BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 76
                                                                  Page  1


          SENATE THIRD READING
          SB 76 (Budget and Fiscal Review Committee)
          As Amended  June 24, 2009
          2/3 vote.  Tax Levy 

           SENATE VOTE  :Vote not relevant  
           
           SUMMARY  :  Enacts the General Fund tax provisions to implement  
          the 2009-10 Conference Budget Package.  Specifically,  this bill  :  


          1)Repeals the provisions that allow net operating losses (NOLs)  
            incurred on or after January 1, 2011 to be carried back to  
            offset the taxpayer's income during the two prior tax years. 

          2)Repeals the provisions that authorize the assignment of unused  
            business tax credits by a corporate taxpayer to its  
            affiliates, unless the assignment is included with a return  
            filed on or before the effective date of this bill. 

          3)Imposes an oil severance tax of 9.9% on the extraction of oil  
            from the earth or water within California, effective October  
            1, 2009.  

          4)Imposes an additional $1.50 per pack excise tax on cigarettes,  
            as of October 1, 2009, and an equivalent tax on tobacco  
            products, as of July 1, 2010.  

          5)Takes immediate effect as a tax levy. 

           FISCAL EFFECT  :  Results in a General Fund (GF) revenue increase  
          totaling about $1.9 billion in 2009-10, with larger amounts  
          annually thereafter. 

          The Franchise Tax Board (FTB) estimates that repealing the  
          provisions allowing NOL carrybacks and the assignment of  
          business tax credits will increase GF revenues by $80 million in  
          fiscal year (FY) 2009-10 and $290 million in FY 2010-11, with  
          ongoing annual revenue gains increasing to $850 million in FY  
          2014-15.

          It is estimated that the oil severance tax will increase  
          revenues by $830 million in FY 2009-10, and by $1.1 billion in  
          FY 2010-11 and each FY thereafter.  








                                                                  SB 76
                                                                  Page  2



          The BOE estimates that the additional cigarette and tobacco  
          products excise tax will result in a revenue gain to the GF of  
          $1 billion in FY 2009-10 and $1.27 billion in FY 2010-11.  It is  
          also estimated that because the higher tax will reduce sales,  
          revenues to the Breast Cancer Fund and the California Children  
          and Families Trust Fund (Proposition 10) will decline by $2.1  
          million and $53 million, respectively, in FY 2009-10, and by  
          $2.7 million and $73 million, respectively, in FY 2010-11.   
          Finally, BOE staff estimates that revenue to the Cigarette and  
          Tobacco Products Surtax Fund (Proposition 99) will decrease by  
          $26.5 million in FY 2009-10 but will annually increase,  
          beginning with FY 2010-11, by $27.6 million due to the  
          Proposition 99 impact of the tax on other tobacco products. 

           COMMENTS  : 

          1)Repeal of NOL Carrybacks.  On September 30, 2008, the Governor  
            signed into law AB 1452 (Budget Committee), Chapter 763,  
            Statutes of 2008, to implement provisions of the 2008-09  
            Budget Agreement.  Among other things, AB 1452 authorized NOL  
            carrybacks for losses incurred in 2011 or later tax years.   
            Specifically, under AB 1452, taxpayers will be able to use  
            carrybacks to offset their income during the two prior tax  
            years.  The carryback provisions are scheduled to phase in,  
            with 50% of any 2011 NOLs available for carryback, 75% of any  
            2012 NOLs, and full carryback for NOLs in subsequent years.   
            This bill would repeal the NOL carryback provisions enacted by  
            AB 1452.  

          2)Repeal of the Business Tax Credit Assignment Provisions.  AB  
            1452 also allowed for the assignment of certain unused  
            business tax credits.  Specifically, for taxable years  
            beginning on or after July 1, 2008, corporate taxpayers may  
            assign eligible credits to an affiliated corporation that is a  
            member of the same combined reporting group.  However,  
            assigned credits may only be applied by an eligible affiliate  
            in taxable years beginning on or after January 1, 2010.  This  
            bill repeals the provisions that authorize the assignment of  
            unused business tax credits, unless the assignment is included  
            with a return filed on or before the effective date of this  
            bill.

          3)Oil Severance Tax.  Currently, California is the only major  








                                                                  SB 76
                                                                  Page  3


            oil-producing state that does not impose a tax on the  
            extraction of oil from the earth or water.  Existing law does  
            impose an excise tax of $0.18 per gallon on the removal of  
            motor vehicle fuel or diesel fuel at the refinery or terminal  
            rack, upon entry into the state, and upon sale to an  
            unlicensed person.  In addition, existing law authorizes a 1%  
            ad valorem property tax, to be imposed by counties, on the  
            full cash value of property where the value of the property  
            includes underlying gas and mineral rights and, with respect  
            to oil in the ground, "proved reserves".  

          The price of California crude oil is normally 15% less than the  
            often-quoted benchmark prices for light crude oil because  
            California crude oil is heavier and more expensive to refine.   
            Revenues from the severance tax will depend on future levels  
            of oil production and the price of oil extracted in  
            California.  Stripper wells - defined as those producing less  
            than 10 barrels of oil per day - would be exempt from the tax  
            if the price of oil they received as of January 1 of the  
            previous year was below $30 per barrel.  This bill also  
            exempts oil owned or produced by the state or any political  
            subdivision.  

            Taxes of this nature are often passed on to the end consumer.   
            Nevertheless, the Legislative Analyst's Office noted in its  
            2006 report on Proposition 87, which would have imposed a  
            similar oil severance tax, that market forces could ensure  
            that an oil severance tax would not be passed on to consumers.  
             Because California oil refiners have many options for  
            purchasing crude oil in the global oil market, California oil  
            producers will have to maintain competitive prices to retain  
            their share of the market.

          4)Cigarette and Tobacco Products Tax.  The Cigarette and Tobacco  
            Products Tax Law imposes a variety of taxes on every  
            distributor of cigarettes and tobacco products.  The revenues  
            derived from the imposition of those taxes fund several  
            programs and services, including health education, research,  
            hospital care, fire prevention, environmental conservation,  
            breast cancer research and early detection services, and early  
            childhood development programs.  The current total amount of  
            tax on cigarettes is set at $0.87 per pack of 20 cigarettes.   
            That amount includes the following taxes and surcharges: 









                                                                  SB 76
                                                                  Page  4


             a)   An excise tax of $0.10 per pack of 20 cigarettes (5  
               mills per cigarette).  The proceeds of this tax are  
               allocated to the GF.  

             b)   A surtax of $0.25 per pack of 20 cigarettes (12  mills  
               per cigarette) imposed under the Tobacco Tax and Health  
               Protection Act of 1988 (Proposition 99), which was adopted  
               by the voters at the general election held on November 8,  
               1988.  

             c)   A surtax of $0.50 per pack of 20 cigarettes (25 mills  
               per cigarette) imposed under the California Families and  
               Children Act of 1998 (Proposition 10), which was adopted by  
               the voters at the general election held on November 3,  
               1998. 

             d)   An additional excise tax at the rate of $0.02 per pack  
               of 20 cigarettes (1 mil per cigarette).  The proceeds from  
               the imposition of this tax are deposited in the Breast  
               Cancer Fund.

            Existing law also imposes a surcharge on the distribution of  
            certain tobacco products at a rate equivalent to the total  
            combined rate of cigarette taxes and based on the March 1  
            wholesale price of cigarettes.  Tobacco products include  
            cigars, smoking tobacco, chewing tobacco, snuff, and other  
            products containing at least 50% tobacco.  The proceeds from  
            the surcharge on tobacco products fund the Cigarette and  
            Tobacco Products Surtax Fund and the California Children and  
            Families Trust Fund. 

            This bill increases the state cigarette excise taxes by an  
            additional $1.50, effective October 1, 2009.  Specifically, an  
            additional excise tax of 75 mills per cigarette (or $1.50 per  
            package of 20 cigarettes) will be imposed on every distributor  
            on or after October 1, 2009.  Furthermore, a one-time floor  
            stock tax of 75 mills (or $1.50 per package of 20 cigarettes)  
            will be levied on each cigarette in a dealer's or wholesaler's  
            cigarette inventory, as of October 1, 2009.  A floor stocks  
            tax is a one-time excise tax placed on a commodity undergoing  
            a tax increase.  The amount of the floor stocks tax is equal  
            to the difference between the new tax rate and the one just  
            previous to it.  A floor tax is necessary to ensure that the  
            excise tax that cigarette dealers, distributors, and  








                                                                  SB 76
                                                                  Page  5


            wholesalers pay on their existing inventory is the same as the  
            tax paid on cigarettes purchased after the tax increase, i.e.,  
            October 1, 2009.  Absent a floor stock tax, a cigarette seller  
            will receive windfall profits if the seller has a large  
            cigarette inventory before the tax increase takes effect.  In  
            addition, this measure imposes upon every licensed distributor  
            a cigarette indicia adjustment tax on affixed and unaffixed  
            cigarette tax stamp inventory, at 12:01 a.m. on October 1,  
            2009.  The floor stock tax return and tax would be due to the  
            BOE on November 16, 2009.  The cigarette tax stamp would be  
            increased to $1.875 for each stamp designated "25", $1.50 for  
            each stamp designated "20" and $0.75 for each stamp designated  
            "10."  

            This bill also imposes a tax on every distributor of tobacco  
            products (other than cigarettes), as of July 1, 2010, based on  
            the wholesale cost of these products.  The rate of this tax  
            will be determined annually by the BOE but must be equivalent  
            to the rate of tax imposed on cigarettes by this bill, i.e.  
            $1.50 per package of 20 cigarettes.  The proceeds of this new  
            tax will be deposited in the General Fund.  Furthermore, by  
            increasing the cigarette tax, this bill also indirectly  
            triggers a tax increase on other tobacco products under the  
            provisions of Proposition 99.  Proposition 99 imposes a surtax  
            on tobacco products at a rate equivalent to the combined rate  
            of tax imposed on cigarettes.  If the combined rate of  
            cigarette tax were increased, as provided in this bill, the  
            existing surtax imposed on tobacco products under Proposition  
            99 would be adjusted as well to account for the additional  
            increase in the cigarette tax.  The additional revenues will  
            be deposited in the Cigarette and Tobacco Products Surtax Fund  
            created by Proposition 99. 

            The State of California has not increased its tobacco tax for  
            over a decade.  The federal Children's Health Insurance  
            Program Reauthorization Act of 2009 (CHIPRA, Public Law 111-3)  
            was signed into law on February 4, 2009.  It increases the  
            federal excise taxes on tobacco products, imposes a floor  
            stocks tax, imposes new requirements on manufacturers and  
            importers of processed tobacco, expands the definition of  
            roll-your-own tobacco, and changes the basis for denial,  
            suspension, or revocation of permits.
           









                                                                 SB 76
                                                                  Page  6



          Analysis Prepared by  :   Oksana Jaffe / REV. & TAX / (916)  
          319-2098




                                                                FN: 0001547