Vanguard tax break altered
"Poor people don't own mutual funds," says whistleblower's lawyer
California State Sen. Mike Gatto, D-Los Angeles, has revised his proposal to try to make Malvern-based mutual fund giant Vanguard Group exempt from California state taxes -- a tax break Vanguard said it didn't ask for.
Gatto's original bill would exempt any mutual fund manager "owned by investors in the mutual funds it serves" from California's Corporation Tax. It passed a state House committee, 9-0. But after an erroneous press announcement trumpeting Vanguard's supposed "nonprofit" status (it is a private company), Gatto told me he planned amendments before another committee and full House votes.
"Tax is a cost," Sorensen added. "You can say you're 'at cost' and still comply with the tax law," which requires companies like Vanguard that buy services from affiliates to pay market prices, not special favorable low prices, as Danon alleges Vanguard has been doing in violation of the longstanding IRS rules governing "transfer payments" between related companies.
"Vanguard is paying taxes in Texas," for example, Sorensen pointed out. If California stops trying to collect taxes from Vanguard, that should leave the company with higher income and higher tax obligations to the U.S. and other states, he told me.
Gatto told me last week that he thinks of Vanguard as the favorite company of middle-class and working investors, such as California teachers.
The California Tax Reform Association, whose members include the California Federation of Teachers and other school and public employees' unions, was on record opposing Gatto's bill in its original form. A California legislative staffer, speaking on condition he not be quoted, tells me the CTRA has since dropped its opposition. The state has not calculated how much the bill could cost California.
Gatto says a dismissive online column about Danon's whistleblower challenge to Vanguard, his former employer, provoked Gatto's efforts to block Danon's hopes of collecting a whistleblower fee, and help Vanguard.
Sorensen questioned why Gatto, a liberal, labor-backed Democrat, is eager to give a tax break to the giant fund manager, which manages more than $3 trillion in clients' U.S. and foreign assets.
"Most investment assets, even at Vanguard, are owned by rich people," Sorensen said. "Poor people don't own mutual funds."
Gatto's spokesman Eric Menjivar declined to comment.