BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 3XXX| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ 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 CONTINUED AB 3XXX Page 2 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 CONTINUED AB 3XXX Page 3 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 CONTINUED AB 3XXX Page 4 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 CONTINUED AB 3XXX Page 5 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 | | | | | | CONTINUED AB 3XXX Page 6 |(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) CONTINUED AB 3XXX Page 7 ------------------------------------------------------------- |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 | | | | | | | |--------------+--------------+--------------+--------------+--------------+--------------+--------------| CONTINUED AB 3XXX Page 8 | 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 **** END **** CONTINUED