Avoiding Taxes While Talking About Oakland’s Budget Woes

Picture 2Last month KALW radio invited three guests to talk about the city of Oakland’s fiscal problems. To give the city’s official perspective was assistant city administrator for finance Scott Johnson. Daniel Bornstein of the Oakland Tribune was there to provide his apocalyptic view on Oakland’s budget, especially its under-funded legacy retirement systems. While they’re night and day in their depictions of Oakland’s fiscal health, Bornstein and Johnson tend to agree on solutions; both favor reducing city employee pay and benefits, and both see Oakland’s budget as unnecessarily swollen with debt.

For a community voice KALW chose a somewhat unlikely guest, Jim Blachman of Make Oakland Better Now!, or MOBN!

Blachman wasn’t really a different voice considering the other two guests. He agrees with the general trope of financial scarcity both Bornstein and Johnson take for granted, and the need for the imposition of austerity upon Oakland’s residents.

So KALW set up a discussion between three white male budget hawks to talk about the fiscal problems of a city that is mostly non-white. It’s as if CNN invited Paul Ryan, Charles Krathammer, and Grover Norquist to come on and talk about the U.S. budget situation and pretended this was a reasonably balanced panel – three white men from the government, press, and civil society, all who would like to impose big cuts on state spending, excepting the military/police.

Picture 3The choice of Jim Blachman to represent a voice from Oakland’s engaged activist community was a strange one because MOBN! has by all measures a very small constituency and only fleeting history. MOBN! was established in 2009 by eight individuals with the intention of eventually incorporating the group as a 501(c)4 non-profit. While MOBN! has added and lost a few members over the past three years, its membership remains small compared to other civic leagues and activist organizations involved in Oakland politics.

The corporate form MOBN! is aiming to become, a 501(c)4, is classified as a non-profit “charity” under the IRS tax code. These types of charities are allowed to participate in political campaigns, and in recent years the Super PACs used by wealthy individuals to shape national politics have proliferated under the 501(c)4 form. A search of the IRS database for charities shows no record of MOBN! having obtained recognition of exemption yet from the federal government.

Founding members of MOBN! back in 2009 included current City Council member Libby Schaaf, as well as a couple real estate agents, and a political campaigner linked to Larry Tramutola. Jim Blachman was there too as an executive officer of the group, and remains a board member today.

The discussion on KALW, which included a lot of echoing statements by Bornstein and Blachman was illustrative of what MOBN! thinks would create a “better” Oakland. Basically the group sees Oakland’s budget problems as a crisis caused by inflated municipal employee salaries, healthcare, and retirement benefits. In all of their materials they ignore the fact of dramatic declines in tax revenues available to California cities in recent decades, and widening inequality between the top one to twenty percent of America, and the bottom 90 percent.

Their political solutions therefore call for attacking labor unions and employees, and cutting services that predominantly benefit the city’s poorest residents. They do not call for progressive tax measures to raise more revenue, or other means of reducing wealth and income inequality and access to public resources within and beyond Oakland.

Here’s how Jim Blachman ended the interview with a call for massive budget cuts, layoffs, and/or slashing of benefits in order to fund a bare minimum of infrastructure and police:

“When you are making decisions as a city about what your priorities are or what you wan to spend money on, if you are going into these things without questioning what you are promising in terms of pensions, what are you promising in terms of compensation, what are you promising in terms of healthcare, and what is that gonna cost? You have to realize how expensive these things are in real terms today. Then you have to ask yourself, do I want to spend $30 million for someone’s retirement and their healthcare, or would I rather spend that money on road streets and highways, or police officers and the like? [….] We have some very hard choices that we’re going to have to make.”

Blachman is a typical California anti-tax, pro-austerity activist focused on attacking labor unions and undermining services that urban communities of color rely upon for survival. Like prior conservative activists who focused on slashing budgets and cutting taxes in the Golden State, Blachman and other MOBN! activists don’t focus on culture war issues – in fact some of them are rather liberal on issues of gender, sexuality, women’s rights, and they’d even claim to be racially progressive, notwithstanding the fact that the economic and political reforms they’re calling for would disproportionately harm Black, Latino, and Asian immigrant communities.

Instead these conservative budget activists fixate on spending, and they make arguments that are logical, but only within a de-politicized framework in which we have to accept the current state of inequality as a given. Blachman is similar to other prototypical California conservatives in that the political solutions to the budget problems he focuses on are linked to his day job; he works for powerful and wealthy interest groups that have spent enormous sums to shape tax laws and exploit tax loopholes in order to hoard capital amongst the wealthy and owners of real estate, favoring a privatized vision of society.

Blachman’s day job is with Advisor Partners, an investment advisory company located in Lafayette. Advisor Partners develops various technical strategies for use by investment management companies to maximize wealth retention for high income individuals.

One of the company’s marquee services is known in the industry’s parlance as “active tax indexing.” When you boil down all the complicated steps involved in active tax indexing, you’re left with a tax avoidance strategy that allows wealthy individuals to avoid paying capital gains taxes on stocks and other traded securities, or to carry these tax write offs over and thereby offset other taxes on the wealth and incomes of high net worth individuals.

The Advisor Partners web site explains that avoiding, and lowering the amount of taxes paid by the wealthy, is part of the firm’s “investment philosophy.”

“We seek to minimize costs and taxes by thoughtfully managing turnover, trading costs, and tax impact.”

In an article about “smart strategies to shelter and protect” the incomes and assets of the wealthy, Blachman’s boss at Adviser Partners, Dan Kern, complained that recently enacted federal tax laws meant to fund Obamacare are, “extremely unfriendly for the ultra-high net worth and somewhat unfriendly for people who have significant investment portfolios.”

Kern went on to describe how active tax indexing helps the wealthy avoid federal taxes: “if an advisor creates an index-oriented portfolio, a harvesting program will look at identifying stocks that are going down and sell them to generate a tax loss, which can be used to offset gains elsewhere. You replace the stocks that were sold with stocks that have the same or similar economic impact—such as selling Chevron and replacing it with Exxon.”

“With the Bush tax cuts set to expire at the end of this year,” wrote Blachman in 2010, “advisors need a plan for actively managing Uncle Samʼs upcoming bills for high-net-worth investors.” Blachman advocated his company’s active tax indexing strategy to thwart the federal government’s tax collectors:

“Indexed-based SMAs also provide ongoing tax management advantages, such as tax loss harvesting using a short-term capital loss to offset capital gains. If a California resident at the highest marginal tax rate (35% currently, 40% when the Bush tax cuts expire) invested $1 million and the advisor was able to harvest 6% in losses, the advisor has lowered his clientʼs tax bill by $24,000—hardly chump change.”

Blachman called this “the quest for tax Alpha,” referring to the somewhat mythical quantity of the fully maximized rate of return on an investment.

As I noted in a previous post most Oaklanders are living below the state’s median family income of $57,000, and only a small proportion of the city’s residents own stock and other securities holdings in significant amounts.

  1. Another thoughtful post in a series of significant contributions to the conversation about Oakland. I’m glad you’re writing about the way the city’s fiscal difficulties are being covered in the media. Though I’m a bit skeptical of the rhetorical weight it carries, I’ll concede it’s a worthwhile public service to report the personal stakes and actions of individuals attempting to guide Oakland’s fiscal policy, as you do with Mr. Blachman.

    However, I feel compelled to add, as I’m sure you know, but didn’t mention, that what holds on a federal or a state level, doesn’t necessarily apply for a city. You mention the guests’ failure to discuss “progressive tax measures”. I am absolutely with you when it comes to corporate and income taxes, capital gains taxes, carried interest, and other corporate and personal loopholes. However these are handled at the level of federal, and to a lesser extent state, policy.

    So if we’re talking about what a city can do, what “progressive” tax measures does it actually have?

    The bulk of Oakland’s revenue comes from property tax, sales tax, real estate transfer tax, as well as business licensing fees, parking fees, and dozens of smaller, revenue-generating measures. Which of these could be increased “progressively”?

    As for the salaries and benefits of municipal workers — is it possible to discuss what a city can afford without being labeled a conservative? Public safety officers can retire at about the age of 50 with $100,000 in annual pensions. Can Oakland afford this?

    And then there’s the fact that paying these pensions is fundamentally tied to the performance of the stock market. Which means that paying “good pensions” is inextricably tied to corporate wellbeing. How do we, as liberals, think about the fact that when some multinational conglomerate lays off workers to squeeze a bit more profit, it’s actually good for CalPERS, because it can sustain its 6.75% discount rate? How do we reconcile that?

    Just wondering.

    – Charlie

  2. Hey Charie,

    I think you raise excellent points.

    I somewhat disagree, however, that “what holds on a federal or a state level doesn’t necessarily apply for a city.” One of the roots of the chronic urban fiscal crisis is the withdrawal of federal aid to cities in the 1980s and 1990s. The fact that there’s an entire industry like the one Jim Blachman works in, seeking to reduce the federal and state tax bills of the wealthy, had, and continues to have, serious impacts on localities like Oakland. State aid to Oakland has been massive via the Redevelopment Agency (recently nixed due to state-level political decisions). The state also acts as the conduit for a lot of Oakland’s in-state revenues and federal funds, and the state spends a significant amount of money in Alameda County and Oakland on housing, healthcare, education, environment, and other services. I would say there’s a direct connection between efforts of the top stratum of wealth holders/income earners to reduce their federal and state tax burdens, and the fiscal problems of local places like Oakland.

    Too often local politicians claim that their hands are tied because the revenue sources they have control over are so small and inflexible, and it would take decisions at the federal or state level to reverse these. This is half honest, half apologetics to avoid confronting the wealthy and propertied interests in their jurisdictions who could very well destroy their political careers, I think.

    Imagine if groups like MOBN! put their considerable resources into campaigns aimed at overturning or modifying Prop 13, or combating the dangerous national austerity program of the Republican Party. Of course I don’t think groups like MOBN! would ever do this, precisely because their constituents benefit from these economic policies.

    As for local progressive taxes, I think there are more than a few, but you’re right; the rich have rigged the rules of the game to give themselves veto power over tax increases, and to make most of the available revenue measures more regressive, therefore highly unpopular. I guess this is another research project to work on: a comprehensive list of progressive tax and revenue measures Oakland could implement now, if only there was the political will within the city….

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