BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 891 |Hearing |4/27/16 |
| | |Date: | |
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|Author: |Gaines |Tax Levy: |Yes |
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|Version: |3/15/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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Personal income tax: standard deduction
Increases the amount of the standard deduction by 25% used to
compute taxable income.
Background
Existing federal and state law allows taxpayers who do not elect
to itemize their deductions for the taxable year to deduct from
adjusted gross income a basic standard deduction amount in
calculating their taxable income.
Both state and federal laws provide annual indexing of the
standard deduction. The 2015 state standard deduction for
single, or married or registered domestic partners filing
separately taxpayers is $4,044 and $8,088 for married or
registered domestic partners filing jointly, head of household,
or a qualifying widow(er).
Proposed Law
Senate Bill 891 increases the amount of the standard deduction
by 25% used to compute taxable income. Specifically, this bill:
Increases the standard deduction for taxpayers that are
single, or married or registered domestic partners filing
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separately from $4,044 in 2015 to $5,055 in 2016.
Increases the standard deduction for taxpayers that are
married or registered domestic partners filing jointly, a
head of household, or a qualifying widow(er) from $8,088 in
2015 to $10,110 in 2016.
Applies to taxable years beginning on or after January
1, 2016.
State Revenue Impact
According to the Franchise Tax Board, SB 891 results in revenue
losses of $260 million in fiscal year (FY) 2016-17, $280 million
in FY 2017-18, and $290 million in FY 2018-19.
Comments
1. Purpose of the bill. According to the author, "Itemizing,
as opposed to claiming a standard deduction, requires a tax
filer to list each deductible expense, which requires more work,
an understanding of which expenses are deductible, greater
record keeping, and a greater chance for error. In addition,
because mortgage interest and property tax are typically the
largest deductible expenses, many property owners choose to
itemize their deductions while renters choose the standard
deduction. This bill would help put California renters, who pay
some of the highest rents in the nation, on a more equal footing
with homeowners. By increasing the standard deduction amounts
in California and increasing the percentage of filers who claim
the standard deduction, the state would accomplish multiple
desirable policy outcomes. It would lower the tax burden on
filers who currently use the standard deduction and who would
continue to use that deduction, as well as lower error rates on
tax filings, and it would lower compliance costs and time for
tax filers."
2. How the standard deduction works. The standard deduction is
claimed instead of itemizing certain personal expenditures. It
acts as a proxy for the typical personal expenses a tax filer
might have. Each year, the standard deduction is indexed for
inflation to account for the increase in personal expenses.
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This bill far exceeds any inflationary increase.
3. Tax expenditures. Existing law provides various credits,
deductions, exclusions, and exemptions for particular taxpayer
groups. In the late 1960s, U.S. Treasury officials began
arguing that these features of the tax law should be referred to
as "expenditures," since they are generally enacted to
accomplish some governmental purpose and there is a determinable
cost associated with each (in the form of foregone revenues).
This bill would increase an existing tax expenditure, costing
the general fund $260 million dollars in foregone revenue in the
first year alone. The tradeoff for increasing the tax
expenditure, resulting in revenue losses, is higher taxes or
reductions to other services or programs.
4. How is tax expenditure different from a direct expenditure ?
As the Department of Finance notes in its annual Tax Expenditure
Report, there are several key differences between tax
expenditures and direct expenditures. First, tax expenditures
are reviewed less frequently than direct expenditures once they
are put in place. This can offer taxpayers greater certainty,
but it can also result in tax expenditures remaining a part of
the tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, once
enacted, it takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results in a
"one-way ratchet" whereby tax expenditures can be conferred by
majority vote, but cannot be rescinded, irrespective of their
efficacy, without a supermajority vote.
Support and
Opposition (4/21/16)
Support : Unknown.
Opposition : California Tax reform Association (unless amended).
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