BILL ANALYSIS
AB 2 X1
Page 1
( Without Reference to File )
CONCURRENCE IN SENATE AMENDMENTS
AB 2 X1 (Evans)
As Amended December 18, 2008
Majority vote
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|ASSEMBLY: | |(December 8, |SENATE: | |(December 18, |
| | |2008) | | |2008) |
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(vote not relevant) (vote not available)
SUMMARY : This bill eliminates certain taxes currently devoted
to transportation and replaces them with an equivalent amount of
revenues available to support General Fund (GF) programs.
Specifically, this bill:
1)Eliminates the existing excise tax on motor vehicle fuel and
diesel. Currently, California imposes an excise tax of 18
cents per gallon on both motor vehicle fuel and diesel fuel.
Proceeds from these taxes are deposited into special
transportation funds to support the planning, construction,
maintenance, and operation of public streets and highways.
This bill repeals these excise taxes effective April 1, 2009.
2)Eliminates existing state sales tax on motor vehicle fuel.
California also imposes a sales tax on purchases of motor
vehicle and diesel fuels. This bill exempts motor vehicle fuel
from the state GF portion of the sales tax, effective April 1,
2009. Sales of motor vehicle fuel, however, would continue to
be subject to special fund and local sales and use taxes.
3)Increases the sales and use tax rate. This bill would raise
the GF sales and use tax rate by 0.5%, from 5% to 5.5%,
effective February 1, 2009.
4)Imposes a new oil severance tax. This bill imposes a
severance tax of 9.9% on the extraction of oil from the earth
or water within California's jurisdiction, effective July 1,
2009.
5)Imposes a surtax on the final personal income tax liability.
For the 2009 taxable year and each taxable year thereafter,
this bill imposes a personal income tax surtax that applies to
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all taxpayers and is calculated based on the taxpayer's final
tax liability, after application of tax credits. For the 2009
tax year, the surcharge will be imposed at the rate of 2.5%
but may be adjusted by the Department of Finance in later
years as authorized by this measure.
6)Establishes a balancing mechanism to ensure that this measure
is revenue neutral. This bill authorizes the Director of
Finance to reset the personal income tax surcharge rate to
ensure the measure is revenue neutral. Based on actual data
received from the Board of Equalization, the Franchise Tax
Board, and the Department of Conservation for the prior
calendar year, as well as revised projections of revenue in
the future year, the director is required to make an annual
determination as to whether or not an adjustment in the
surcharge rate is necessary. In the event that the surcharge
rate is not sufficient to bring the bill into balance, the
Director of Finance is authorized to adjust the oil severance
tax rate.
7)Specifies the time period for bringing a legal action to
challenge any provision of this measure. The bill limits the
time period within which a legal action challenging its
provisions may be filed to 90 days following the operative
date of this bill.
8)Provides that the entire measure shall be invalid if any of
the revenue raising provisions is invalidated by the courts.
AS PASSED BY THE ASSEMBLY , this bill was a vehicle to enact
statutory changes relating to the 2008 Budget Act.
FISCAL EFFECT : As shown in the accompanying table, the bill
results in special fund decreases and corresponding GF increases
of slightly over $1.1 billion in fiscal year (FY) 2008-09, $4.6
billion in FY 2009-10, and about $4.7 billion in FY 2010-11.
-----------------------------------------------
| |2008-09 |2009-10 |2010-11 |
|-----------+-----------+-----------+-----------|
|Special | | | |
|Fund | | | |
|Reductions:| | | |
| | | | |
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|-----------+-----------+-----------+-----------|
|Excise tax | -$829| -$3,209| -$3,274|
|on motor | | | |
|vehicle | | | |
|fuels | | | |
|-----------+-----------+-----------+-----------|
|Sales tax | -356| -1,425| -1,485|
|on | | | |
|gasoline | | | |
|-----------+-----------+-----------+-----------|
|Total-speci| -$1,185| -$4,634| -$4,759|
|al funds | | | |
|reductions | | | |
|-----------+-----------+-----------+-----------|
|General | | | |
|Fund | | | |
|increases: | | | |
|-----------+-----------+-----------+-----------|
|One-half | 955| 2,260| 2,416|
|cent sales | | | |
|tax | | | |
|increase | | | |
|-----------+-----------+-----------+-----------|
|2.5% PIT | $150| $1,500| $1,400|
|surcharge | | | |
|-----------+-----------+-----------+-----------|
|9.9% oil | 0| $855| $862|
|severance | | | |
|tax | | | |
|-----------+-----------+-----------+-----------|
|Total-GF | $1,105| $4,615| $4,678|
|increases | | | |
|-----------+-----------+-----------+-----------|
|Net Impact | -$80| -$19|-$81 |
| | | | |
-----------------------------------------------
COMMENTS :
1)Existing law imposes a sales or use tax on the sale or use in
this state of tangible personal property, absent a specific
exemption. The combined sales tax rate in California
currently ranges from 7.25% (for counties with no optional
transactions and use taxes) up to 9.25% (for the City of South
Gate in Los Angeles County). The combined rate consists of a
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state GF rate of 5%, statewide special fund rates totaling
1.25%, a local tax rate of 1%, and local optional rates.
Sales and use taxes, as general taxes on consumption, are
generally paid by the consumer. They are considered to be more
regressive than some other taxes, such as California's
personal income tax, since they absorb a larger portion of the
income of lower-income taxpayers than of higher-income
taxpayers. Also, some researchers have asserted that
significant increases in sales taxes can have negative impacts
on spending and the economy. However, given the imperative of
a balanced budget and the magnitude of the current budget
shortfall, the economic effects of a sales tax rate increase
must be weighed against the economic effects of other options
for balancing the budget.
2)The state's sales and use tax has applied to sales of motor
vehicle fuel and diesel fuel since 1972. Revenues from the
sales and use tax on motor vehicle fuel generally flow to
special funds to support transportation programs, either under
the terms of a "spillover" formula created when the tax was
first broadened to include motor vehicle fuel, or through the
provisions of Proposition 42 (2002).
3)Existing law imposes an excise tax of $0.18 per gallon on the
removal of motor vehicle fuel or diesel fuel at the refinery
or terminal rack, upon entry into the state, and upon sales to
an unlicensed person. The motor vehicle fuel excise tax was
first imposed on October 1, 1923 at a rate of 2 cents per
gallon. The tax was increased five times over the next 60
years, and was set at 9 cents per gallon on January 1, 1983.
In the early 1990s, the tax was increased in increments over
several years, until it was set at the current level of 18
cents per gallon on January 1, 1994. Under the California
Constitution, the proceeds of this tax are used exclusively
for state and local transportation purposes.
4)Existing law imposes a personal income tax (PIT) and provides
for six different graduated PIT rates ranging from 1% to 9.3%,
with an additional 1% Mental Health Tax on taxable income
over $1 million (Proposition 63, 2004). Under this measure,
the taxpayer's California income tax will be increased only
marginally, because the 2.5% surcharge is imposed on the
taxpayer's final tax liability, not his or her gross or
taxable income. For example, a taxpayer with tax due of
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$1,000 would pay $25 in additional tax, unless the taxpayer is
eligible for a dependent care tax credit, which would reduce
the additional tax by five dollars. Generally, a married
couple filing jointly with adjusted gross income of $75,000
would pay approximately $35 as a result of this additional
surcharge, whereas joint filers with adjusted gross income of
$500,000 would pay around $900. This additional California
income tax surcharge, however, may be deducted by taxpayers on
their federal tax returns. Thus, joint filers who itemize
their deductions may be able to deduct between 33% and 35% of
that additional surcharge on their federal income tax return.
The surcharge rate of 2.5% may be adjusted annually by the
Department of Finance based on the department's determination
regarding the revenue effect of this bill in any particular
fiscal year to ensure that revenue gains from the new and
increased taxes enacted by this measure do not exceed the
revenue foregone as the result of the partial sales tax
exemption for motor vehicle fuel and the repeal of the excise
tax on motor vehicle and diesel fuels. 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 in 2009 if the
understatement was due to the increased liability resulting
from this bill.
5)Currently, California is the only major oil-producing state
that does not impose a tax on the extraction of oil from the
earth or water. Existing law, however, does require oil
producers to pay to the Department of Conservation a
regulatory fee of $0.07023 per barrel of oil produced to fund
the department's regulatory programs. In addition, the law
imposes a fee of $0.05 per barrel of oil on persons owning
crude oil when it is received at a marine terminal from within
the state. Existing law also imposes sales tax on the sale of
motor vehicle fuel and diesel fuel and an excise tax of $0.18
per gallon on the removal of motor vehicle fuel or diesel fuel
at the refinery or terminal rack, upon entry into the state,
and upon sale to an unlicensed person. Finally, existing law
authorizes a 1% ad valorem property tax, to be imposed by
counties, on the full cash value of property where the value
of the property includes underlying gas and mineral rights
and, with respect to oil in the ground, "proved reserves".
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The price of California crude oil is normally 15% less than the
often-quoted benchmark prices for light crude oil because
California crude oil is heavier and more expensive to refine.
Revenues from the severance tax will depend on future levels
of oil production and the price of oil extracted in
California. Stripper wells - defined as those producing less
than 10 barrels of oil per day - would be exempt from the tax
if the price of oil they received as of January 1 of the
previous year was below $30 per barrel. This bill also
exempts production of oil owned or produced on or behalf of
any political subdivision of this state.
Taxes of this nature are often passed on to the end consumer.
Nevertheless, the Legislative Analyst's Office noted in its
2006 report on Proposition 87, which would have imposed a
similar oil severance tax, that market forces could ensure
that an oil severance tax would not be passed on to consumers.
Because California oil refiners have many options for
purchasing crude oil in the global oil market, California oil
producers will have to maintain competitive prices to retain
their share of the market.
Local property taxes paid on oil reserves could decline modestly
under this measure, to the extent that the imposition of the
severance tax reduces the value of oil reserves in the ground.
The severance tax provisions are similar to AB 9 x3 (Nunez),
which was introduced in the 2007-08 legislative session. AB 9
x3 would have imposed a 6% severance tax on specified oil
producers. In addition, AB 9 x3 would have levied a 2% surtax
on that portion of taxable income or net income, respectively,
in excess of $10 million, of taxpayers engaged in the
petroleum industry.
6)The loss of transportation funding resulting from this bill is
offset by new revenues created by other legislation pending in
this extraordinary session.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
Brad Williams / APPR. / (916) 319-2081
Dan Rabovsky / BUDGET / (916) 319-2099
AB 2 X1
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FN: 0000047