim the refund on tax returns filed next year.

At issue is a local tax on long distance phone calls that may affect cell phone use, although local officials are not sure if that is the case. The tax is a portion of the Utilities Users Tax (UUT), which is based on a national tax known as the Federal Excise Tax.

The UUT is one of the City’s five major revenue streams, which also include property and sales taxes. Currently the City has a 10 percent tax on all long-distance calls, including mobile phone calls.

There were already warning signs when Ewell presented his first proposed budget to council members in mid-May. Ewell noted that U.S. Treasury Department officials had announced May 25 that they would no longer fight litigation brought mainly by telecommunications companies to repeal the Federal Excise Tax.

The IRS followed suit June 1 by no longer collecting the tax from phone companies that chose to no longer pay it.

"The Federal Appeals courts have spoken across the board,” Treasury Secretary John Snow said in a statement issued the same month he offered his resignation. “It's time to `disconnect' this tax and put it on the permanent `do not call' list.

“It marks the beginning of the end of an outdated, antiquated tax that has survived a century beyond its original purpose, and by now should have been ancient history,” Snow said.

In addition to rolling back taxes on long-distance calls, the fight is on to repeal the tax on local service as well, Snow said. That could result in further revenue losses for Santa Monica and other municipalities.

The quick about-face by the Treasury and the IRS has led some -- including Ewell -- to speculate that the decision to stop defending the excise tax in court could be “a political move.”

“This is something the telecommunications companies have been pushing for about five or six years,” said Ewell, noting that the federal government’s decision is a “break to (large) business.”

So far, Ewell said, Verizon, the local phone and wireless company that handles much of the long-distance service in Santa Monica, has not withheld its taxes to the City, and company officials have not indicated that they plan to do so.

“If (Verizon) chose not to (pay the tax), God only knows what will happen,” said Ewell.

Ewell said the City would be watching the issue closely, since changes could kick in within the next six months to a year.