BILL ANALYSIS
AB 1836
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1836 (Furutani) - As Amended: April 5, 2010
VOTE ONLY
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Personal Income Tax: 10% and 11% brackets
SUMMARY : Temporarily establishes 10% and 11% personal income
tax (PIT) brackets for high-income taxpayers and increases the
alternative minimum tax (AMT) rate to 8.5%. Specifically, this
bill :
1)Establishes a 10% PIT rate for the following:
a) Single filers whose taxable income is over $250,000 and
equal to or less than $400,000;
b) Joint filers whose taxable income is over $500,000 and
equal to or less than $800,000; and,
c) Head of household filers whose taxable income is over
$400,000 and equal to or less than $600,000.
2)Establishes an 11% PIT rate for the following:
a) Single filers whose taxable income is over $400,000;
b) Joint filers whose taxable income is over $800,000; and,
c) Head of household filers whose taxable income is over
$600,000;
3)Increases the AMT rate to 8.5%.
4)Is operative for taxable years beginning on or after January
1, 2011, and before January 1, 2016.
AB 1836
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EXISTING FEDERAL LAW :
1)Imposes six different income tax rates on individuals,
estates, and trusts ranging from 10% to 35%.
2)Provides an AMT rate of 26% on AMT income up to $175,000 and
28% on AMT income exceeding that amount.
EXISTING STATE LAW :
1)Imposes, for taxable years beginning on or after January 1,
2009, and before January 1, 2011, six different PIT rates
ranging from 1.25% to 9.55%. Each rate applies to a different
range of income, known as a "tax bracket." The Franchise Tax
Board (FTB) is required to recalculate the tax brackets each
year based on the change in the California Consumer Price
Index.
2)Imposes an addition 1% Mental Health Tax, not subject to
reduction by credits, on the portion of a PIT taxpayer's
taxable income that exceeds $1 million.
3)Provides an AMT rate of 7.25% for taxable years beginning on
or after January 1, 2009, and before January 1, 2011.
FISCAL EFFECT : FTB estimates that this bill would increase
General Fund revenues by $1.1 billion in fiscal year (FY)
2010-11, by $2.1 billion in FY 2011-12, and by $2.4 billion in
FY 2012-13.
COMMENTS :
1)Author's Statement. The author has provided the following
statement in support of this bill:
In 1991, California was entering a deep recession, and the
unemployment rate was increasing. The State's budget
deficit grew as the months passed. The Legislative
Analyst's Office (LAO) wrote at the time, "[u]nderlying
structural budget problems and the onset of a national
recession have combined to pose extremely difficult
challenges for the 1991-92 state budget."
When then-Governor Wilson unveiled his May Revision in
1991, the updated budget plan was based on a deficit of
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$14.3 billion. In order to bridge the gap, the 1991-92
budget Governor Wilson signed into law included $3.4
billion in expenditure reductions and $9.1 billion in
increased resources. Notably, the increased resources that
Governor Wilson relied on included $5.1 billion in
state-level tax increases.
AB 1836 is a less restrictive version of the temporary tax
brackets initiated by former Governor Wilson in 1991. If
in place today, Governor Wilson's tax brackets would apply
to single filers with taxable income over $163,954 and
joint filers with taxable income over $327,913. Like the
tax brackets established by Governor Wilson, the tax
brackets under AB 1836 are temporary and apply only to tax
years 2011-15. If passed, AB 1836 is estimated to raise
almost $14 billion of critical funding over the next five
years. AB 1836 will only affect the wealthiest of
Californians and not low-income or middle class individuals
and families that have been hit hard by the recession and
the Governor's past budget cuts.
2)Argument in Favor. Proponents of this bill state that low and
middle income Californians have already been hit hard by the
economic downturn. Over the last two years, over $2 billion
has been cut from health and human services programs meant to
help keep families afloat during tough economic times.
Governor Schwarzenegger has proposed cutting another $6.4
billion from health and human services to close the budget
gap, without proposing real revenue-raising budget solutions.
Health care has already been cut to the bare bones and the
state's budget woes cannot be solved on the backs of
California's lowest-income families. Enrollment for CalWORKS,
Medi-Cal, and Healthy Families has increased despite budget
cuts. This problem cannot be fixed by continuing to cut
programs.
3)Argument in Opposition. Opponents of this bill state that
California just recently increased all its income tax brackets
by .25%, giving it the highest rates in the country.
California already has the most progressive income tax
structure in the United States, with the top 1% of earners
paying half the tax revenue California receives. If anything,
California needs fewer tax brackets to keep it from becoming
over-reliant on one source of revenue. This measure will only
add credence to the notion that California is the most taxed
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state in the union.
4)Background. Throughout California's history, governors and
the Legislature have imposed progressive tax brackets on the
highest income earners. Beginning with Governor Ronald
Reagan, a 10% tax bracket was enacted in 1967, and later
raised to 11% in 1971. In the early 1990's, California faced
a severe recession, which resulted in significant shortfalls
in the state budget. In response, the State acted to increase
revenues and reduce expenditures. The Legislature and
Governor Pete Wilson, in addressing the issue, increased the
PIT rates by adding a 10% and an 11% tax bracket for the
State's highest income earners. In 1991, the 10% rate was
imposed on filers with incomes over $100,000 (single) and
$200,000 (married filing jointly). The 11% rate was imposed
on filers with taxable incomes over $200,000 (single) and
$400,000 (married filing jointly). These income thresholds
were increased for inflation each year, so that by 1995, the
10% rate was imposed on filers with taxable incomes over
$109,936 (single) and $219,872 (married filing jointly), and
the 11% rate was imposed on filers with taxable incomes over
$219,872 (single) and $439,744 (married filing jointly).
In 1995, supporters of a permanent extension of the tax
bracket rates placed Proposition 217 on the ballot. The
measure would have continued the 10% and 11% tax rates
permanently and allocated revenue from the increase to schools
and local governments. Proposition 217 failed narrowly by
2/10 of one percentage point.
5)Committee Staff Comments:
a) Progressive Taxation. California currently has a
progressive taxation system. A progressive tax is one
where the tax rate increases as the taxable base amount
increases. As explained earlier, California has six
different tax rates, each increasing as the base increases.
There are several schools of thought addressing this
issue. Generally speaking, there are those who believe in
a progressive system of taxation, and those who do not,
preferring other methods of taxation, like a flat tax.
The argument against a progressive tax system is similar to
the one espoused by Austrian economist and author, Eugen
Von Bohm-Bawerk. Addressing the concept in his work, Karl
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Marx and the Close of his System, Von Bohm-Bawerk focuses
his argument on the consumption of goods versus the
consumption of capital. Applying the concept of
diminishing returns, as income rises, a smaller portion of
that income will be used for consumption of goods. By
default, a larger portion will be used for capital
investments, which will generate more income for more
capital investments. By purchasing more and more capital
goods, the cost of production begins to fall and begins to
elevate the standard of living. A progressive system of
taxation would increase the tax rate on higher income
individuals, reducing the amount of income available for
capital investments and thereby reducing improvements to
the standard of living.
This argument against a progressive system of taxation,
however, fails to address the issue of a growing gap
between those who have capital investments generating an
exceedingly greater amount of income and those who are just
able to pay for life's necessities. Because low income
earners spend a larger share of their income on
necessities, they have a much smaller portion of income
left over to make their own capital investments. The
argument also fails to address the elimination of jobs from
increased capital improvements. For example, a company
employing 10 workers may decide to purchase large capital
equipment, eliminating the need for those workers. The
machine can perform the same amount of work, but the
business will become more efficient by reducing its labor
costs in subsequent years.
The idea of a progressive tax system has gained acceptance
from a wide range of individuals. Writing in The Wealth of
Nations, Adam Smith outlined the hardship and burden that
lower income individuals have in society. Specifically,
Smith focused on the necessities of life, which low income
individuals spend a much larger percentage of their income
on. In recognizing the disproportionate impact on the
poor, Smith stated, "it is not very unreasonable that the
rich should contribute to the public expense, not only in
proportion to their revenue, but something more than in
that proportion." Other arguments also encourage the use
of a progressive taxation system because individuals with
greater capital are also more likely to take advantage of
societal benefits supported by taxation, such as defense,
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infrastructure, and the protection of property rights.
Individuals who control larger sums of capital are also
able to take advantage of economies of scale, a wider range
of investment opportunities, and are able to more directly
participate in shaping government. By providing a
progressive tax system, democracies are better able to
enhance economic opportunity for the lower and middle
classes.
b) Revenue Volatility. Revenue volatility is related to
both California's economic cycle and its tax structure. As
noted in Revenue Volatility in California by the
Legislative Analyst's Office (LAO), California's economic
cycle has historically been more volatile than the nation's
economic cycle due to the presence of high-paying cyclical
technology-related industries and the housing sector. In
addition to the historic volatility of California's
economic cycle, revenue volatility has also been an issue
because of California's increased dependency on the PIT.
The percentage of state revenue coming from the PIT has
increased from 37% in 1979-80 to a peak of 57% in 2000-01.
LAO's report mentioned several ways in which California
could reduce the volatility of its revenues. Among them
was reducing the progressivity of the basic PIT structure.
This would involve flattening the PIT structure by
increasing the tax rates on lower and moderate income
earners and reducing the tax rate on high-income earners.
Other suggestions included increasing the State's reliance
on alternative tax revenues. Specifically, the State may
be able to reduce its dependence on the PIT by extending
taxes to services, which tend to be relatively stable
during a business cycle, or by increasing property taxes.
With regard to property tax, revenues generated from the
levying of taxes on property tend to be the most stable of
the major state and local sources. According to the
Commission on the 21st Century Economy, property taxes are
more stable because property tends not to fluctuate as much
as other tax bases in response to the business cycle, most
notably the PIT. Prior to 1978, property tax was assessed
at the market value. In 1978 voters passed Proposition 13,
which limited assessments to the property's acquisition
value, plus an annual increase capped at the lesser of 2%
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or the rate of inflation. Proposition 13 also added a
two-thirds vote requirement for raising taxes. After the
passage of Proposition 13, there was a dramatic drop in
property taxes relative to personal income. Property tax
as a share of personal income dropped from 5% in years
1977-78 to 2.4% in years 2005-06. In terms of preventing
volatility in the state's revenue, Proposition 13 made it
incredibly difficult to raise revenue from one of the most
stable sources. Of course, it is also important to note
that volatility is only a problem if state government
operates with an expectation of stability. If the
Legislature properly addresses the issue of volatility
within the budget, state funded programs and other costs
could be properly managed without having to restructure
California's tax system.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County and Municipal Employees,
AFL-CIO
Asian Americans for Civil Rights & Equity
California Commission on the Status of Women
California Immigrant Policy Center
California Labor Federation
California Professional Firefighters
California School Employees Association
California Tax Reform Association
California Teachers Association
Coalition for Humane Immigrant Rights of Los Angeles
Health Access Coalition
Jericho
Lutheran Office of Public Policy - California
National Association of Social Workers
Planned Parenthood Affiliates of California
Services, Immigration Rights & Education Network
Opposition
California Aerospace Technology Association
California Bankers Association
California Chamber of Commerce
California Manufacturers & Technology Association of America
California Taxpayers' Association
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Howard Jarvis Taxpayers Association
Analysis Prepared by : Carlos Anguiano / M. David Ruff / REV. &
TAX. / (916) 319-2098