BILL ANALYSIS Ó
AB 1130
Page 1
Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1130 (Skinner) - As Amended: May 2, 2011
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Personal Income Tax: tax rates.
SUMMARY : Establishes a 10.3% personal income tax (PIT) bracket
for taxable income in excess of $500,000. Specifically, this
bill :
1)Establishes a 10.3% PIT rate for the following:
a) Single filers whose taxable income is over $500,000;
b) Joint filers whose taxable income is over $500,000; and,
c) Head of household filers whose taxable income is over
$500,000.
2)Requires the Franchise Tax Board (FTB) to recompute the 10.3%
income tax bracket for taxable years beginning on or after
January 1, 2011.
3)Applies to taxable years beginning on or after January 1,
2011.
4)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Imposes six different income tax rates on individuals,
estates, and trusts ranging from 10% to 35%.
2)Provides an AMT rate of 26% on AMT income up to $175,000 and
28% on AMT income exceeding that amount.
EXISTING STATE LAW :
1)Provides for six different PIT rates ranging from 1% to 9.3%,
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and for five different filing statuses, including single, head
of household, married filing separately, married filing
jointly, and surviving spouse. Each rate applies to a
different range of income, known as a "tax bracket."
Individual tax liability is dependent on one's taxable income
and one's filing status. For taxable years beginning on or
after January 1, 2009 and before January 1, 2011, each of the
six tax rate percentages was increased by an additional 0.25%.
2)Requires the Franchise Tax Board (FTB) to recalculate the tax
brackets each year based on the change in the California
Consumer Price Index.
3)Imposes an additional 1% tax on the portion of a an individual
taxpayer's taxable income that exceeds $1 million and
dedicates the funds received to provide mental health services
to children and adults, approved by the voters as Proposition
63 in 2004. Disallows any reduction of this additional mental
health tax liability by tax credits. (R&TC Section 17043).
4)Imposes an AMT in order to ensure that a taxpayer who can use
preferential tax benefits, such as deductions, exemptions, and
credits, does not escape taxation completely. California's
AMT rate for individual taxpayers equals 7%. Unlike the
federal government, California indexes AMT exemption amounts
under the PIT Law.
5)Provides for an AMT rate of 7.25% for taxable years beginning
on or after January 1, 2009, and before January 1, 2011, and
for an AMT rate of 7% for taxable years beginning on or after
January 1, 2011.
FISCAL EFFECT : The FTB estimates that this bill would increase
General Fund revenues by $2.3 billion in fiscal year (FY)
2011-12, by $1.7 billion in FY 2012-13, and by $1.8 billion in
FY 2013-14.
COMMENTS :
1)Author's Statement. The author has provided the following
statement in support of this bill:
"The richest one percent of Californians are making an average
of $1.7 million dollars. Novel-winning economist Joseph
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Stiglitz states 'the upper 1 percent of Americans are now
taking in nearly a quarter of the nation's income every year.
In terms of wealth rather than income, the top 1 percent
control 40 percent. The recently approved federal tax cut
extension gave California's wealthiest citizens $14 billion in
tax cuts. The top 1% of Californians received an average of
$90,000 in tax cuts.
"Recent polls reveal that an overwhelming majority of
Californians believe that richest Californians should pay more
taxes. Seventy-eight percent of likely Californian voters
support a 1 percent increase in the income tax rate for
Californians earning more than $500,000 a year. This includes
60% of Republicans.
"Historically, even our most fiscally conservative Governors
have increased the tax rate in times of major deficits.
Governor Pete Wilson increased taxes on the top 1% by
including a 10 and 11 percent tax rate. Governor Reagan did
the same in 1973. 'This bill would add a 1% tax increase of
the richest Californians. Those that make over $500,000
constitute less than 1% of taxpayers but could contribute an
estimated $2.3 billion in additional revenue. The proposed
tax rate schedule is as follows:
---------------------------------
|Tax Rate |Taxable Income |
|------------+--------------------|
|1.0 |Up to $7,124 |
|------------+--------------------|
|2.0 |$7,214 to $16, 890 |
|------------+--------------------|
|4.0 |$16,890 to $26,657 |
|------------+--------------------|
|6.0 |$26,657 to $37,005 |
|------------+--------------------|
|8.0 |$37,005 to $46,766 |
|------------+--------------------|
|9.0 |$46,766 to $500,000 |
|------------+--------------------|
|10.3 |$500,000 and over |
---------------------------------
2)Argument in Support. Proponents of this bill state,
"California currently faces a $15.4 billion budget deficit,
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even after the $11.2 billion recently made cuts" to higher
education and social services provided to the sick, poor, and
elderly. The proponents assert that recent polls reveal that
"seventy-eight percent of California voters support a 1%
increase in the income tax rate for Californians earning more
than $500,000 a year." The proponents also argue that even
"our most fiscally conservative governors have increased the
tax rate in times of major deficits."
3)Argument in Opposition. Opponents of this bill assert that
the "tax increase on higher income tax brackets ? will hit
California's small and medium sized businesses especially
hard, as many of them do not organize as corporations and
therefore pay personal income taxes in lieu of corporate tax."
The opponents state that California already has the most
progressive income tax structure in the United States, with
the top 1% of earners paying more than 75% of state's income
tax revenues. Opponents argue that progressive income tax
structures "cause individuals and small businesses to change
their income-earning and tax-planning behavior "the create "a
drag on the economy and may ultimately result in fewer tax
revenues." Finally, the opponents believe that this measure
will further harm the economy, will contribute to the
increased revenue volatility, and is unlikely to generate the
estimated revenues.
4)Background. Throughout California's history, governors and
the Legislature have imposed progressive tax brackets on the
highest income earners. Beginning with Governor Ronald
Reagan, a 10% tax bracket was enacted in 1967, and later
raised to 11% in 1971. In the early 1990s, California faced a
severe recession, which resulted in significant shortfalls in
the state budget. In response, the State acted to increase
revenues and reduce expenditures. The Legislature and
Governor Pete Wilson, in addressing the issue, increased the
PIT rates by adding a 10% and an 11% tax bracket for the
State's highest income earners and increasing the AMT rate
from 7% to 8.5% ÝSB 169 (Alquist), Chapter 117, Statutes of
1991]. In 1991, the 10% rate was imposed on filers with
incomes over $100,000 (single) and $200,000 (married filing
jointly). The 11% rate was imposed on filers with taxable
incomes over $200,000 (single) and $400,000 (married filing
jointly). These income thresholds were increased for
inflation each year, so that by 1995, the 10% rate was imposed
on filers with taxable incomes over $109,936 (single) and
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$219,872 (married filing jointly), and the 11% rate was
imposed on filers with taxable incomes over $219,872 (single)
and $439,744 (married filing jointly). In 1995, supporters of
a permanent extension of the tax bracket rates placed
Proposition 217 on the ballot. The measure would have
continued the 10% and 11% tax rates permanently and allocated
revenue from the increase to schools and local governments.
Proposition 217 failed narrowly by 2/10ths of one percentage
point.
In February of 2009, in an effort to deal with a $20 billion
budget deficit, the California Legislature voted to add 0.25%,
or twenty five basis points, to the tax rate for all brackets
for the 2009 and 2010 tax years. ÝABx3 3 (Evans), Chapter 18,
Statutes of 2009]. The Legislature also proposed to the
voters to extend this 0.25% increase to the 2011 and 2012 tax
years, but the voters did not approve Proposition 1A (2009) in
the May 19, 2009 special election.
5)Progressive Taxation. California currently has a progressive
taxation system. A progressive tax is one where the tax rate
increases as the taxable base amount increases. As explained
earlier, California has six different tax rates, each
increasing as the base increases. There are several schools
of thought addressing this issue. Generally speaking, there
are those who believe in a progressive system of taxation, and
those who do not, preferring other methods of taxation, like a
flat tax.
The argument against a progressive tax system is similar to the
one espoused by Austrian economist and author, Eugen Von
Bohm-Bawerk. Addressing the concept in his work, Karl Marx
and the Close of his System, Von Bohm-Bawerk focuses his
argument on the consumption of goods versus the consumption of
capital. Applying the concept of diminishing returns, as
income rises, a smaller portion of that income will be used
for consumption of goods. By default, a larger portion will
be used for capital investments, which will generate more
income for more capital investments. By purchasing more and
more capital goods, the cost of production begins to fall and
begins to elevate the standard of living. A progressive
system of taxation would increase the tax rate on higher
income individuals, reducing the amount of income available
for capital investments and thereby reducing improvements to
the standard of living.
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This argument against a progressive system of taxation, however,
fails to address the issue of a growing gap between those who
have capital investments generating an exceedingly greater
amount of income and those who are just able to pay for life's
necessities. Because low income earners spend a larger share
of their income on necessities, they have a much smaller
portion of income left over to make their own capital
investments. The argument also fails to address the
elimination of jobs from increased capital improvements. For
example, a company employing 10 workers may decide to purchase
large capital equipment, eliminating the need for those
workers. The machine can perform the same amount of work, but
the business will become more efficient by reducing its labor
costs in subsequent years.
The idea of a progressive tax system has gained acceptance from
a wide range of individuals. Writing in The Wealth of Nations,
Adam Smith outlined the hardship and burden that lower income
individuals have in society. Specifically, Smith focused on
the necessities of life, on which low-income individuals spend
a much larger percentage of their income. In recognizing the
disproportionate impact on the poor, Smith stated, "it is not
very unreasonable that the rich should contribute to the
public expense, not only in proportion to their revenue, but
something more than in that proportion." Other arguments also
encourage the use of a progressive taxation system because
individuals with greater capital are also more likely to take
advantage of societal benefits supported by taxation, such as
defense, infrastructure, and the protection of property
rights. Individuals who control larger sums of capital are
also able to take advantage of economies of scale, a wider
range of investment opportunities, and are able to more
directly participate in shaping government. By providing a
progressive tax system, democracies are better able to enhance
economic opportunity for the lower and middle classes.
6)The Recent Temporary PIT Increase . As part of the budget
agreement enacted in February of 2009, California increased
the burden of PIT that made the state's income tax system less
progressive. By increasing each rate by 25 basis points, the
Legislature ensured that all taxpayers with income tax
liabilities shoulder the burden of a tax increase. In
contrast, this bill proposes to make the PIT Law more
progressive. Instead of increasing the tax burden for all
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taxpayers, it shifts the costs of financing public services
from taxpayers with less income to those with more income.
7)The Recent Public Policy Institute of California's Poll. The
survey released by the Public Policy Institute of California
(PPIC) on April 28, 2011, found that 68% of Californians
believe the quality of K-12 education will suffer if cuts are
made (PPIC Statewide Survey, Californians and Education, April
2011). The majority oppose increases in the state sales tax
(61% all adults, 62% likely voters) or overall state personal
income tax (62% all adults, 66% likely voters) to maintain
funding for schools. However, 68% of adults and 62% of likely
voters favor raising the top rate of the state income tax paid
by the wealthiest Californians to maintain K-12 funding.
8)Revenue Volatility. Revenue volatility is related to both
California's economic cycle and its tax structure. As noted
in Revenue Volatility in California by the Legislative
Analyst's Office (LAO), California's economic cycle has
historically been more volatile than the nation's economic
cycle due to the presence of high-paying cyclical
technology-related industries and the housing sector. In
addition to the historic volatility of California's economic
cycle, revenue volatility has also been an issue because of
California's increased dependency on the PIT. The percentage
of state revenue coming from the PIT has increased from 37% in
FY 1979-80 to a peak of 57% in FY 2000-01, although it receded
to 53.4% in FY 2007-08. Because of the progressive structure
of the PIT law, 88.5% of PIT revenue comes from the top 20% of
taxpayers by income, with the top 1% of taxpayers - 144 in all
- pay almost half of total income tax receipts. Since the
income of these taxpayers include a large share from capital
gains, which are much more volatile than wages, California has
seen changes of 10% or more in total income tax receipts in 10
of the last 13 years.
The LAO's report mentioned several ways in which California
could reduce the volatility of its revenues. One of the
proposed approaches was reducing the progressivity of the
basic PIT structure, which would involve flattening the PIT
structure by increasing the tax rates on lower and moderate
income earners and reducing the tax rate on high-income
earners. Other suggestions included increasing the State's
reliance on alternative tax revenues. Specifically, the State
may be able to reduce its dependence on the PIT by extending
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taxes to services, which tend to be relatively stable during a
business cycle, or by increasing property taxes.
With regard to property tax, revenues generated from the levying
of taxes on property tend to be the most stable of the major
state and local sources. According to the Commission on the
21st Century Economy, property taxes are more stable because
property tends not to fluctuate as much as other tax bases in
response to the business cycle, most notably the PIT. Prior
to 1978, property tax was assessed at the market value.
However, in 1978, voters passed Proposition 13, which limited
assessments to the property's acquisition value, plus an
annual increase capped at the lesser of 2% or the rate of
inflation. Proposition 13 also added a two-thirds vote
requirement for raising taxes. After the passage of
Proposition 13, there was a dramatic drop in property taxes
relative to personal income. Property tax as a share of
personal income dropped from 5% in FYs 1977-78 to 2.4% in FYs
2005-06. In terms of preventing volatility in the state's
revenue, Proposition 13 made it incredibly difficult to raise
revenue from one of the most stable sources.
Of course, it is also important to note that volatility is not
inherently undesirable; it is only a problem if state
government operates with an expectation of stability. If the
Legislature properly addresses the issue of volatility within
the budget, state funded programs and other costs could be
properly managed without having to restructure California's
tax system.
9)A "Marriage Penalty: An Unintended Consequence? This
measure proposes to increase the highest PIT rate from 9.3% to
10.3% to apply to taxable incomes greater than $500,000,
regardless of the taxpayer's filing status. In other words, a
single individual with a taxable income over $500,000 would be
subject to this new tax as well as a head of household or a
married couple with the same amount of taxable income of
$500,000. As such, it would encourage married individuals and
registered domestic partners to file separately to avoid the
so-called "marriage penalty" and to reduce their overall tax
burden. The marriage penalty refers to the higher tax
liability of married two-worker couples, compared to their
non-married counterparts. As explained by the FTB staff in
the analysis of this bill, the "marriage penalty" was an
unintended consequence of the Revenue Act of 1948, when
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Congress abandoned treatment of the individual as the taxpayer
unit and adopted the split-income plan of joint returns for
married persons. (Public Law No. 471, Chapter 168, §§301-305,
62 Stat. 110, 114-16). The author may wish to consider
amending this bill to equalize the tax treatment of married
individuals and registered domestic partners filing separately
and those filing jointly.
10)Related Legislation.
AB 1239 (Furutani), introduced in the current legislative
session, temporarily establishes 10% and 11% personal income
tax brackets for high-income taxpayers and increases the
alternative minimum tax rate to 8.5%. AB 1239 is set to be
heard in this Committee on May 16, 2011.
AB 1836 (Furutani), introduced in the 2009-10 legislative
session, was similar to this bill. AB 1836 failed passage out
of this Committee.
SB 96 (Ducheny), introduced in the 2009-10 legislative session,
would have added four higher tax brackets with higher tax
rates. SB 96 was held by the Senate Committee on Revenue and
Taxation.
AB 2897 (Hancock), introduced in the 2007-08 legislative
session, would have established two additional tax brackets
with higher rates, similarly to this bill. AB 2897 failed
passage out of this Committee.
AB 6 (Chan), introduced in the 2005-06 legislative session, was
similar to this bill. AB 6 failed passage on the Assembly
Floor.
11)FTB's Suggested Technical Amendments.
On page 3, line 6, replace "2011" with "2012"
On page 4, line 24, replace "2011" with "2012"
REGISTERED SUPPORT / OPPOSITION :
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Support
Alliance of Californians for Community Empowerment (ACCE)
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
California Federation of Teachers
California Nurses Association
Coalition of California Welfare Rights Organizations
Congress of California Seniors
CREDO
Opposition
California Chamber of Commerce
California Taxpayers Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098