BILL ANALYSIS
AB 1700
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1700 (Gaines) - As Amended: March 23, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Sales and use taxes: vehicle license fee: income
taxes.
SUMMARY : Repeals the recently-enacted provisions of the
February 2009 special session budget relating to the sales and
use tax (SUT), vehicle license fee (VLF), and personal income
tax (PIT). Specifically, this bill :
1)Repeals the temporary state SUT rate of 1%, which is currently
set to expire on July 1, 2011, effective on the first day of
the first calendar quarter commencing more than 90 days after
the effective date of this bill.
2)Repeals the 0.35% VLF rate, which is currently set to expire
on July 1, 2011, effective for registration taking place on or
after the effective date of this bill.
3)Repeals, for taxable years beginning on or after January 1,
2010, the reduction in the dependent exemption credit amount.
4)Repeals, effective for taxable years beginning on or after
January 1, 2010, the 0.25 percentage point that was
temporarily added to each marginal PIT rate and to the
alternative minimum tax rate of 7% in February of 2009.
5)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Imposes a state sales tax on the retail sale of tangible
personal property (TPP) to be used or consumed in California
at the rate of 7 % of the gross receipts. A state use tax
is imposed at the same rate on the storage, use or other
consumption in California of TPP purchased outside of
California. For sales occurring after July 1, 2011, the rate
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of the state SUT will be decreased by 1%, down to 6 %.
2)Establishes, in lieu of any ad valorem property tax upon
vehicles, an annual license fee for any vehicle subject to
registration in this state in an amount of 1.15% of the market
value of that vehicle. For vehicle registration after July 1,
2011, the VLF rate will be decreased to 0.65%.
3)Imposes a PIT on individuals but allows various credits,
including a dependent exemption credit. For taxable years
beginning on or after January 1, 2009, and before January 1,
2011, the PIT law was amended temporarily to add to each
marginal PIT rate an additional increase of 0.25 percentage
point, to decrease the amount allowable as a dependent
exemption credit from $309 to $98, and to increase the
alternative minimum tax rate by adding 0.25 percentage point
to the current rate of 7%.
FISCAL EFFECT : The Franchise Tax Board staff estimates that
this bill will result in a revenue loss of $2.855 billion in the
2010-11 fiscal year (FY).
COMMENTS :
1)Author's Statement . The author states that, "Over the last
year and half California, along with the rest of the country,
has experienced a depression the size not experienced since
the Great Depression. Almost every sector of California has
been affected in some way. Since October 2009, California has
lost nearly 1 million jobs. Families are hurting, forced to
cut back their own budgets to live within their means.
"Last February, the California Legislature and the Governor
decided that the State was not able to do the same thing that
everyday citizens were being forced to do. Unwilling to make
the tough choices, the State instead passed the burden of
overspending onto the taxpayer. The February budget deal
included a host of tax increases, including the Sales and Use
tax and the Personal Income Tax, forcing Californians to
adjust their budgets to compensate for the state's higher tax
burden.
"AB 1700 will repeal all of the tax increases that were levied
in that February budget deal. At the time the tax increases
were passed, it was expected they would cost taxpayers $12
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billion. While AB 1700 would not be able to undo all the
damage from the tax increases from the last year, it would
offer a stimulus of $8 billion to the California economy.
Allowing everyday citizens a little breathing room that could
help to revitalize the economy, bring back jobs and provide
financial stability to the state."
2)Arguments in Opposition . The opponents argue that, given the
current budget constraints facing law enforcement, "it is ill
advised, even irresponsible, to eliminate funding for key
programs which keep California's communities safe without
proposing any responsible fiscal funding alternatives." The
opponents also express their concern about this bill's effect
on the state's budget deficit and the implications of
eliminating a significant source of state General Fund revenue
for counties. They argue that the repeal of the 2009
temporary tax increases, combined with the state's ongoing
deferral of payments, state budget reductions, and declines in
local revenues, would put at risk the vital services that
local governments provide to people.
3)Arguments in Support . The proponents of this bill assert that
the $12.6 billion in new taxes approved by the Legislature and
Governor last February represent the largest tax increase by a
state in United States history. The proponents argue that
"repealing these increases a year early would help to
stimulate the economy by increasing purchasing power for
average Californians suffering under the weight of a 12.5%
unemployment rate" and would allow the private sector "to
increase inventories, add jobs, and help to make California
the Golden State once again."
4)Background . On February 20, 2009, the Governor signed into
law AB x3 3 (Evans), Chapter 18, Statutes of 2009, which
implemented the revenue raising provisions of the 2009-10
Special Session budget agreement. AB x3 3 temporarily
increased (through June 30, 2011) the rate of the General Fund
(GF) portion of the state SUT by 1% and the rate of the VLF
from 0.65% to 1.15%, except for commercial vehicles with a
gross weight of 10,000 pounds or more. The SUT rate increase
was effective on April 1, 2009, and the VLF rate increase
became effective for registrations beginning May 19, 2009
(corresponding to the timing of a weekly VLF billing cycle).
In addition, for taxable years 2009 and 2010, AB x3 3 reduced
the dependent credit exemption amount from $309 to $98, as
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adjusted for inflation, and temporarily added to each marginal
PIT rate an additional increase of 0.25 percentage point.
5)The SUT Increase . Existing law imposes a SUT on the sale and
use in this state of TPP, absent a specific exemption. The
combined sales tax rate in California currently ranges from
8.25% (for counties with no optional transactions and use
taxes) up to 10.25% (for the City of South Gate in Los Angeles
County). The combined rate consists of a state GF rate of 6%
(which will be reduced to 5% on July 1, 2011), statewide
special fund rates totaling 1.25%, a local tax rate of 1%, and
local optional rates. SUTs, 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 and tax increases.
6)The VLF Increase . 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% 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
revenues from the portion of the VLF increase from 0.65% to 1%
are retained by the GF ($121 million in FY 2008-09 and $1.2
billion in FY 2009-10) and revenues from the additional
increase of 0.15% are currently transferred to a newly created
Local Safety and Protection Account, which is continuously
appropriated for specific local public safety programs ($82
million in FY 2008-09 and $502 million in FY 2009-10). AB 1700
only repeals the VLF rate increase of 0.35% and does not , in
any way, affect the revenues that are derived from the 0.15%
rate increase and are deposited in the Local Safety and
Protection Account.
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7)Reduction of the Dependent Credit Amount . Currently,
taxpayers are allowed a non-refundable personal credit, which
applies to the taxpayer and their spouse or domestic partner
if filing a joint return, and a dependent credit for children
and other dependents. These credits are phased out for high
income taxpayers, and are indexed for inflation each year.
The amount of the personal exemption credit is $98, as
adjusted for inflation, and the amount of the dependent
exemption credit has been temporarily reduced for tax years
2009 and 2010 to the size of the personal credit. Beginning
with the 2011 tax year, the dependent credit amount will
revert to the size it would have been if the reduction had
never become operative ($309, as adjusted for inflation).
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 that had been in
effect prior to 2009 was the result of legislation passed in
1997, which tripled the dependent credit amount starting in
1998. AB x3 3 temporarily restores the equivalence of the
personal and dependent credit that was in effect prior to
1998.
8)Marginal Tax Rate Increase . Existing law imposes a state PI)
and provides for six graduated PIT tax rates of 1%, 2%, 4%,
6%, 8%, and 9.3%, with an additional 1% Mental Health Tax on
taxable income over $1 million (Proposition 63, 2004). AB x3 3
added an additional rate component to each PIT rate, equal to
0.25 percentage point. Thus, the temporary PIT rates currently
range from 1.25% to 9.55%. The increase of tax liabilities by
a 0.25% of taxable income slightly flattens the otherwise
progressive tax rate structure, but it also makes PIT revenues
slightly less volatile. As an illustration of the impact on
taxpayers, the 0.25% surcharge results 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
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$500,000 in taxable income. In addition, the rate increase at
the lowest brackets results in tax liabilities for some
taxpayers who, prior to 2009, had none, because some taxpayers
whose tax liability was fully offset by the personal and
dependent credits now have tax liabilities that somewhat
exceed the credits (and because the amount of the dependent
credit is also reduced for 2009 and 2010 tax years). However,
since state PITs 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.
9)Alternative Minimum Tax . AB x3 3 also made an equivalent
temporary change to the PIT Alternative Minimum Tax (AMT)
rate-adding 0.25% to the current rate of 7.0%. A taxpayer
with substantial income can use preferential tax benefits,
such as exclusion, deductions, and credits to reduce their
income tax liability. The AMT was established to ensure that
a taxpayer who uses preferential tax benefits does not
completely escape taxation. The AMT is calculated after
adding back in certain types of deductions and preference
items. Taxpayers pay either their regular tax or the AMT,
whichever is higher.
10)Related Legislation . SB 952 (Wyland), introduced in the
2009-10 Legislative Session, contains provisions identical to
the provisions of AB 1700. SB 952 was referred to the Senate
Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Howard Jarvis Taxpayers Association
Opposition
Association for Los Angeles Deputy Sheriffs
California Federation of Teachers
California Fraternal Order of Police
California Professional Firefighters
California School Employees Association, AFL-CIO
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California State Association of Counties
California Tax Reform Association
Chief Probation Officers of California
L.A. County Probation Officers Union
Long Beach Police Officers Association
Los Angeles County Professional Peace Officers Association
Los Angeles Police Protective League
Riverside Sheriffs' Association
Santa Ana Police Officers Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098