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: 2/19/09 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 : This bill provides the necessary statutory
changes in the area of taxation to implement the 2009-10
Special Session budget agreement.
Senate Floor Amendments of 2/19/09 delete the 12-cent
increase in the fuel excise tax and changes the personal
income tax "surtax" to a personal income tax surcharge
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
1, 2009. The rate increase will sunset on June 30 of
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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. 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
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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.
4. Imposes a PIT surcharge of 0.25 on taxable income. For
example, the income currently taxed at the 4.0 percent
rate would instead be taxed at the 4.25 percent rate;
the income taxed at the 8.0 percent rate would instead
be taxed at the 8.25 percent rate. The amendments would
reduce the surcharge to 0.125 percent if specified
federal stimulus is received. While the surtax and the
surcharge bring in similar amounts of revenue in the
out-years, the surcharge brings in about $400 million
more General Fund in 2009-10. Like the other revenues
in the bill, the surcharge would trigger off in two
years if the Spending Cap Constitutional amendment is
not approved by voters. Otherwise, the surcharge would
be in effect for four years.
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
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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.
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.
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.
Existing law imposes a PIT and provides for six different
graduated PIT rates ranging from 1 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 0.125
percent or 0.25 on each existing tax rate. The alternative
minimum tax is adjusted in conformance with this change.
This surcharge will slightly flattening the current
progressive tax rate structure, but also making PIT
revenues slightly less volatile. As an illustration of the
impact on taxpayers, the 0.25 percent surcharge would
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result in additional state taxes of about $125 for
taxpayers filing jointly with $50,000 in taxable income,
$250 for taxpayers filing with $100,000 in taxable income,
and $1,250 for taxpayers filing jointly with $500,000 in
taxable income. In addition, the rate increase at the
lowest brackets will result in tax liabilities for some
persons who currently have none. This is because some
taxpayers whose tax liability currently is fully offset by
the personal and dependent credits will now have tax
liabilities that somewhat exceed the credits (and because
this measure also reduces the amount of the dependent
credit). 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 fiscal effect of the measure, including these
amendments, through 2009-10, is to increase revenues by a
cumulative total of between $11.1 billion (if sufficient
savings from federal funds occur) and $13.0 billion (if
federal funds savings fail to meet the $10 billion
threshold). The overall multi-year fiscal effect of these
amendments is to decrease revenues in this bill to benefit
the General Fund from $36.4 billion to $32.3 billion (if
sufficient savings from federal funds occur) and from $41.1
billion to $37.2 billion (if federal funds fail to meet the
threshold). The specific fiscal effects of the provisions
are shown in the tables below.
General Fund Revenue Impact of the 2/19/09 amendments to AB
3XXX
(Millions of dollars)
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|Tax |Effective |2008-0|2009-1|2010-1|2011-1|2012-|
|Provision |Date \a |9 |0 |1 |2 |13 |
| | | | | | | |
|-------------+-------------+------+------+------+------+-----|
|PIT 5% |Tax years | | 3,254| 2,418| 2,458|1,238|
|surtax |2009 through | | | | | |
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|(federal |2012 | | | | | |
|funds | | | | | | |
|threshold | | | | | | |
|met | | | | | | |
|-------------+-------------+------+------+------+------+-----|
| PIT 2.5% | | | 1,627| 1,209| 1,229| 619|
|surtax | | | | | | |
|(federal | | | | | | |
|funds | | | | | | |
|threshold | | | | | | |
|not met) | | | | | | |
|-------------+-------------+------+------+------+------+-----|
|PIT 0.25 |Tax years | | 3,658| 2,454| 2,526|1,147|
|surcharge |2009 through | | | | | |
|(federal |2012 | | | | | |
|funds | | | | | | |
|threshold | | | | | | |
|met | | | | | | |
|-------------+-------------+------+------+------+------+-----|
| PIT 0.125 | | | 1,829| 1,227| 1,263| 574|
|surcharge | | | | | | |
|(federal | | | | | | |
|funds | | | | | | |
|threshold | | | | | | |
|not met) | | | | | | |
|-------------+-------------+------+------+------+------+-----|
|Gas tax: 12 |April 2009 | 250| 1,808| 608| 767|896 |
|cent |through June | | | | | |
|increase \b |2013 | | | | | |
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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 GF, through reimbursements for debt service on
transportation bonds. Total revenues raised from the gas
tax increase are about $2 billion annually .
General Fund Revenue Impact of AB 3XXX after the 2/19/09
amendments
(Millions of dollars)
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|Tax Provision |Effective |2008-0|2009-1|2010-1|2011-1|2012-|
| |Date a |9 |0 |1 |2 |13 |
| | | | | | | |
|---------------+-----------+------+------+------+------+-----|
|Sales |April 2009 |$1,203|$4,553|$4,792|$5,195|-$164|
|tax:1-cent |through | | | | | |
|increase |June 2012 | | | | | |
|---------------+-----------+------+------+------+------+-----|
|VLF rate |May 2009 | 264| 1,213| 1,238| 1,263|1,187|
|increase to 1% |through | | | | | |
| |June 2013 | | | | | |
|---------------+-----------+------+------+------+------+-----|
|VLF: 0.15% |May 2009 | 111| 509| 518| 529| 496|
|rate increase |through | | | | | |
|for local law |June 2013 | | | | | |
|enforcement | | | | | | |
|---------------+-----------+------+------+------+------+-----|
|PIT .25% rate |Tax years | | 3,658| 2,454| 2,526|1,147|
|surcharge |2009 | | | | | |
|(federal funds |through | | | | | |
|threshold not |2012 | | | | | |
|met | | | | | | |
|---------------+-----------+------+------+------+------+-----|
| PIT .125% |Tax years | | 1,829| 1,227| 1,263| 574|
|rate surcharge |2009 | | | | | |
|(federal funds |through | | | | | |
|threshold met) |2012 | | | | | |
|---------------+-----------+------+------+------+------+-----|
|PIT dependent |Tax years | | 1,440| 1,227| 1,181| 670|
|credit |2009 | | | | | |
|reduction |through | | | | | |
| |2012 | | | | | |
|---------------+-----------+------+------+------+------+-----|
| | | | | | | |
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|Totals: | | | | | | |
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| Assuming | | $1,578| $11,373| $10,229| $10,694| $3,336|
|0.25% rate | | | | | | |
|surcharge | | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
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| Assuming | | $1,578| $9,544| $9,002| $9,431|$2,763 |
|0.125% rate | | | | | | |
|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 2
years earlier than shown, as noted in the descriptions of
the individual provisions above,
DLW:mw 2/19/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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