BILL ANALYSIS
AB 2528
Page 1
Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2528 (Knight) - As Introduced: February 19, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income and corporations tax: gross income:
exclusion: Cash for Clunkers.
SUMMARY : Excludes from gross income any voucher or payment made
pursuant to the federal Consumer Assistance to Recycle and Save
(CARS) Act of 2009, also known as "Cash for Clunkers," received
as a result of a purchase of a vehicle. Specifically, this
bill :
1)Provides that a voucher or payment issued under CARS shall not
be considered gross income for the purchaser of a vehicle.
2)Takes effect immediately as a tax levy.
EXISTING STATE LAW:
1)Does not conform to the federal CARS program.
2)Provides that a trade-in of a used vehicle to buy a new
vehicle is treated as a normal sale or other disposition of
the old vehicle. In some cases, the value of the voucher
received may result in a taxable gain if it exceeds the
taxpayer's basis in the old vehicle.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
revenue losses of $100,000 in fiscal year (FY) 2009-2010,
$150,000 in FY 2010-11, and $150,000 in FY 2011-2012.
COMMENTS :
1)Author's Statement. The author states, "Assembly Bill 2528
ensures that tax collection in the State of California is fair
and correct and would exclude the $3,500 or $4,500 federal tax
credit from being calculated as gross income for tax purposes.
Generating tax revenue from the 'Cash for Clunkers' program
is not a legitimate source of income for the state, and
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violates the spirit of this program. The people of California
deserve a fair tax system that does not punish them for taking
advantage of the federal 'Cash for Clunkers' program."
2)Argument in Opposition. The opponents state that California's
budget deficit is far too large to grant tax credits for a
federal program, and that this bill is not beneficial to the
state because it does not create new jobs or stimulate the
economy, and it rewards actions that have already taken place.
3)Background. The CARS program, also known as "Cash for
Clunkers," was a $3 billion United States (U.S.) federal scrap
program intended to provide incentives to U.S. residents in
order to purchase a new and more fuel efficient vehicle when
trading in a less fuel efficient vehicle. In order to be
eligible for the program, a car must be less than 25 years
before the date of trade in, have a "new" combined
city/highway fuel economy of 18 miles per gallon or less, be
in drivable condition, and be continuously insured and
registered to the same owner for the full year preceding the
trade-in. The program began on July 1, 2009 and ended on
August 24, 2009.
According to the December 2009 CARS report developed by
National Highway Traffic Safety Administration, the CARS
program increased car manufacturing, dealership sales, and
salvage yard usage. Using the ratio of the change in vehicle
production to the change in employment, the 597,950 vehicles
sold because of the CARS program created an estimated 38,600
new jobs. In total, the CARS program helped create and save
an estimated 61,960 jobs. This figure does not include jobs
on the supply chain that have also been affected by the CARS
program. However, the longevity of the program's employment
impact is uncertain. At the very least, the report showed an
immediate economic impact on Gross Domestic Product of $7.8
billion from the CARS program.
4)Federal Conformity. The failure to conform to federal tax
laws in some areas but not other areas can be incredibly
confusing for taxpayers and may lead to improper tax
reporting. Under CARS, a taxpayer may unknowingly believe
that the voucher or payment received by the federal government
is not subject to tax in California. Also, vouchers are only
subject to tax in California if a gain is realized from the
trade in of the old vehicle. A taxable gain exists if the
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amount of the voucher exceeds the basis of the old vehicle,
which may be difficult for individuals to estimate. Applying
the "like-kind exchange" rules may also be confusing for small
businesses. By conforming to federal law, California taxpayer
confusion will be eliminated.
5)"Cash for Clunkers" in California? Although CARS seems to be
effective on the federal level, a "Cash for Clunkers" program
would not be appropriate at a state level. The economic
incentives underlying the CARS program are founded on
Keynesian economics. Specifically, economist John Maynard
Keynes advocated deficit spending to moderate or end a
recession. Unfortunately, California is unable to run
deficits in the same manner as the federal government; the
state has to balance its budget. According to a report by the
Center for Budget and Policy Priorities on the effects of a
fiscal stimulus package, the creation of a stimulus package
similar to the CARS program at the state level would either
have to be funded by raising taxes or eliminating services.
Recipients of a state stimulus package will receive a little
extra money, but the state will have to eliminate teachers,
construction workers, health-care workers, and other important
services in order to pay for the stimulus package. Unlike the
federal government, reduction in revenue typically must be
accompanied by a reduction in spending or a raise in taxes.
6)FTB staff comment. It is uncertain if this bill applies
retroactively, without regard to taxable year, to vouchers or
payments issued under CARS. It is recommended that "A" be
struck out on page 1, line 3, and on page 2, line 6, and be
replaced by, "without regard to taxable year, a."
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
The American Federation of State, County and Municipal Employees
Analysis Prepared by : Carlos Anguiano / Oksana Jaffe / REV. &
TAX. / (916) 319-2098