BILL ANALYSIS                                                                                                                                                                                                    Ó



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          ASSEMBLY THIRD READING
          AB 1963 (Huber)
          As Amended April 25, 2012
          Majority vote 

           REVENUE & TAXATION  6-0                                         
           
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          |Ayes:|Perea, Beall, Cedillo,    |     |                          |
          |     |Fuentes, Gordon, Nestande |     |                          |
          |     |                          |     |                          |
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           SUMMARY  :  Requires the Legislative Analyst's Office (LAO) to 
          assess the changes to the Personal Income Tax (PIT) Law and the 
          Sales and Use Tax (SUT) Law proposed in the introduced version 
          of this bill (Introduced Proposal).  Specifically,  this bill  :

          1)Requires the LAO to make recommendations on both of the 
            following:

             a)   How the state could "diversify, in a revenue-neutral 
               manner, the tax revenue it would have received as a result 
               of" the Introduced Proposal, so that annual state tax 
               revenues are less subject to volatile fluctuations due to 
               economic upturns and downturns; and, 

             b)   The impact on state tax revenues of excluding the 
               following service categories from the service tax contained 
               in the Introduced Proposal:

               i)     Necessary medical services;

               ii)    Services related to education;

               iii)   Automotive repair services; 

               iv)    Tax preparation and filing services;

               v)     Licensed legal services;

               vi)    Services relating to agriculture and livestock; and, 


               vii)   Services relating to housing, real estate, and 








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                 banking.  

          2)Requires these recommendations to be issued in a report to the 
            Legislature on or before July 1, 2013.  

           EXISTING LAW  imposes:

          1)Taxes under the PIT Law based upon taxable income, at 
            specified rates, and allows a taxpayer to elect to take a 
            standard deduction, as provided.  

          2)A sales tax on retailers for the privilege of selling tangible 
            personal property (TPP), absent a specific exemption.  The tax 
            is based upon the retailer's gross receipts from TPP sales in 
            this state.  

           FISCAL EFFECT  :  Assembly Revenue and Taxation Committee staff 
          estimates that this bill would have no impact on General Fund 
          revenues.  

           COMMENTS  :  The author has provided the following statement in 
          support of this bill:

               According to the Legislative Analyst's Office, the basic 
               elements of California's current state tax system were 
               put in place in the late 1920s and early 1930s.  With 
               the exception of Prop 13, California's tax system has 
               remained largely unchanged. 

               Approximately 80 percent of the state's own-source 
               revenue comes from three sources: the personal income 
               tax (PIT), the sales and use tax (SUT) and the 
               corporation tax (CT), with the largest source of 
               İGeneral Fund] dollars being derived from the PIT. 

               As a result, the current tax system has failed to adapt 
               to a "21st Century" economy where services and 
               E-commerce play a major role.  The İGeneral Fund] has 
               become heavily dependent upon the PIT, which accounts 
               for roughly 40 percent of all state revenues and 
               one-half of General Fund revenues.  This is problematic 
               because most of the PIT is generated by a relatively 
               small number of taxpayers with the highest incomes, thus 
               making the PIT revenue stream very volatile - producing 








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               huge surpluses in the good economic times and huge 
               deficits when the economy takeİs] a turn for the worse.

               AB 1963 seeks to examine what effect diversifying and 
               stabilizing the state's revenue stream would have on 
               stabilizing our manic tax revenue structure.  
               Specifically, this bill requires the Legislative 
               İAnalyst's] Office to (1) assess the tax reforms 
               proposed by the introduced version of AB 1963 (lowering 
               the personal income tax, lowering the sales tax and 
               extending sales taxes to services), (2) make 
               recommendations on how the state could diversify, in a 
               revenue neutral manner, the tax revenue it would have 
               received as a result of those proposed tax reforms so 
               that annual state tax revenues are less subject to 
               volatile fluctuations due to economic upturns and 
               downturns and (3) make recommendations on the impact 
               exempting various services from the proposed sales tax 
               on services would have on state revenues. 

          Assembly Revenue and Taxation Committee Staff Comments:

           1)What does this bill do  ?  This bill would require the LAO to 
            assess the changes to both the PIT Law and the SUT Law 
            contained in the Introduced Proposal.  Specifically, this bill 
            would require the LAO to make recommendations on "İh]ow the 
            state could diversify, in a revenue-neutral manner, the tax 
            revenue it would have received as a result of" the Introduced 
            Proposal, so that annual state tax revenues are less volatile. 
             The LAO would also be required to "make recommendations" on 
            the state revenue impact of excluding various service 
            categories from the Introduced Proposal's broad-based service 
            tax.  Finally, the LAO would have to issue these 
            recommendations in a report to the Legislature on or before 
            July 1, 2013.  
           
          2)The Introduced Proposal  :  The Introduced Proposal would have 
            modified the state's tax laws in numerous respects.  First, 
            the Introduced Proposal would have collapsed the state's six 
            PIT rates into two rates (2.75% and 6.5%), while increasing 
            the standard deduction.  Second, the Introduced Proposal would 
            have reduced the rate of the state SUT to 4%.  Finally, the 
            Introduced Proposal would have imposed a broad-based 4% state 
            SUT on services, with an exemption for the following service 








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            categories:  necessary medical services, services related to 
            education, automotive repair services, tax preparation and 
            filing services, licensed legal services, and services 
            relating to agriculture and livestock.   

          3)Clarifying amendments may be useful  :  This bill could 
            potentially benefit from amendments clarifying the precise 
            scope of the LAO report.  For example, this bill would require 
            the LAO to make recommendations on "İh]ow the state could 
            diversify, in a revenue-neutral manner, the tax revenue it 
            would have received as a result of" the Introduced Proposal.  
            Does this mean that the LAO would first have to estimate the 
            combined revenue impact of the Introduced Proposal and then 
            suggest additional modifications to the state's tax laws to 
            achieve even greater revenue stability in a revenue-neutral 
            manner?  Moreover, what does the term "revenue-neutral" mean 
            in this context?  

          This bill also requires the LAO to "make recommendations" on the 
            state revenue impact of excluding various service categories 
            from the Introduced Proposal's broad-based service tax.  Is 
            the LAO to confine its analysis to the projected fiscal impact 
            of these exemptions, or is the LAO to make policy 
            recommendations on whether the individual service categories 
            should be exempted?  In addition, the service categories 
            contained in the Introduced Proposal were rather vague and 
            could make any attempt to estimate revenues difficult.  For 
            example, what services are included within those "relating to 
            agriculture and livestock?"  Amendments clarifying these 
            issues would likely assist the LAO in providing a useful 
            report.   
           

           Analysis Prepared by  :    M. David Ruff / REV. & TAX. / (916) 
          319-2098 


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