BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 952 - Wyland
Amended: April 5, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Repeals Three Tax Increases from the February,
2009 Budget Agreement.
EXISTING LAW increased the state sales and use tax
rate from 5% to 6% commencing on April 1, 2009 until June
30, 2011 (ABx3 3, Evans, 2009). That measure also
increased each income tax rate by 25 basis points (or
hundredths of a percentage - the top rate went from 9.3% to
9.55%), reduced the amount of the dependent credit from
three times the amount of the personal exemption credit for
the 2009 and 2010 taxable years, and increased the
tentative minimum tax amount from 7% to 7.25% for the same
taxable years.
THIS BILL repeals the sales and use tax increase
effective for the first day of the first calendar quarter
after enactment of the bill. The measure also cancels the
income tax rate increase, reinstates the dependent credit
amount at three times the amount of the personal exemption
credit, and replaces the 7% rate for the tentative minimum
tax for the 2010 taxable year. The measure also removes
contingency language that provided for increases periods of
increased sales taxes and reduced dependent credits had
Proposition 1A been approved by the voters. The voters
rejected the initiative in the May, 2009 special election.
SB 952 - Wyland Page 4
FISCAL EFFECT:
Total revenue losses from SB 952 equal between $3.9
billion and $6.1 billion for 2010-11, depending on the
measure's enactment date, with gains of $2.6 million in
2011-12 and 2012-13.
According to the BOE, revenue losses from repealing
the sales and use tax increase result in revenue losses
that depend on the measure's effective dates. Revenue
losses are $3.3 billion if enacted by July 1, 2010, $2.2
billion if enacted by October 1, 2010, and $1.1 billion if
enacted by January 1, 2011.
According to the Franchise Tax Board, revenue losses
from repealing the reduced dependent credit amount,
tentative minimum tax percentage, and increased income tax
amount with factoring in increased income resulting from
the lower sales and use tax rate are $2.8 billion 2010-11,
with gains of $2.6 million in 2011-12 and 2012-13.
COMMENTS:
A. Purpose of the Bill
Last year the state budget included the largest state
level tax increase in the history of the United States,
levying an additional $12.5 billion on taxpayers. SB 952
repeals measures enacted under AB 3 (3rd Extraordinary
session). The bill will eliminate both the personal and
sales tax increases and reinstate the dependent tax credit.
In January 2009, just one month before the state
enacted a combination of sizeable tax increases, the
non-partisan Public Policy Institute of California reported
that 58% of respondents opposed increasing the vehicle
license fee and 64% opposed increasing the state sales tax.
California already has the highest sales tax and the
fourth highest income taxes of any state in the nation.
This measure will provide immediate relief for Californians
SB 952 - Wyland Page 4
by eliminating the disruptive tax increases passed last
year.
B. Second Thoughts
The February, 2009 Budget Agreement contained numerous
provisions, including tax increases that resulted in
approximately $11 billion in increased revenue, combined
with special tax incentives estimated to result in
approximately $1 billion in revenue losses due to begin in
the current taxable year. The tax increases would have
been in place for longer periods of time had the voters
approved Proposition 1A (2010), but the voters rejected the
proposition. SB 952 posits that the tax increases were a
bad idea and should be undone, by repealing three of the
tax increases below (all but the VLF), and leaving the tax
incentives in place.
ABx3 3 (Evans):
Increased sales taxes by 1% from July 1, 2009 to
July 1, 2011 ($4.5b)
Added 25 bps on each income tax rate for the 2009
and 2010 taxable years ($3.7b)
Increased VLF by 50 bps for registrations from May
19, 2009 to June 30, 2011 ($1.7b)
Reduced dependent credit to the amount of the
personal exemption credit for 2009 and 2010 taxable
years. ($1.4b)
ABx3 15 (Krekorian), SBx3 15 (Calderon):
SB 952 - Wyland Page 4
Elective sales-factory only apportionment of
corporate income for $750 million, effective in the
2010 taxable year
Small business hiring credit capped at $400 million
over the 2010 and 2011 taxable years.
Movie Production tax credit, which can be applied
to the sales and use tax, shared within the unitary
group, or sold under specified circumstances for $500
million over the next five taxable years, commencing
in the 2010 tax year.
C. The First Step
The national and state economy slowed considerably in
recent years. While measures of Gross Domestic Product and
other indicators show an end to the rapidity of decline,
and occasionally signs of a nascent recovery, unemployment
statistics persist at historically high levels. To address
unemployment, governments at all levels are seeking
solutions to increase employment, often by changing the tax
code; however, no clear link exists between lower taxes,
especially at the state level, and increased employment.
Few economists posit that the primary inhibiting factor for
firms to hire is an excess of tax liability; instead,
larger macroeconomic changes have lead to reduced aggregate
demand for products, so firms require fewer workers to meet
lower quantities demanded
Proponents of changes to state taxes to increase
employment assert that California must lower taxes or
provide special tax benefits to provide better treatment to
mobile capital, assuming that it will flow to other states
to earn a better return, thereby spurring employment and
economic growth. However, the Public Policy Institute of
California research shows that while California loses more
SB 952 - Wyland Page 4
jobs to interstate business relocation than it gains, the
overall impact on the state's employment is negligible.<1>
The same study found that while California companies expand
in other states, out-of-state companies similarly start
branches or add jobs in California. The Economic Policy
Institute states that "an analysis of relevant research
material shows little grounds to support tax cuts and
incentives - especially when they occur at the expense of
public investment - as the best means to expand employment
and spur growth."<2> While taxes almost always matter to
firms that seek to expand or relocate, research shows
little to no direct correlation between lower state taxes
and employment growth.
D. California's Dependent Credit
In California, like many other states, personal
exemption credits result in a dollar for dollar reduction
in tax due. The dollar amounts are arbitrary; but
California is the only state in the country that tripled
the personal exemption credit for dependents, essentially
granting a tax benefit that grows with the number of
dependents a taxpayer lists. California's one-of-a-kind
dependent credit was increased as part of a package of
other tax reductions in the hopes of distributing some of
the benefits of that legislation to families to offset the
costs of raising children (AB 2797, Cardoza, 1997). While
existing law will reset in the 2011 taxable year to
reinstate California's unique dependent credit amount, SB
952 returns the benefit one year early.
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<1> Kolko, Jed and Neumark, David, "Business Location
Decisions and Employment Dynamics in California" Public
Policy Institute of California, November, 2007
<2> Lynch, Robert, "Rethinking Growth Strategies: How State
and Local Taxes and Services Affect Economic Development"
Economic Policy Institute, 2004.
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Support and Opposition
Support:California Small Business Association, Howard
Jarvis Taxpayers Association, National Tax Limitation
Committee
Oppose:California Fraternal Order of Police, Long
Beach Police Officers Association, Los Angeles County
Professional Peace Officers Association, Santa Ana Police
Officers Association, Riverside Sheriffs' Association, Los
Angeles Probation Officers Union, AFSCME, Local 685,
Association For Los Angeles Deputy Sheriffs, Chief
Probation Officers of California, California State
Sheriffs' Association, and Sacramento County Sheriff's
Department
Oppose:None received.
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Consultant: Colin Grinnell