BILL ANALYSIS
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THIRD READING
Bill No: AB 2X
Author: Evans (D)
Amended: 12/18/08 in Senate
Vote: 21
WITHOUT REFERENCE TO COMMITTEE
SUBJECT : Budget Act of 2008
SOURCE : Author
DIGEST : This bill make several changes to current tax
law that reduce or eliminate taxes devoted for
transportation purposes and replace them with new and
increased taxes dedicated to the General Fund.
ANALYSIS :
This bill does the following:
1. State Sales Tax Exemption for Gasoline . In 1972, the
Legislature applied the sales and use tax to sales of
gasoline, when it relinquished .25% of the sales tax to
local agencies for transportation development. Revenues
from the state sales and use tax on gasoline flow under a
statutory formula to transportation purposes under
Proposition 42 (2002). This bill enacts an exemption for
the state share of the sales tax on the sale of gasoline
commencing on April 1, 2009, resulting in revenue losses
in the current year of $356 million, and the budget year
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of $1.425 billion. The bill leaves intact local sales
and use taxes on gasoline.
2. Gasoline and Diesel Excise Tax . First enacted in 1923 at
a rate of two cents per gallon, the state applies an
excise tax of 18 cents per gallon on gasoline and diesel.
Since 1923, the Legislature raised the rate five times,
setting the 18 cent rate in 1994. Gasoline and diesel
excise tax revenue does not flow to the general fund;
instead, the California Constitution requires that
proceeds may only be used to plan, construct, maintain,
and operate public streets and highways. This bill
repeals the gasoline and diesel excise taxes effective
April 1, 2009, resulting in revenue losses of $829
million in the current year, and $3.209 billion in the
budget year.
3. Sales Tax Increase . The state applies a sales and use
tax rate of 5% (currently 5.25% under the California
Fiscal Recovery Financing Act) of the purchase price of
tangible personal property, with some exceptions for
food, prescription drugs, utilities, and other items.
Local agencies also impose sales and use taxes, such as
1% for local general taxes under the Bradley-Burns
Uniform Local Sales and Use Tax Law (currently .75% under
the California Fiscal Recovery Financing Act), statewide
special funds rates of 1.25%, and transactions and use
taxes between 0 and 2%, leading to variance in rates
between jurisdictions; for example, the rate ranges from
7.25% in some jurisdictions without local transactions
and use taxes to 8.75% in Los Angeles, and up to 9.25% in
the City of Southgate. This bill increases the state
sales tax rate by one-half cent effective February 1,
2009, resulting in General Fund revenue increases of $955
million in the current year, and $2.26 billion in the
budget year.
4. Oil Severance Tax . The state applies corporate and
personal income taxes to oil producers, and the property
tax also applies to oil on a taxpayer's property.
Additionally, oil producers must pay a regulatory fee of
$0.07023 per barrel of oil to the Department of
Conservation (DOC) to fund the department's regulatory
programs. This bill enacts the Oil Tax Severance Law,
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and applies a 9.9% severance tax upon each barrel of oil
produced in California for the privilege of severing oil
from the earth or water of this state, effective July 1,
2009, in addition to all other ad valorem and business
license taxes. The measure imposes the tax on the entire
production in this state regardless of where the taxpayer
sells the oil, and the severance tax does not exempt the
taxpayer from ad valorem taxes related to equipment,
material, or property by reason of the payment. The
Director of the Department of Finance (DOF) may reduce
this rate pursuant to the balancing mechanism detailed
below.
The bill excludes stripper wells (wells incapable of
producing more than 10 barrels per day) when a barrel of
oil costs less than $30, and provides that the imposition
of the oil severance tax shall be reduced to zero for
taxpayers that meet the definition of "person" under a
Public Utilities Code section relating to gas producers
acquiring easement rights, thereby ensuring that
individuals acquiring new rights will not be subject to
the tax for the first ten years. The bill provides that
the severance tax is due and payable to the department
quarterly on or before the last day of the month next
succeeding each calendar quarter, applies a per month
penalty of 1.5% of the tax owed plus interest applied
starting on the delinquency date, and provides an order
for the application of delinquent payments. Oil
producers must also file a return with the Department in
the form as the Department may prescribe.
The bill applies the Fee Collection Procedures Law that
guides the Board of Equalizations (BOE) fee
administration procedures to DOC for the oil severance
tax. The bill allows DOC to prescribe forms and
reporting requirements, as well as to issue emergency
regulations. The bill provides that if any provision of
the oil severance tax is declared invalid, that
invalidity shall not affect other provisions. This bill
also provides definitions of its terms.
The bill results in annual revenue gains of approximately
$855 million.
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5. Personal Income Surtax . Administered by the FTB, the
state applies a personal income tax upon all non-exempt
income generated in California in six brackets of 1%, 2%,
4%, 6%, 8%, and 9.3%, with an additional 1% surtax on
income over $1 million (Proposition 63, 2004). Personal
income taxes are deductible from income for federal tax
purposes. This bill enacts a 2.5% personal income tax
surcharge that applies to all taxpayers and is calculated
based on final tax liability after tax credits, except
for the Child and Dependent Care tax credit which
taxpayers may use to reduce tax after applying the
surcharge. The Director of DOF may adjust the surcharge
rate in future years pursuant to the balancing mechanism
detailed below. The bill additionally provides that FTB
shall not adjust withholding tables until 2010 to reflect
increased tax liability added by this section, and also
provides that FTB may not apply penalties on taxpayers
who underpay estimated payments if the understatement was
due to the increased liability resulting from this bill.
This provision results in revenue increases of $150
million in the current year, and $1.5 billion in the
budget year.
6. Balancing Mechanism . This bill does not result in
revenue increases to the state, and contains a balancing
mechanism to ensure that revenue gains from the new and
increased taxes in the bill do not exceed the revenue
foregone from enacting a sales tax exemption for gasoline
and repealing the excise tax on gasoline and diesel.
This bill requires:
A. BOE to report to DOF regarding revenue
attributable to the increase in the sales tax under
the bill for the 2009 calendar year and each year
thereafter.
B. BOE to report to DOF regarding foregone revenue
attributable to elimination of the excise tax on
gasoline and diesel and enacting the sales tax
exemption of gasoline for the 2009 calendar year and
each year thereafter.
C. DOC to report to the DOF regarding revenue
attributable to the Oil Severance Tax for the 2009
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calendar year and each year thereafter.
D. FTB to report to DOF regarding increased revenue
from personal income surtax for the 2009 calendar
year and each year thereafter.
E. Based on the estimates and changes in tax
collections, the Director of DOF to annually adjust
the surtax percentage in 2010 and every calendar year
thereafter to ensure that this bill does not result
in a net revenue gain or loss in state taxes.
F. The Director of DOF may reduce the rate of the oil
severance tax to ensure that this measure does not
result in a net revenue increase to the state.
7. Court Review and Non-Severability . This bill provides
that any action challenging the validity of the bill must
be brought in a court of competent jurisdiction within 90
days. Additionally, if the parts of the bill enacting
new or increased taxes are held invalid, the remaining
provisions of the bill are not severable and have no
force or effect.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
DLW:mw 12/18/08 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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