BILL ANALYSIS �
AB 1239
Page 1
Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
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
$600,000;
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 �Revenue 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.
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%,
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
increases.
"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
economy.
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% �SB 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
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. �ABx3 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
income.
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
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.
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)"
REGISTERED SUPPORT / OPPOSITION :
Support
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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)
PowerPAC
University of California Student Association
Opposition
Howard Jarvis Taxpayers Association
California Taxpayers Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098