BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 2528 - Knight
Amended: May 5, 2010
Hearing: June 23, 2010 Tax Levy Fiscal: Yes
SUMMARY: Conforms California to Federal Law by Excluding
From Gross Income the Voucher Payments Received
Under the Federal Consumer Assistance to Recycle
and Save (CARS) Act of 2009, Also Known As "Cash
for Clunkers."
EXISTING FEDERAL LAW, under the federal CARS Act of
2009 (or "Cash for Clunkers" program), which ended on
August 25, 2009, allowed consumers to receive either a
$3,500 or $4,500 discount from a car dealer when they
traded in their vehicle and purchased or leased a new, fuel
efficient, qualifying vehicle. Any voucher issued under the
program or any payment made for such a voucher is not
considered as gross income of the purchaser of a vehicle
for purposes of the federal Internal Revenue Code.
EXISTING LAW does not conform to the Consumer
Assistance to Recycle and Save Act of 2009. For state
income tax purposes, 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; and, 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.
THIS BILL does not conform to the federal CARS
program. Specifically, this bill provides that a voucher or
payment issued under CARS shall not be considered gross
AB 2528 - Knight
Page 3
income for the purchaser of a vehicle.
FISCAL EFFECT:
The Franchise Tax Board (FTB) estimates that this bill
would result in a revenue loss of $100,000 in fiscal year
(FY) 2009-10, and $150,000 in FYs 2010-11 and 2011-12.
COMMENTS:
A. Purpose of Bill
The author's office states: "Assembly Bill 2528 would
protect the rights of California's taxpayers by excluding
any payment derived from the federal Consumer Assistance to
Recycle and Save Act of 2009 from being calculated as gross
income for tax purposes."
B. Background
The CARS program, also known as "Cash for Clunkers,"
was a $3 billion 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 old 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
AB 2528 - Knight
Page 3
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.
C. Tax treatment of vouchers
Federal law explicitly excludes the voucher payments
under the CARS program from income taxation. Absent
conformity, however, a portion of voucher payment could be
subject to income tax in California under certain
circumstances -specifically, if the $3,500 or $4,500
voucher were greater than the amount the individual had
originally paid for the used car. For example, if the
person bought the car for $3,000, then traded it in and
received a $3,500 voucher under the "Cash for Clunkers"
program, the $500 capital gain (representing the difference
between the trade-in voucher price and the "basis," or
purchase price of the property) would be considered a
capital gain that is subject to taxation. By conforming to
federal law, taxpayers facing this somewhat unusual
circumstance would no longer be liable for state taxes on
the capital gain.
D. Would a "Cash for Clunkers" program work in
California?
Although CARS seemed to be effective at the federal
level, a "Cash for Clunkers" program would not be
appropriate at the state level. This is because, as
pointed out by the Center for Budget and Policy Priorities,
unlike the federal government, states can't borrow their
way out of a budget shortfall. Rather, they typically must
cut spending or raise revenue, either of which can
exacerbate a recession by reducing aggregate demand in the
economy. In short, the state has to balance its budget.
AB 2528 - Knight
Page 3
Therefore 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 would receive a
little extra money, but California would have to eliminate
important services, such as health care workers or
teachers, in order to pay for this stimulus program.
Support and Opposition
Support: Spidell Publishing, Inc.
Oppose: None on file.
---------------------------------
Consultant: Meg Svoboda