BILL ANALYSIS
SB 1 X1
Page A
(Without Reference to File)
SENATE THIRD READING
SB 1 X1 (Ducheny)
As Amended December 16, 2008
2/3 vote. Urgency
SENATE VOTE :Vote not relevant
SUMMARY: Contains the tax-increase provisions included in the
Governor's special session proposals. Specifically, this bill :
1)Increases the General Fund (GF) sales and use tax rate by 1.5%. This
provision, which applies to sales occurring between March 1, 2009 and
December 31, 2011, would raise the GF rate from 5% to 6.5% and the
total combined rate paid by consumers to between 8.75% (in
jurisdictions with no optional transactions and use taxes) up to
10.25% (in Los Angeles County).
2)Imposes a 9.9% oil severance tax. Currently, California is the only
major oil producing state that does not impose a tax on the
extraction of oil from the earth or water. This bill imposes a
severance tax of 9.9% on the extraction of oil from the earth or
water within California's jurisdiction. Stripper wells-defined as
those producing less than 10 barrels of oil per day-would be exempt
from the tax when the price of oil on January 1 of the previous year
was below $30 per barrel.
3)Raises alcohol-related excise taxes. Existing law imposes excise
taxes on alcoholic beverages at a rate of 20 cents per gallon for
beer and wine, 30 cents for champagne and sparkling wine, and $3.30
per gallon for distilled spirits. These rates have been in place
since 1991. This bill raises the rate for alcoholic beverages by the
equivalent of 5 cents per drink. On a per gallon basis, the tax on
beer would increase by 53 cents, the tax on wine would increase by
$1.28 per gallon, and the tax on distilled spirits would increase by
$4.27 per gallon.
FISCAL EFFECT : As shown in the accompanying table, the bill increases
total GF revenues by 3.2 billion in 2008-09, $9.7 billion in 2009-10,
and $10.2 billion. These estimates are consistent with the
administration's December revenue revisions and take into account
estimated impacts of the tax increases on consumer spending on taxable
items.
Impact of Revenue Provisions
(Millions of dollars)
-------------------------------------------------------------
| |Effective | 2008-09 | 2009-10 | 2010-11 |
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| |Date | | | |
|----------------+----------+----------+-----------+----------|
|Increase in |March | 2,350| 7,114| 7,595|
|sales and use |2009 | | | |
|tax rate | | | | |
|----------------+----------+----------+-----------+----------|
|Expansion of |March and | 272| 1,154| 1,333|
|sales and use |April | | | |
|tax to selected |2009 | | | |
|services | | | | |
|----------------+----------+----------+-----------+----------|
|Oil severance |February | 358| 855| 862|
|tax<1> |2009 | | | |
|----------------+----------+----------+-----------+----------|
|Increase in |February | 244| 585| 862|
|alcoholic |2009 | | | |
|beverage excise | | | | |
|taxes | | | | |
|----------------+----------+----------+-----------+----------|
|Total | | 3,224| 9,708|10,224 |
-------------------------------------------------------------
COMMENTS :
1)Existing law imposes a sales or use tax on the gross receipts from
the sale or other consumption in this state of tangible personal
property. Sales and use taxes, as general taxes on consumption, are
passed on to the consumer, they are considered to be more regressive
than some other taxes, such as California's personal income tax,
since they 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
must be weighed against the economic effects of other options for
balancing the budget.
2)Existing law does not impose an oil severance tax but it requires oil
producers to pay to the Department of Conservation a regulatory fee
of $0.07023 per barrel of oil produced to fund the department's
regulatory programs and a fee of $0.05 per barrel of oil on persons
owning crude oil when it is received at a marine terminal from within
the state. Existing law also imposes a sales tax on the sale of
motor vehicle fuel and diesel fuel and an excise tax of $0.18 per
gallon on the removal of motor vehicle fuel or diesel fuel at the
--------------------------------
<1> The imposition of this oil severance tax will result in a reduction
in tidelands oil revenues of $10 mln. in FY 2008-09, $19 mln. in FY
2009-10, and $20 mln. in FY 2010-11.
SB 1 X1
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refinery or terminal rack, upon entry into the state, and upon sale
to an unlicensed person. Finally, existing law authorizes a 1% ad
valorem property tax, to be imposed by counties, on the full cash
value of property where the value of the property includes underlying
gas and mineral rights and, with respect to oil in the ground,
"proved reserves".
The price of California crude oil is normally 15% less than the
often-quoted benchmark prices for light crude oil because California
crude oil is heavier and more expensive to refine. Revenues from the
severance tax will depend on future levels of oil production and the
price of oil extracted in California.
Taxes of this nature are often passed on to the end consumer.
Nevertheless, the Legislative Analyst's Office noted in its 2006
report on Proposition 87, which would have imposed a similar oil
severance tax, that market forces could ensure that an oil severance
tax would not be passed on to consumers. Because California oil
refiners have many options for purchasing crude oil in the global oil
market, California oil producers will have to maintain competitive
prices to retain their share of the market.
Local property taxes paid on oil reserves could decline under this
measure, to the extent that the imposition of the severance tax
reduces the value of oil reserves in the ground.
This bill is similar to AB 9 X3 (Nunez), which was introduced in the
2007-08 legislative session. AB 9 X3 would have imposed a 6%
severance tax on specified oil producers. In addition, AB 9 X3 would
have levied a 2% surtax on that portion of taxable income or net
income, respectively, in excess of $10 million, of taxpayers engaged
in the petroleum industry.
3)The alcoholic beverage tax is a per-gallon excise tax collected on
the sale, distribution, or importation of alcoholic beverages in
California. The alcohol excise tax rates have steadily been eroded
by inflation because they are set at a fixed value per volume.
According to the Alcohol Policies Project, California's excise taxes
on wine are among the lowest in the nation, while the state's excise
taxes on beer and liquor fall below current national averages.
Proponents of higher excise taxes argue that higher alcohol taxes
would increase prices, thereby lowering consumption and its attendant
problems. Opponents state that any tax increase would be unfair to
the alcohol industry and depress demand at a time when the economic
recession is already reducing consumer demand. In addition,
opponents argue that increasing the excise tax rates could lead to
layoffs in the industry.
SB 1 X1
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Analysis Prepared by: Dan Rabovsky and Brad Williams / BUDGET/ (916)
319-2099 FN: 0000023