BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 3XXX|
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THIRD READING
Bill No: AB 3XXX
Author: Evans (D)
Amended: 2/14/09 in Senate
Vote: 27 - Urgency
WITHOUT REFERENCE TO COMMITTEE OR FILE
ASSEMBLY FLOOR : Not relevant
SUBJECT : State budget: revenue and tax provisions
SOURCE : Author
DIGEST : Senate Floor Amendments of 2/14/09 delete the
prior version of the bill expressing the intent of the
Legislature to make statutory changes relating to the
Budget Act of 2008.
This bill now provides the necessary statutory changes in
the area of taxation to implement the 2009-10 Special
Session budget agreement.
ANALYSIS :
Specifics of AB 3XXX
1. Increases, temporarily, the rate of the General Fund
portion of the state sales and use tax by one percent --
from the current rate of five percent to a rate of six
percent. The increase would be effective starting April
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1, 2009. The rate increase will sunset on June 30 of
either 2011 (approximately two years) or 2012
(approximately three years), the latter if the voters
approve the proposed Budget Stabilization constitutional
amendment.
2. Increases, temporarily, the rate of the vehicle license
fee (VLF) from the current rate of 0.65 percent to a
rate of 1.15 percent, except for commercial vehicles
with a gross weight of 10,000 pounds or more. Revenue
from the portion of the increase from 0.65 percent to
one percent will be retained by the General Fund ($121
million in 2008-09 and $1.2 billion in 2009-10) and
revenue from the additional increase of 0.15 percent
will be transferred to a newly created Local Safety and
Protection Account, which is continuously appropriated
for specific local public safety programs ($82 million
in 2008-09 and $502 million in 2009-10). The VLF rate
increase will become effective for registrations
beginning May 19, 2009 (corresponding to the timing of a
weekly VLF billing cycle) and expire June 30, 2013, if
the voters approve the proposed Budget Stabilization
constitutional amendment.
If the voters reject the amendment, both components of the
rate increase will expire two years sooner -- June 30,
2011. Starting in 2010, the Director of the Department
of Finance must determine by January 10 and upon
enactment of the annual budget, whether any of the money
derived from the 0.15 percent rate component have been
allocated by the state for other purposes. In the event
of an affirmative determination, collection of the 0.15
percent rate component would be suspended until the
Director determines that the purpose of the allocations
has been restored.
3. Increases the motor vehicle fuel and diesel fuel excise
tax by 12 cents per gallon -- from 18 cents per gallon
to 30 cents per gallon. The higher tax rate would be in
effect for a period of 51 months -- from April 1, 2009,
through June 30, 2013. However, the higher tax rate
would end two years earlier (June 30, 2011) if the
voters reject the Budget Stabilization constitutional
amendment. This bill also imposes an equivalent
one-time 12-cent-per-gallon tax on tax-paid fuel already
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in the distribution chain on April 1 in order to fully
apply the tax rate to all fuel sold on and after that
date. Motor vehicle fuel excise tax revenue is subject
to the spending restrictions of Article XIX of the
California Constitution, and may only be used for
eligible transportation expenditures. Expenditure of
the new fuel excise tax funds is specified in associated
legislation that amends the 2008 Budget Act and enacts
the 2009-10 Budget Act. That associated legislation
directs most of the new revenue in 2008-09 and 2009-10
to General Fund relief through reimbursement to the
General Fund for transportation-related general
obligation bond debt-service costs. This bill limits
expenditure of the new excise tax revenues for General
Fund benefit (via debt service reimbursement) to 90
percent of funds in 2008-09 and 2009-10 and to 50
percent of funds thereafter. This bill specifies that
any funds transferred for General Fund debt service
reimbursement shall only be used for that purpose and
shall be retained in the debt service holding account
until used for that purpose.
4. Rolls back the dependent credit amount under the
personal income tax (PIT). Currently, taxpayers are
allowed a non-refundable personal credit of $99 (which
applies to the taxpayer and their spouse or domestic
partner if filing a joint return) and a dependent credit
of $309 (for children and other dependents) on their tax
returns for 2008. These credits are phased out for high
income taxpayers, and are indexed to inflation each
year. This bill temporarily reduces the dependent
credit to the size of the personal credit for tax years
2009 through 2012. However, the higher tax rate would
end two years earlier (after tax year 2010) if the
voters reject the Budget Stabilization constitutional
amendment. Subsequent to 2012 (or 2010), the dependent
credit will revert to the size it would have been had
current law not been changed (the current $309 as
adjusted for inflation). For a taxpayer with two
dependents, the smaller exemption credit will raise tax
liabilities by $420.
5. Imposes a PIT surcharge. The surcharge will be in
effect for tax years 2009 through 2012. However, the
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higher tax rate would end two years earlier (after tax
year 2010) if the voters reject the Budget Stabilization
constitutional amendment. This surcharge will equal
either:
A. Five percent of the taxpayer's final income tax
liability (after most credits are taken) if the
Director of the Department of Finance determines that
funds from the federal stimulus package which can be
used to offset General Fund expenditures are less
than $9.1 billion.
B. Or, 2.5 percent of the taxpayer's final income tax
liability (after most credits are taken) if the
Director of the Department of Finance determines that
funds from the federal stimulus package which can be
used to offset General Fund expenditures are at least
equal to $9.1 billion.
Comments
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 percent (for counties
with no optional transactions and use taxes) up to 9.25
percent (for the City of South Gate in Los Angeles County).
The combined rate consists of a state General Fund rate of
five percent, statewide special fund rates totaling 1.25
percent, a local tax rate of one percent, and local
optional rates. Sales and use taxes, as general taxes on
consumption, are generally considered to be more regressive
than some other taxes, such as California's PIT, since
purchases of taxable goods 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 cannot be considered in a vacuum, but
must be weighed against the effects of other additional
spending reductions or tax increases.
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The VLF is a state tax levied on the purchase price of a
vehicle, and subsequently annually assessed against the
vehicle's value adjusted by a statutory depreciation
schedule. Proposition 1A, approved by the voters in
November 2004, requires that VLF revenue from the existing
0.65 percent rate be allocated to support local health,
mental health, and social services costs under Realignment
or otherwise allocated to local government. However, the
Legislature may increase the VLF rate and there is no
restriction on the use of the additional revenue.
The motor vehicle fuel excise tax was first imposed on
October 1, 1923, at a rate of two cents per gallon. The
tax was increased five times over the next 60 years, and
was set at nine 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. The Legislative
Analyst looked at the erosion in the purchasing power of
the excise tax in the "Analysis of the 2008-09 Budget Bill"
and found that based on the Producer Price Index for
Highway and Street Construction, the 18 cent gas tax
implemented in 1994 is worth 11 cents in purchasing-power
today. The excise tax is allocated by statutory formula to
the state and to local governments. Of the base 18 cent
tax, the state receives 11.54 cents (or 64 percent) and
cities and counties receive 6.46 cents (or 36 percent).
Dependent exemption credits are usually justified on the
grounds that taxpayers who raise children or care for
others incur extra expenses and therefore have less
disposable income from which to pay taxes. The amount of
the credit, however, has varied considerably over the past
30 years, and according to the Legislative Analyst's
Office, there is no consensus on how large the credit
should be. Prior to 1987, the dependent credit was roughly
one-third the size of the personal credit, and from 1987
through 1997, the dependent and personal credits were the
same. The larger dependent credit currently in effect is
the result of legislation passed in 1997, which tripled the
dependent credit amount starting in 1998. This bill
temporarily restores the relationship between the personal
and dependent credit that was in effect prior to 1998.
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Existing law imposes a PIT and provides for six different
graduated PIT rates ranging from one percent to 9.3
percent, with an additional one percent Mental Health Tax
on taxable income over $1 million (Proposition 63, 2004).
This bill imposes an additional surcharge, equal to either
2.5 percent or five percent on the taxpayer's final
liability. As an illustration of its impact on taxpayers,
the surcharge would result in additional state taxes of
about $60 for taxpayers filing jointly with $50,000 in
taxable income, $230 for taxpayers filing jointly with
$100,000 in taxable income, and $2,100 for taxpayers filing
jointly with $500,000 in taxable income. Since state
personal income taxes can be taken as itemized deductions
on federal returns, the net impact of the surcharge may be
reduced by as much as one third for some taxpayers.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
The overall multi-year fiscal effect of this bill is to
increase revenues to benefit the General Fund by a
cumulative total of between $36.4 billion (if sufficient
savings from federal funds occur) and $41.1 billion (if
federal funds fail to meet the $9.1 billion threshold).
The specific fiscal effects of the provisions are shown in
the table below:
General Fund Revenue Impact of AB 3XXX
(Millions of dollars)
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|Tax Provision |Effective | 2008-09| 2009-10| 2010-11| 2011-12| 2012-13|
| |Date \a | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Sales tax: |April 2009 - | $1,203| $4,553| $4,792| $5,195| -$164|
|one cent |June 2012 | | | | | |
|increase | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|VLF increase |May 2009 - | 264| 1,213| 1,238| 1,263| 1,187|
|to 1% |June 2013 | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|VLF: 15% |May 2009 - | 111| 509| 518| 529| 496|
|increase for |June 2013 | | | | | |
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|law | | | | | | |
|enforcement | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|PIT 5% surtax |Tax years | | 3,254| 2,418| 2,458|1,238 |
|(federal |2009 - 2012 | | | | | |
|funds | | | | | | |
|threshold met | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
| PIT 2.5% | | | 1,627| 1,209| 1,229| 619|
|surtax | | | | | | |
|(federal | | | | | | |
|funds | | | | | | |
|threshold not | | | | | | |
|met) | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|PIT dependent |Tax years | | 1,440| 1,227| 1,181| 670|
|credit |2009 - 2012 | | | | | |
|reduction | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Gas tax: 12 |April 2009 - | 250| 1,812| 608| 767| 896|
|cent increase |June 2013 | | | | | |
|\b | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
| | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Total: | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
| Assuming 5% | | $1,828| $12,781| $10,801| $11,393| $4,323|
| surcharge | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
| Assuming | | $1,828| $11,154| $9,592| $10,164|$3,704 |
| 2.5% | | | | | | |
| surcharge | | | | | | |
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a\All dates are contingent on voter approval in 2009 of a
constitutional amendment relating to budget stabilization
and reform. Absent such approval, the provisions sunset
two years earlier than shown, as noted in the
descriptions of the individual provisions above.
b\Revenue impacts reflect portion of increase that benefits
the General Fund, through reimbursements for debt service
on transportation bonds. Total revenues raised from the
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gas tax increase are approximately $2 billion annually.
DLW:mw 2/14/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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