BILL ANALYSIS                                                                                                                                                                                                    Ó

                                                                  AB 1239
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          Date of Hearing:  May 16, 2011

                                Henry T. Perea, Chair

                AB 1239 (Furutani) - As Introduced:  February 18, 2011

          2/3 vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Personal Income Tax:  10% and 11% brackets.

           SUMMARY  :  Temporarily establishes 10% and 11% personal income 
          tax (PIT) brackets for high-income taxpayers and increases the 
          alternative minimum tax (AMT) rate to 8.5%.  Specifically,  this 
          bill  :  

          1)Declares the intent of the Legislature to reinstate income tax 
            brackets for the highest income earners to address the state's 
            structural budget problems. 

          2)Establishes a 10% PIT rate for the following:

             a)   Single filers whose taxable income is over $250,000 and 
               equal to or less than $400,000;

             b)   Joint filers whose taxable income is over $500,000 and 
               equal to or less than $800,000; and, 

             c)   Head of household filers whose taxable income is over 
               $400,000 and equal to or less than $600,000. 

          3)Establishes an 11% PIT rate for the following:

             a)   Single filers whose taxable income is over $400,000;

             b)   Joint filers whose taxable income is over $800,000; and, 

             c)   Head of household filers whose taxable income is over 

          4)Reduces the amount of income tax imposed on high-income 
            taxpayers by an amount equal to the 1% mental health tax 
            imposed on taxable incomes in excess of $1 million in 
            accordance with Proposition 63 ŬRevenue and Taxation Code 


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            (R&TC) Section 17043]. 

          5)Increases the AMT rate from 7% to 8.5% for individual 
            taxpayers for taxable years beginning on or after January 1, 
            2011, and before January 1, 2017.  

          6)Is operative for taxable years beginning on or after January 
            1, 2012, and before January 1, 2017. 

          7)Takes effect immediately as a tax levy.


          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.  


          1)Provides for six different PIT rates ranging from 1% to 9.3%, 
            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 


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            credits, does not escape taxation completely.  California's 
            AMT rate for individual income taxpayers equals 7%.  Unlike 
            the federal government, California indexes AMT exemption 
            amounts under the PIT Law.  

          5)Provides an AMT rate of 7.25% for taxable years beginning on 
            or after January 1, 2009, and before January 1, 2011.  

           FISCAL EFFECT  :  The FTB estimates that this bill would increase 
          General Fund revenues by $950 million in fiscal year (FY) 
          2011-12, $1.6 billion in FY 2012-13, $1.7 billion in 2013-14, 
          $1.8 billion in FY 2104-15, and $1.9 billion in FY 2015-16.  

           COMMENTS  :   

           1)Author's Statement.   The author has provided the following 
            statement in support of this bill:

          "When then-Governor Wilson unveiled his May Revision in 1991, 
            the updated budget plan was based on a deficit of $14.3 
            billion.  In order to bridge the gap, the 1991-92 budget 
            Governor Wilson signed into law included $3.4 billion in 
            expenditure reductions and $9.1 billion in increased 
            resources.  Notably, the increased revenue that Governor 
            Wilson relied on included $5.1 billion in state-level tax 

          "AB 1239 is a less restrictive version of the temporary tax 
            brackets initiated by former Governor Wilson in 1991, and it 
            impacts only those who make more than a quarter million 
            dollars a year.  Like the tax brackets established by former 
            Governor Wilson, the tax brackets under AB 1239 are temporary 
            and apply only to tax years beginning January 1, 2012, and 
            through January 1, 2017.  

          "If passed, AB 1239 is estimated to raise almost $8 billion of 
            critical funding over the next five years.  Currently, the 
            wealthiest earners pay 7.8 percent of their salary towards the 
            income tax, while the poorest California families pay a 
            disproportionate 11.1 percent of their salary towards the 
            income tax.  AB 1239 will only affect the wealthiest of 
            Californians and not low-income or middle class individuals 
            and families that have been hit hard by the recession and the 
            Governor's past budget cuts. Only 1% of single taxpayers and 
            3% of joint taxpayers would be affected by AB 1239."


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           2)Argument in Favor.   Proponents of this bill state that, given 
            the scope of California's budget crisis, the state cannot rely 
            on spending cuts alone for a remedy, but must embrace revenue 
            increases as well.  The level of services provided by the 
            State for education, public safety, social services, and 
            infrastructure spending on roads, bridges and highways are 
            already at a bare minimum.  Any more cuts could cause 
            long-term damage to the state's competiveness in the global 
            economy as our infrastructure crumbles and our schools fail to 
            educate the workforce of the future.  The temporary creation 
            of the top income tax brackets will help avert additional 
            spending cuts to important programs that drive California's 

          The proponents assert that, as a society, we can no longer 
            continue to slash programs that help the sick, disabled, 
            blind, poor, children, students and seniors.  The way to mend 
            the safety net for those most vulnerable in California is by 
            finding new revenues and not by imposing regressive taxes upon 
            middle class Californians.  AB 1239 is a reasonable measure 
            that mirrors actions taken by former Governor Pete Wilson in 
            1991; it provides a humane solution to the state's budget 
            deficit by fairly spreading the burden of balancing the budget 
            and asking top income earners to pay their fair share. 

           3)Argument in Opposition.   Opponents of this bill state that 
            California already has the most progressive income tax 
            structure in the United States, with the top 1% of earners 
            paying half the tax revenue California receives, and that is 
            after the sunset of the 2009 income tax increase of .25%.  If 
            anything, California needs fewer tax brackets to keep it from 
            becoming over-reliant on one source of revenue.  The opponents 
            assert that this bill would negatively impact small business 
            growth during these already trying economic times, will 
            further harm the economy, will contribute to the increased 
            revenue volatility, and will add credence to the notion that 
            California is the most taxed state in the union.  

           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 


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            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% ŬSB 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 
            $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 

          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.  ŬABx3 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 


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            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. 

          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 


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            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 tax increase.  In contrast, 
            AB 1239 proposes to enact a considerably more progressive 
            income tax rates.  Instead of increasing the tax burden for 
            all taxpayers, it shifts the costs of financing public 
            services from taxpayers with less income to those with more 

           7)Offset Against the Mental Health Tax  .  While this bill 
            proposes to create an 11% tax bracket for taxpayers with 
            incomes over $400,000 ($800,000 for married filing jointly), 
            it, at the same time, allows those taxpayers who are subject 
            to the 1% mental health tax to reduce -dollar for dollar - the 
            increased income tax liability by an amount of the  mental 
            health tax paid.  Under existing law, no such credit is 
            allowed.  Essentially, this bill creates the 11% tax brackets 
            for taxpayers with income between $400,000 and $1 million 
            ($800,000 and $1 million for married filing jointly) but 
            decreases it, by virtue of allowing the credit against the 
            mental health tax liability, to a 10% bracket for taxpayers 
            with income over $1 million.  

           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 


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            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 
            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.  


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           9)Related Legislation.   

          AB 1130 (Skinner), introduced in the current legislative 
            session, would establish a 10.3% income tax rate applicable to 
            taxable income of over $500,000.  AB 1130 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 

          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 

           10)FTB's Suggested Technical Amendments.   

          On page 2, line 15, strike out "to" and insert "would"

          On page 7, line 15, delete "(" before "Notwithstanding"

          On page 8, line 9, insert before clause (iv), "(iv) For any 
            taxable year beginning on or after January 1, 2011, and before 
            January 1, 2012, 7 percent."  

          On page 8, line 9, strike out "(iv)" and insert "(v)"

          On page 8, line 9, strike out "2011" and insert "2012"

          On page 8, line 11, strike out "(v)" and insert "(vi)"




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          Asian Americans For Civil Rights and Equality
          Asian Health Services
          American Federation of State, County, and Municipal Employees 
          (AFSCME), AFL-CIO
          California Allians for Retired Americans
          California Commission on the Status of Women
          California Labor Federation
          California Pan-Ethnic Health Network
          California Partnership
          California Professional Firefighters
          California Teachers Association
          California Federation of Teachers, AFT, AFL-CIO
          California United Homecare Workers
          Congress of California Seniors
          Glendale City Employees Association (GCEA)
          Organization of SMUD Employees (OSE)
          San Bernardino Public Employees Association (SBPEA)
          San Luis Obispo County Employees Association (SLOCEA)
          Santa Rosa City Employees Association (SRCEA)
          University of California Student Association

          Howard Jarvis Taxpayers Association
          California Taxpayers Association
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916)