BILL ANALYSIS Ó
AB 1963
Page 1
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
FN: 0003515