BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 96 - Ducheny
Introduced: January 26, 2009
Hearing: June 10, 2009 Tax Levy Fiscal: Yes
SUMMARY: Modifies Personal Income Tax Brackets;
Establishes 9%, 9.5%, 10%, 10.5%, and 11%
Brackets.
EXISTING LAW applies the following tax rates by income
band for single filers for tax year 2008 (breakpoints are
double the below thresholds for joint filers; breakpoints
for head of household filers 68.058% of joint filers):
EXISTING LAW adds .25 percent, or twenty five basis
points, to the tax rate for all brackets the 2009 and 2010
tax years (ABx3 3, Evans, 2009). The .25 increase would
have applied for the 2011 and 2012 had voters approved
Proposition 1A (2009) in the May 19, 2009 special election.
The Franchise Tax Board indexes the bracket breakpoints
for inflation each year by measuring changes in the
California Consumer Price Index. The brackets are
cumulative, meaning that the 1% tax rate applies to the
first $7,168 of any taxpayer's taxable income; the 2% rate
applies to that marginal amount of income between $7,168
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and $16,994, and so forth, regardless of the taxpayer's
total amount of taxable income.
EXISTING LAW also applies a 7% rate to alternative
minimum income. Generally, the AMT seeks to ensure that
higher income taxpayers who can use exclusions, deductions,
and credits pay some minimum amount of tax.
EXISTING LAW further applies a 1% surcharge upon
incomes over $1 million for all filing statuses to fund
mental health programs (Proposition 63, 2004)
THIS BILL revises the above brackets starting in the
2009 tax year in the following ways (changes also apply to
taxpayers filing as married filing jointly or head of
household in the same manner as existing brackets):
Reduces the current 9.3 (2008)/ 9.55
(2009 and 2010) to 9% for taxpayers filing
separately with taxable incomes between $47,055
and $60,000.
Enacts a 9.5% bracket for taxpayers with
taxable income between $60,000 and $125,000.
Enacts a 10% bracket for taxpayers with
taxable income between $125,000 and $250,000.
Enacts a 10.5% bracket for taxpayers with
taxable income between $250,000 and $500,000.
Enacts an 11% bracket for taxpayers with
taxable income above $500,000. The Proposition
63 surcharge would also apply for these
taxpayers, pushing the marginal rate for
taxpayers with more than $1 million in taxable
income to 12%.
THIS BILL also increases the alternative minimum tax
amount from 7% to 8.5%.
FISCAL EFFECT:
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According to the Franchise Tax Board, SB 16 results in
revenue gains of $1.2 billion in 2009-10, $2.2 billion in
2010-11, and $2.9 billion in 2011-12.
COMMENTS:
A. Purpose of the Bill
According to the Author, "Working families spend more
of their income on necessities and a proportionally larger
share of those dollars in the local economy. A small tax
cut during these recessionary times, therefore, would act
as a stimulus to local California businesses at a critical
juncture. During the past two decades income disparities
between those on the higher end of the economic ladder and
those of lesser means, has grown at a significant rate.
This growing disparity makes it harder to count upon
working families to support critical government services.
Additionally, since those in higher income brackets receive
a much larger return on federally deductible state property
and income taxes, Californians would receive more of their
money back in federal returns, making the bill a useful
tool in obtaining a larger share of return on the money
that Californians send to Washington, DC. Finally, the
state has gone to the higher 10% and 11% tax brackets
during difficult economic times. Under Governor Reagan the
personal income tax was increased to 10 and 11% and then
again under the Wilson administration to help solve the
$14.3 billion dollar budget deficit the state faced in
1991.
B. Marty McFly is Alive and Well
SB 96 proposes to take California's income tax rates
back to the future by increasing rates on higher-income
taxpayers in a way similar, but not identical, to measures
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taken in the early 1990's. Between 1991 and 1996,
California applied 10 and 11% rates on income above
$100,000 and $200,000 respectively (SB 169, Alquist, 1991),
and ended when voters elected against extending the higher
income tax rates (Proposition 217, 1996). The bill seeks
to increase state revenues during a time of extreme fiscal
stress by applying a strategy previously used during the
last severe recession in California.
C. Bracketology
California's income tax rates are well known for their
progressivity, where marginal rates increase as income
grows. Progressive income tax systems rely on both equity
considerations, where the wealthy are taxed at higher rates
than the poor because they can better afford to pay the
tax, and the economic concept of diminishing marginal
utility, where more affluent taxpayers have a smaller need
for each additional marginal dollar than those with less
income; however, conservatives argue for equal tax rates
upon all amounts of income (the "flat tax") using equity
and efficiency arguments too. Federal law and all states
applying an income tax do so using a progressive system,
although the degree of progressivity varies from state to
state.
As part of the budget agreement enacted in February of
this year, California enacted income tax increases to make
the state's income tax system less progressive by
increasing each rate by 25 basis points, thereby ensuring
that all taxpayers with income tax liabilities shoulder the
burden of tax increase. SB 96 repeals the less progressive
changes that will currently apply in 2009 for considerably
more progressive income tax rates. In doing so, the bill
presents a clear choice for policymakers by shifting the
costs of financing public services from taxpayers with less
income to those with more.
According to FTB, SB 96 would have the following tax
effect for each taxpayer, net of federal deductibility
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(taxpayers can blunt the impact of increased state income
taxes by deducting them from income for federal tax,
resulting in lower federal revenues, so the federal
government pays some of SB 96's tax increase).
-----------------------------------------------------------
|For single | | | | | |
|taxpayers | | | | | |
|--------------+-------+--------+--------+--------+---------|
|AGI (Adjusted | | $ | $ | | |
|Gross Income) |$60,000 |100,000 |200,000 |$500,000 |$1,000,000 |
| | | | | | |
|--------------+-------+--------+--------+--------+---------|
|Deductions | | $ | $ | | |
| |$10,000 |15,000 |30,000 |$70,000 |$125,000 |
|--------------+-------+--------+--------+--------+---------|
|Net tax | -$100 | -$145 | -$14 | $1,525 | $6,061 |
|change | | | | | |
|--------------+-------+--------+--------+--------+---------|
| | | | | | |
|--------------+-------+--------+--------+--------+---------|
|For joint | | | | | |
|taxpayers | | | | | |
|--------------+-------+--------+--------+--------+---------|
|AGI | | | | | |
| |$100,000 |$200,000 |$500,000 |$1,000,000 |$2,000,000 |
|--------------+-------+--------+--------+--------+---------|
|deductions | | | | | |
| |$20,000 |$40,000 |$100,000 |$150,000 |$200,000 |
|--------------+-------+--------+--------+--------+---------|
|Net tax | -$176 | -$316 | $173 | $2,979 | $12,661 |
|change | | | | | |
-----------------------------------------------------------
D. Of Geese and Golden Eggs
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The personal income tax, especially in California, has
been roundly criticized as a volatile revenue source with
exacerbates California feast-or-famine fiscal condition.
Income tax receipts as a share of California's total
revenues have grown considerably over the years, growing
from 11.3% of total revenues in 1950-51 to a peak of 57.5%
of total revenues in 2000-01, but receded to 53.4% in
2007-08. Because of the progressive structure, 88.5% of
personal income tax revenue comes from the top 20% of
taxpayers by income, with the top 1% of taxpayers, 144 in
all, pay almost half of total income tax receipts.
California's ability to finance public services relies in
large part on the economic fortunes of a very small set of
taxpayers. Because the income of these taxpayers include a
larger share from capital gains, which are much more
volatile than wages, California has seen changes of 10% or
more in total income tax receipts in ten of the last
thirteen years.
However, income volatility is not inherently
undesirable; the phenomenon only becomes a problem if the
state assumes that income tax receipts are predictable. To
demonstrate this concept, erstwhile Senate Revenue and
Taxation Committee consultant Martin Helmke created the
"Parable of the Goose that Laid the Golden Eggs."
According to the parable, two islands both had magical
geese that laid golden eggs; however, one goose always laid
one egg per year, whereas the other laid eggs on an
unpredictable schedule: some years the goose produced
several eggs, but would then fail to make any for several
years. The people of the island housing the less
consistent goose grew frustrated with the lack of
predictability of wealth, eventually killing the goose, and
ending the future flow of golden eggs. The parable seeks
to demonstrate the lesson that income unpredictability and
volatility is only a problem when one expects stability and
capitalizes decisions assuming such stability.
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Support and Opposition
Support:California Professional Firefighters
Association
Oppose:California Taxpayers' Association
Howard Jarvis Taxpayers' Association
---------------------------------
Consultant: Colin Grinnell