BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 653 (Steinberg) Hearing Date: 05/16/2011 Amended: 04/27/2011 Consultant: Mark McKenzie Policy Vote: G&F 6-2 _________________________________________________________________ ____ BILL SUMMARY: SB 653 would authorize counties and school districts to impose a local personal income tax, vehicle license fee (VLF), transactions and use tax, extractive business activities tax, oil severance tax, and excise tax, with voter approval. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2011-12 2012-13 2013-14 Fund Local revenue gains Unknown, very major revenue gains to Local counties and school districts that impose one or more local taxes (see staff comments) FTB one-time costs Unknown significant startup costs to establish General procedures and mechanisms for administering local income taxes (reimbursement likely impractical) FTB ongoing costs All ongoing administrative costs paid by local Local taxing entities on a reimbursement basis BOE one-time costs Unknown significant fixed startup costsGeneral that exceed reimbursement authority BOE ongoing costs Preparatory costs for each new tax reimb- Local ursed as they are incurred, and ongoing administrative costs reimbursed upon collection SB 653 (Steinberg) Page 1 DOC: certify stripper wells Annual costs of up to $3,200 if all wells General/ require certification Special* DMV: VLF administration$116 one-time programming costs, ongoing Special** costs reimbursed by local taxing entities Tax revenue loss Maximum one-time loss of $150,000 if allGeneral (VLF deductions) counties impose 1.35% VLF (losses reimbursed in the following year) ____________ * Oil, Gas, and Geothermal Administrative Fund ** Motor Vehicle Account _________________________________________________________________ ____ STAFF COMMENTS: This bill meets the criteria for referral to the Suspense File. This bill would authorize each of the 58 counties and approximately 1,000 school districts, subject to limitations of the California Constitution, to levy, increase, or extend any of the following taxes, upon voter approval of a local ordinance or resolution: A local personal income tax at a maximum rate of 1% of taxable income. A local vehicle license fee of up to 1.35%. A transactions and use tax that would be excluded from the 2% combined county and city rate limit in current law. An excise tax, including but not limited to a local alcoholic beverage tax of 5 cents per drink, as specified, a local cigarette and tobacco products tax of 5 cents per cigarette, as specified, a local sweetened beverage tax of 1 cent per ounce, as specified, and a local medical marijuana tax. A local tax on extractive business activities at a rate of up to 2% of the wholesale value per unit measure. A local oil severance tax of up to 10% of the gross value of the product, as specified. The bill requires the Department of Motor Vehicles (DMV) to administer the local VLF, the Franchise Tax Board (FTB) to administer the local income tax, and the Board of Equalization SB 653 (Steinberg) Page 2 (BOE) to administer the local transactions and use tax, various excise taxes, and the oil severance tax. A local taxing entity may either administer a specified excise tax on its own behalf or through a contract with BOE. Staff notes that the bill is silent on the administration of the local medical marijuana tax and other unspecified excise taxes, as well as the local tax on extractive business activities. Total local revenue gains would depend upon the number of entities imposing a tax, which local taxes are imposed, and the rates of those taxes. For example, if the following taxes were imposed statewide at the specified rates, annual local revenue gains would be: 1% personal income tax on all residents: $8 billion 0.5% transactions and use tax: $2.2 billion 1.35% VLF on all vehicles: $4.6 billion 2% oil severance tax: $378 million 5 cents per cigarette ($1 per pack): $813 million 5 cents per drink alcoholic beverage tax: $16.1 million Revenue impact of a 1 cent per ounce sweetened beverage tax is unknown The bill would require a local taxing entity to contract with FTB for the administration of a local income tax approved by voters. FTB indicates that additional staff and General Fund resources would be necessary to implement the bill without adversely affecting existing revenue generating functions. The reimbursement structure established in the bill would require FTB to incur significant costs until the local income tax generated new revenues sufficient to provide reimbursement by the local entity. It is unlikely that the first county or school district that imposes a local income tax would be able to cover FTB's one-time implementation costs in their entirety, and reimbursement for these one-time costs would be impractical. All ongoing administrative costs would be paid on a reimbursement basis. With respect to the local excise tax authority provided in the bill, the local entity would have the option of either administering the tax on its own behalf or contracting with BOE, as specified. Any costs that BOE would incur in preparing to administer the tax, up to a cap of $175,000, would be reimbursed as costs are incurred. All ongoing BOE costs would be reimbursed from revenues collected. Staff notes that the bill SB 653 (Steinberg) Page 3 does not address how BOE would be reimbursed for its one-time fixed startup costs to implement any new local excise tax program. It would be infeasible to impose these costs onto the first county or school district that imposed a local excise tax, and these costs would easily exceed the cap of $175,000 for preparatory costs identified in the bill. Staff notes a concern that a taxpayer could be subject to multiple levels of local taxation if, for instance, that person is geographically located in the boundaries of a county, an elementary school district, and a high school district that each impose a tax authorized by this bill. This would be most likely to occur with the local personal income tax and certain local excise taxes. The oil severance tax provisions of SB 653 provide for an exemption for oil produced by a "stripper well" in which the average value of oil as of January 1 of the prior year is less than $30 per barrel price of California oil. A stripper well is defined as a well certified by the Department of Conservation (DOC) as incapable of producing an average of more than 10 barrels of oil per day during an entire month. The bill would require DOC to provide notification of all wells that have been certified as a stripper well. DOC indicates that it would incur additional costs of approximately $4.1 million in the initial year and $3.2 million ongoing for 22 new staff to certify the estimated 30,000 stripper wells in the state. SB 653 would require DMV to administer a local VLF imposed by a county or school district, and would require the taxing entity to contract with DMV to reimburse the department for all costs incurred in the administration and operation of a local VLF. DMV indicates that it would incur one-time programming costs of $116,000 to prepare for the administration of a local VLF prior to collecting any revenues. Ongoing costs would be reimbursed by the local taxing entity from revenues collected. Staff notes, however, that DMV could also incur additional unreimbursable costs related to the discount fees the department pays to credit card companies, based on the vehicle transaction amount, for each registration renewal processed online with a credit card. Total annual transaction fees could be as high as $14.5 million annually. Existing law provides that the VLF, which is effectively a SB 653 (Steinberg) Page 4 property tax on vehicles, is deductible for both the state and federal income tax purposes. SB 653 would require FTB to estimate General Fund losses attributable to each county or school district that imposed a local tax that is deductible on income tax returns. Each local taxing agency would be required to reimburse the state for any losses due to deductions allowed for that fiscal year. FTB estimates that the revenue impact related to VLF deductions would be $150 million annually if all counties imposed this local tax. These amounts would be reimbursed in the following year, resulting in a one year General Fund impact. Staff recommends that the bill be amended to address the numerous technical and implementation concerns noted by BOE and FTB.