BILL ANALYSIS Ó AB 1963 Page 1 ASSEMBLY THIRD READING AB 1963 (Huber) As Amended April 25, 2012 Majority vote REVENUE & TAXATION 6-0 ----------------------------------------------------------------- |Ayes:|Perea, Beall, Cedillo, | | | | |Fuentes, Gordon, Nestande | | | | | | | | ----------------------------------------------------------------- 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 AB 1963 Page 2 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 AB 1963 Page 3 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 AB 1963 Page 4 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 FN: 0003515