BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                  AB 3XXX|
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                                 THIRD READING


          Bill No:  AB 3XXX
          Author:   Evans (D)
          Amended:  2/19/09 in Senate
          Vote:     27 - Urgency

           
          WITHOUT REFERENCE TO COMMITTEE OR FILE

           ASSEMBLY FLOOR  :  Not relevant


           SUBJECT  :    State budget:  revenue and tax provisions

           SOURCE  :     Author


           DIGEST  :    This bill provides the necessary statutory  
          changes in the area of taxation to implement the 2009-10  
          Special Session budget agreement.

           Senate Floor Amendments  of 2/19/09 delete the 12-cent  
          increase in the fuel excise tax and changes the personal  
          income tax "surtax" to a personal income tax surcharge

           ANALYSIS  :    

           Specifics of AB 3XXX

           1. Increases, temporarily, the rate of the General Fund  
             portion of the state sales and use tax by one percent --  
             from the current rate of five percent to a rate of six  
             percent.  The increase would be effective starting April  
             1, 2009.  The rate increase will sunset on June 30 of  
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             either 2011 (approximately two years) or 2012  
             (approximately three years), the latter if the voters  
             approve the proposed Budget Stabilization constitutional  
             amendment. 

          2. Increases, temporarily, the rate of the vehicle license  
             fee (VLF) from the current rate of 0.65 percent to a  
             rate of 1.15 percent, except for commercial vehicles  
             with a gross weight of 10,000 pounds or more. Revenue  
             from the portion of the increase from 0.65 percent to  
             one percent will be retained by the General Fund ($121  
             million in 2008-09 and $1.2 billion in 2009-10) and  
             revenue from the additional increase of 0.15 percent  
             will be transferred to a newly created Local Safety and  
             Protection Account, which is continuously appropriated  
             for specific local public safety programs ($82 million  
             in 2008-09 and $502 million in 2009-10).  The VLF rate  
             increase will become effective for registrations  
             beginning May 19, 2009 (corresponding to the timing of a  
             weekly VLF billing cycle) and expire June 30, 2013, if  
             the voters approve the proposed Budget Stabilization  
             constitutional amendment.  
          If the voters reject the amendment, both components of the  
             rate increase will expire two years sooner -- June 30,  
             2011.  Starting in 2010, the Director of the Department  
             of Finance must determine by January 10 and upon  
             enactment of the annual budget, whether any of the money  
             derived from the 0.15 percent rate component have been  
             allocated by the state for other purposes.  In the event  
             of an affirmative determination, collection of the 0.15  
             percent rate component would be suspended until the  
             Director determines that the purpose of the allocations  
             has been restored.

          3. Rolls back the dependent credit amount under the  
             personal income tax (PIT).  Currently, taxpayers are  
             allowed a non-refundable personal credit of $99 (which  
             applies to the taxpayer and their spouse or domestic  
             partner if filing a joint return) and a dependent credit  
             of $309 (for children and other dependents) on their tax  
             returns for 2008.  These credits are phased out for high  
             income taxpayers, and are indexed to inflation each  
             year.  This bill temporarily reduces the dependent  
             credit to the size of the personal credit for tax years  

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             2009 through 2012.  However, the higher tax rate would  
             end two years earlier (after tax year 2010) if the  
             voters reject the Budget Stabilization constitutional  
             amendment.  Subsequent to 2012 (or 2010), the dependent  
             credit will revert to the size it would have been had  
             current law not been changed (the current $309 as  
             adjusted for inflation).  For a taxpayer with two  
             dependents, the smaller exemption credit will raise tax  
             liabilities by $420.

          4. Imposes a PIT surcharge of 0.25 on taxable income.  For  
             example, the income currently taxed at the 4.0 percent  
             rate would instead be taxed at the 4.25 percent rate;  
             the income taxed at the 8.0 percent rate would instead  
             be taxed at the 8.25 percent rate.  The amendments would  
             reduce the surcharge to 0.125 percent if specified  
             federal stimulus is received.   While the surtax and the  
             surcharge bring in similar amounts of revenue in the  
             out-years, the surcharge brings in about $400 million  
             more General Fund in 2009-10.  Like the other revenues  
             in the bill, the surcharge would trigger off in two  
             years if the Spending Cap Constitutional amendment is  
             not approved by voters.  Otherwise, the surcharge would  
             be in effect for four years.
           
          Comments  

          Existing law imposes a sales or use tax on the sale or use  
          in this state of tangible personal property, absent a  
          specific exemption.  The combined sales tax rate in  
          California currently ranges from 7.25 percent (for counties  
          with no optional transactions and use taxes) up to 9.25  
          percent (for the City of South Gate in Los Angeles County).  
           The combined rate consists of a state General Fund rate of  
          five percent, statewide special fund rates totaling 1.25  
          percent, a local tax rate of one percent, and local  
          optional rates.  Sales and use taxes, as general taxes on  
          consumption, are generally considered to be more regressive  
          than some other taxes, such as California's PIT, since  
          purchases of taxable goods absorb a larger portion of the  
          income of lower-income taxpayers than of higher-income  
          taxpayers.  Also, some researchers have asserted that  
          significant increases in sales taxes can have negative  
          impacts on spending and the economy.  However, given the  

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          imperative of a balanced budget and the magnitude of the  
          current budget shortfall, the economic effects of a sales  
          tax rate increase cannot be considered in a vacuum, but  
          must be weighed against the effects of other additional  
          spending reductions or tax increases.

          The VLF is a state tax levied on the purchase price of a  
          vehicle, and subsequently annually assessed against the  
          vehicle's value adjusted by a statutory depreciation  
          schedule.  Proposition 1A, approved by the voters in  
          November 2004, requires that VLF revenue from the existing  
          0.65 percent rate be allocated to support local health,  
          mental health, and social services costs under Realignment  
          or otherwise allocated to local government.  However, the  
          Legislature may increase the VLF rate and there is no  
          restriction on the use of the additional revenue.

          Dependent exemption credits are usually justified on the  
          grounds that taxpayers who raise children or care for  
          others incur extra expenses and therefore have less  
          disposable income from which to pay taxes.  The amount of  
          the credit, however, has varied considerably over the past  
          30 years, and according to the Legislative Analyst's  
          Office, there is no consensus on how large the credit  
          should be.  Prior to 1987, the dependent credit was roughly  
          one-third the size of the personal credit, and from 1987  
          through 1997, the dependent and personal credits were the  
          same.  The larger dependent credit currently in effect is  
          the result of legislation passed in 1997, which tripled the  
          dependent credit amount starting in 1998.  This bill  
          temporarily restores the relationship between the personal  
          and dependent credit that was in effect prior to 1998.

          Existing law imposes a PIT and provides for six different  
          graduated PIT rates ranging from 1 percent to 9.3 percent,  
          with an additional one percent Mental Health Tax on taxable  
          income over $1 million (Proposition 63, 2004).  This bill  
          imposes  an additional surcharge, equal to either 0.125  
          percent or 0.25 on each existing tax rate. The alternative  
          minimum tax is adjusted in conformance with this change.   
          This surcharge will slightly flattening the current  
          progressive tax rate structure, but also making PIT  
          revenues slightly less volatile. As an illustration of the  
          impact on taxpayers, the 0.25 percent surcharge would  

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          result in additional state taxes of about $125 for  
          taxpayers filing jointly with $50,000 in taxable income,  
          $250 for taxpayers filing with $100,000 in taxable income,  
          and $1,250 for taxpayers filing jointly with $500,000 in  
          taxable income. In addition, the rate increase at the  
          lowest brackets will result in tax liabilities for some  
          persons who currently have none.  This is because some  
          taxpayers whose tax liability currently is fully offset by  
          the personal and dependent credits will now have tax  
          liabilities that somewhat exceed the credits (and because  
          this measure also reduces the amount of the dependent  
          credit).  Since state personal income taxes can be taken as  
          itemized deductions on federal returns, the net impact of  
          the surcharge may be reduced by as much as one third for  
          some taxpayers.
           
          FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

          The overall fiscal effect of the measure, including these  
          amendments, through 2009-10, is to increase revenues by a  
          cumulative total of between $11.1 billion (if sufficient  
          savings from federal funds occur) and $13.0 billion (if  
          federal funds savings fail to meet the $10 billion  
          threshold).  The overall multi-year fiscal effect of these  
          amendments is to decrease revenues in this bill to benefit  
          the General Fund from $36.4 billion to $32.3 billion (if  
          sufficient savings from federal funds occur) and from $41.1  
          billion to $37.2 billion (if federal funds fail to meet the  
          threshold).  The specific fiscal effects of the provisions  
          are shown in the tables below.

          General Fund Revenue Impact of  the 2/19/09 amendments  to AB  
                                      3XXX
                             (Millions of dollars)
          

           ------------------------------------------------------------- 
          |Tax          |Effective    |2008-0|2009-1|2010-1|2011-1|2012-|
          |Provision    |Date \a      |9     |0     |1     |2     |13   |
          |             |             |      |      |      |      |     |
          |-------------+-------------+------+------+------+------+-----|
          |PIT 5%       |Tax years    |      | 3,254| 2,418| 2,458|1,238|
          |surtax       |2009 through |      |      |      |      |     |

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          |(federal     |2012         |      |      |      |      |     |
          |funds        |             |      |      |      |      |     |
          |threshold    |             |      |      |      |      |     |
          |met          |             |      |      |      |      |     |
          |-------------+-------------+------+------+------+------+-----|
          | PIT 2.5%    |             |      | 1,627| 1,209| 1,229|  619|
          |surtax       |             |      |      |      |      |     |
          |(federal     |             |      |      |      |      |     |
          |funds        |             |      |      |      |      |     |
          |threshold    |             |      |      |      |      |     |
          |not met)     |             |      |      |      |      |     |
          |-------------+-------------+------+------+------+------+-----|
          |PIT 0.25     |Tax years    |      | 3,658| 2,454| 2,526|1,147|
          |surcharge    |2009 through |      |      |      |      |     |
          |(federal     |2012         |      |      |      |      |     |
          |funds        |             |      |      |      |      |     |
          |threshold    |             |      |      |      |      |     |
          |met          |             |      |      |      |      |     |
          |-------------+-------------+------+------+------+------+-----|
          | PIT 0.125   |             |      | 1,829| 1,227| 1,263|  574|
          |surcharge    |             |      |      |      |      |     |
          |(federal     |             |      |      |      |      |     |
          |funds        |             |      |      |      |      |     |
          |threshold    |             |      |      |      |      |     |
          |not met)     |             |      |      |      |      |     |
          |-------------+-------------+------+------+------+------+-----|
          |Gas tax: 12  |April 2009   |   250| 1,808|   608|   767|896  |
          |cent         |through June |      |      |      |      |     |
          |increase \b  |2013         |      |      |      |      |     |
           ------------------------------------------------------------- 
           a\ All dates are contingent on voter approval in 2009 of a  
          Constitutional Amendment relating to budget stabilization  
          and reform.  Absent such approval, the provisions sunset  
          two years earlier than shown, as noted in the descriptions  
          of the individual provisions above.
           b\ Revenue impacts reflect portion of increase that  
          benefits the GF, through reimbursements for debt service on  
          transportation bonds. Total revenues raised from the gas  
          tax increase are about $2 billion annually  .
           
             General Fund Revenue Impact of AB 3XXX  after the 2/19/09  
                                   amendments  
                             (Millions of dollars)


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           ------------------------------------------------------------- 
          |Tax Provision  |Effective  |2008-0|2009-1|2010-1|2011-1|2012-|
          |               |Date a     |9     |0     |1     |2     |13   |
          |               |           |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |Sales          |April 2009 |$1,203|$4,553|$4,792|$5,195|-$164|
          |tax:1-cent     |through    |      |      |      |      |     |
          |increase       |June 2012  |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |VLF rate       |May 2009   |   264| 1,213| 1,238| 1,263|1,187|
          |increase to 1% |through    |      |      |      |      |     |
          |               |June 2013  |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |VLF: 0.15%     |May 2009   |   111|   509|   518|   529|  496|
          |rate increase  |through    |      |      |      |      |     |
          |for local law  |June 2013  |      |      |      |      |     |
          |enforcement    |           |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |PIT .25% rate  |Tax years  |      | 3,658| 2,454| 2,526|1,147|
          |surcharge      |2009       |      |      |      |      |     |
          |(federal funds |through    |      |      |      |      |     |
          |threshold not  |2012       |      |      |      |      |     |
          |met            |           |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          | PIT .125%     |Tax years  |      | 1,829| 1,227| 1,263|  574|
          |rate surcharge |2009       |      |      |      |      |     |
          |(federal funds |through    |      |      |      |      |     |
          |threshold met) |2012       |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |PIT dependent  |Tax years  |      | 1,440| 1,227| 1,181|  670|
          |credit         |2009       |      |      |      |      |     |
          |reduction      |through    |      |      |      |      |     |
          |               |2012       |      |      |      |      |     |
          |---------------+-----------+------+------+------+------+-----|
          |               |           |      |      |      |      |     |
           ------------------------------------------------------------- 
           -------------------------------------------------------------------------------------------------------- 
          |Totals:       |              |              |              |              |              |              |
           -------------------------------------------------------------------------------------------------------- 
          |  Assuming    |              |        $1,578|       $11,373|       $10,229|       $10,694|        $3,336|
          |0.25% rate    |              |              |              |              |              |              |
          |surcharge     |              |              |              |              |              |              |
          |--------------+--------------+--------------+--------------+--------------+--------------+--------------|

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          | Assuming     |              |        $1,578|        $9,544|        $9,002|        $9,431|$2,763        |
          |0.125% rate   |              |              |              |              |              |              |
          |surcharge     |              |              |              |              |              |              |
           -------------------------------------------------------------------------------------------------------- 
          

          a All dates are contingent on voter approval in 2009 of a  
            Constitutional Amendment relating to budget stabilization  
            and reform. Absent such approval, the provisions sunset 2  
            years earlier than shown, as noted in the descriptions of  
            the individual provisions above,


          DLW:mw  2/19/09   Senate Floor Analyses 

                       SUPPORT/OPPOSITION:  NONE RECEIVED

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