BILL ANALYSIS
SB 76
Page 1
SENATE THIRD READING
SB 76 (Budget and Fiscal Review Committee)
As Amended June 24, 2009
2/3 vote. Tax Levy
SENATE VOTE :Vote not relevant
SUMMARY : Enacts the General Fund tax provisions to implement
the 2009-10 Conference Budget Package. Specifically, this bill :
1)Repeals the provisions that allow net operating losses (NOLs)
incurred on or after January 1, 2011 to be carried back to
offset the taxpayer's income during the two prior tax years.
2)Repeals the provisions that authorize the assignment of unused
business tax credits by a corporate taxpayer to its
affiliates, unless the assignment is included with a return
filed on or before the effective date of this bill.
3)Imposes an oil severance tax of 9.9% on the extraction of oil
from the earth or water within California, effective October
1, 2009.
4)Imposes an additional $1.50 per pack excise tax on cigarettes,
as of October 1, 2009, and an equivalent tax on tobacco
products, as of July 1, 2010.
5)Takes immediate effect as a tax levy.
FISCAL EFFECT : Results in a General Fund (GF) revenue increase
totaling about $1.9 billion in 2009-10, with larger amounts
annually thereafter.
The Franchise Tax Board (FTB) estimates that repealing the
provisions allowing NOL carrybacks and the assignment of
business tax credits will increase GF revenues by $80 million in
fiscal year (FY) 2009-10 and $290 million in FY 2010-11, with
ongoing annual revenue gains increasing to $850 million in FY
2014-15.
It is estimated that the oil severance tax will increase
revenues by $830 million in FY 2009-10, and by $1.1 billion in
FY 2010-11 and each FY thereafter.
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The BOE estimates that the additional cigarette and tobacco
products excise tax will result in a revenue gain to the GF of
$1 billion in FY 2009-10 and $1.27 billion in FY 2010-11. It is
also estimated that because the higher tax will reduce sales,
revenues to the Breast Cancer Fund and the California Children
and Families Trust Fund (Proposition 10) will decline by $2.1
million and $53 million, respectively, in FY 2009-10, and by
$2.7 million and $73 million, respectively, in FY 2010-11.
Finally, BOE staff estimates that revenue to the Cigarette and
Tobacco Products Surtax Fund (Proposition 99) will decrease by
$26.5 million in FY 2009-10 but will annually increase,
beginning with FY 2010-11, by $27.6 million due to the
Proposition 99 impact of the tax on other tobacco products.
COMMENTS :
1)Repeal of NOL Carrybacks. On September 30, 2008, the Governor
signed into law AB 1452 (Budget Committee), Chapter 763,
Statutes of 2008, to implement provisions of the 2008-09
Budget Agreement. Among other things, AB 1452 authorized NOL
carrybacks for losses incurred in 2011 or later tax years.
Specifically, under AB 1452, taxpayers will be able to use
carrybacks to offset their income during the two prior tax
years. The carryback provisions are scheduled to phase in,
with 50% of any 2011 NOLs available for carryback, 75% of any
2012 NOLs, and full carryback for NOLs in subsequent years.
This bill would repeal the NOL carryback provisions enacted by
AB 1452.
2)Repeal of the Business Tax Credit Assignment Provisions. AB
1452 also allowed for the assignment of certain unused
business tax credits. Specifically, for taxable years
beginning on or after July 1, 2008, corporate taxpayers may
assign eligible credits to an affiliated corporation that is a
member of the same combined reporting group. However,
assigned credits may only be applied by an eligible affiliate
in taxable years beginning on or after January 1, 2010. This
bill repeals the provisions that authorize the assignment of
unused business tax credits, unless the assignment is included
with a return filed on or before the effective date of this
bill.
3)Oil Severance Tax. Currently, California is the only major
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oil-producing state that does not impose a tax on the
extraction of oil from the earth or water. Existing law does
impose an excise tax of $0.18 per gallon on the removal of
motor vehicle fuel or diesel fuel at the refinery or terminal
rack, upon entry into the state, and upon sale to an
unlicensed person. In addition, 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. Stripper wells - defined as those producing less
than 10 barrels of oil per day - would be exempt from the tax
if the price of oil they received as of January 1 of the
previous year was below $30 per barrel. This bill also
exempts oil owned or produced by the state or any political
subdivision.
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.
4)Cigarette and Tobacco Products Tax. The Cigarette and Tobacco
Products Tax Law imposes a variety of taxes on every
distributor of cigarettes and tobacco products. The revenues
derived from the imposition of those taxes fund several
programs and services, including health education, research,
hospital care, fire prevention, environmental conservation,
breast cancer research and early detection services, and early
childhood development programs. The current total amount of
tax on cigarettes is set at $0.87 per pack of 20 cigarettes.
That amount includes the following taxes and surcharges:
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a) An excise tax of $0.10 per pack of 20 cigarettes (5
mills per cigarette). The proceeds of this tax are
allocated to the GF.
b) A surtax of $0.25 per pack of 20 cigarettes (12 mills
per cigarette) imposed under the Tobacco Tax and Health
Protection Act of 1988 (Proposition 99), which was adopted
by the voters at the general election held on November 8,
1988.
c) A surtax of $0.50 per pack of 20 cigarettes (25 mills
per cigarette) imposed under the California Families and
Children Act of 1998 (Proposition 10), which was adopted by
the voters at the general election held on November 3,
1998.
d) An additional excise tax at the rate of $0.02 per pack
of 20 cigarettes (1 mil per cigarette). The proceeds from
the imposition of this tax are deposited in the Breast
Cancer Fund.
Existing law also imposes a surcharge on the distribution of
certain tobacco products at a rate equivalent to the total
combined rate of cigarette taxes and based on the March 1
wholesale price of cigarettes. Tobacco products include
cigars, smoking tobacco, chewing tobacco, snuff, and other
products containing at least 50% tobacco. The proceeds from
the surcharge on tobacco products fund the Cigarette and
Tobacco Products Surtax Fund and the California Children and
Families Trust Fund.
This bill increases the state cigarette excise taxes by an
additional $1.50, effective October 1, 2009. Specifically, an
additional excise tax of 75 mills per cigarette (or $1.50 per
package of 20 cigarettes) will be imposed on every distributor
on or after October 1, 2009. Furthermore, a one-time floor
stock tax of 75 mills (or $1.50 per package of 20 cigarettes)
will be levied on each cigarette in a dealer's or wholesaler's
cigarette inventory, as of October 1, 2009. A floor stocks
tax is a one-time excise tax placed on a commodity undergoing
a tax increase. The amount of the floor stocks tax is equal
to the difference between the new tax rate and the one just
previous to it. A floor tax is necessary to ensure that the
excise tax that cigarette dealers, distributors, and
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wholesalers pay on their existing inventory is the same as the
tax paid on cigarettes purchased after the tax increase, i.e.,
October 1, 2009. Absent a floor stock tax, a cigarette seller
will receive windfall profits if the seller has a large
cigarette inventory before the tax increase takes effect. In
addition, this measure imposes upon every licensed distributor
a cigarette indicia adjustment tax on affixed and unaffixed
cigarette tax stamp inventory, at 12:01 a.m. on October 1,
2009. The floor stock tax return and tax would be due to the
BOE on November 16, 2009. The cigarette tax stamp would be
increased to $1.875 for each stamp designated "25", $1.50 for
each stamp designated "20" and $0.75 for each stamp designated
"10."
This bill also imposes a tax on every distributor of tobacco
products (other than cigarettes), as of July 1, 2010, based on
the wholesale cost of these products. The rate of this tax
will be determined annually by the BOE but must be equivalent
to the rate of tax imposed on cigarettes by this bill, i.e.
$1.50 per package of 20 cigarettes. The proceeds of this new
tax will be deposited in the General Fund. Furthermore, by
increasing the cigarette tax, this bill also indirectly
triggers a tax increase on other tobacco products under the
provisions of Proposition 99. Proposition 99 imposes a surtax
on tobacco products at a rate equivalent to the combined rate
of tax imposed on cigarettes. If the combined rate of
cigarette tax were increased, as provided in this bill, the
existing surtax imposed on tobacco products under Proposition
99 would be adjusted as well to account for the additional
increase in the cigarette tax. The additional revenues will
be deposited in the Cigarette and Tobacco Products Surtax Fund
created by Proposition 99.
The State of California has not increased its tobacco tax for
over a decade. The federal Children's Health Insurance
Program Reauthorization Act of 2009 (CHIPRA, Public Law 111-3)
was signed into law on February 4, 2009. It increases the
federal excise taxes on tobacco products, imposes a floor
stocks tax, imposes new requirements on manufacturers and
importers of processed tobacco, expands the definition of
roll-your-own tobacco, and changes the basis for denial,
suspension, or revocation of permits.
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Analysis Prepared by : Oksana Jaffe / REV. & TAX / (916)
319-2098
FN: 0001547