BILL ANALYSIS �
AB 218
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Date of Hearing: March 7, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 218 (Wieckowski) - As Amended: February 28, 2011
Majority vote. Fiscal committee.
SUBJECT : Taxation: estate tax: sales and use taxes exemption.
SUMMARY : Calls for a special election to a) repeal the
initiative measure that prohibits the imposition of the estate
tax, and b) enact a partial sales and use tax (SUT) exemption
for purchases of qualified tangible personal property (TPP) by
persons engaged in manufacturing and software production, as
specified. Specifically, this bill :
1)States the intent of the Legislature to do all of the
following:
a) Propose an amendment to Proposition 6, an initiative
measure enacted by the voters at the June 8, 1982,
statewide primary election (Proposition 6);
b) Provide, in conjunction with proposing the amendment to
Proposition 6, a state SUT exemption for purchases of
manufacturing equipment used in the manufacturing process;
and
c) Use the revenue generated from a proposed estate tax, in
whole or in part, to supplant the reduction of General Fund
(GF) revenue as a result of the SUT exemption for purchases
of manufacturing equipment.
2)Proposes an amendment to Proposition 6 to do the following:
a) Provide a partial SUT exemption. Specifically, it
would:
i) Exempt the following from SUT:
(1) TPP
purchased by a "qualified person" for use primarily in
the manufacturing, processing, refining, fabricating,
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or recycling of property; and,
(2) TPP
purchased by a contractor for use in the performance
of a construction contract for a "qualified person"
who will use the TPP as an integral part of the
manufacturing, processing, refining, fabricating, or
recycling process, or as a storage facility for use in
connection with the manufacturing process.
ii) Define a "qualified person" to mean either of the
following:
(1) A
person primarily engaged in those lines of business
described in Codes 3111 to 3399, inclusive, or 5112 of
the North American Industry Classification System
(NAICS), 2007 edition; or,
(2) An
affiliate of such a person, provided the affiliate is
a member of the qualified person's unitary group for
which a combined report is required to be filed, as
provided.
iii) Provide that TPP includes, but is not limited to,
all of the following:
(1)
Machinery and equipment, including component parts and
contrivances;
Equipment used to operate, control, or maintain the
machinery, including computers, data processing
equipment, and computer software;
(2)
Property used in pollution control that meets standards
established by the state or any local or regional
governmental agency within California;
(3)
Special purpose buildings and foundations, as defined; and,
(4) Fuels
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used or consumed in the manufacturing process.
iv) Specify that TPP does not include:
(1)
Consumables with a normal useful life of less than one year,
except for fuels used in the manufacturing process;
(2)
Furniture, inventory, and equipment used in the extraction
process, or equipment used to store finished products
that have completed the manufacturing process; and,
(3)
Property used primarily in administration, general
management, or marketing.
v) Define "fabricating" as making, building, creating,
producing, or assembling components or property to work
in a new or different manner.
vi) Define "manufacturing" as the activity of converting
or conditioning property by changing the form,
composition, quality, or character of the property for
ultimate sale at retail or use in the manufacturing of a
product to be ultimately sold at retail. Manufacturing
includes any improvements to TPP that result in a greater
service life or greater functionality than that of the
original property.
vii) Define "primarily" to mean TPP used 50% or more of
the time in any stage of manufacturing, processing,
refining, fabricating, or recycling of property by a
qualified person.
viii) Define "process" to mean the period beginning at the
point at which any raw materials are received by the
qualified person and introduced into the manufacturing,
processing, refining, fabricating, or recycling activity
of the qualified person, and ending at the point at which
the qualified activity has altered TPP to its completed
form. Raw materials are considered to have been
introduced into the process when the raw materials are
stored on the same premises where the qualified activity
is conducted.
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ix) Define "processing" as the physical application of
the materials and labor necessary to modify or change the
characteristics of the property.
x) Define "refining" as the process of converting a
natural resource to an intermediate or finished product.
xi) Provide that no exemption shall be allowed unless
the purchaser provides the retailer with an exemption
certificate, and the retailer then provides the State
Board of Equalization (BOE) with a copy.
xii) Provide that the exemption does not apply to any of
the following:
(1) Any
tax levied by a county, city, or district pursuant to,
or in accordance with, the Bradley-Burns Uniform Local
SUT Law or the Transactions and Use Tax Law;
(2) Any
tax levied pursuant to Revenue and Taxation Code
(R&TC) Sections 6051.2 or 6201.2 (Local Revenue Fund);
(3) Any
tax levied pursuant to R&TC Sections 6051.5 or 6201.5
(State Fiscal Recovery Fund);
(4)
Section 35 of Article XIII of the California Constitution
(Local Public Safety Fund); or,
(5) Any
sale or use of property which, within three years of
being purchased, is removed from California, converted
to a non-exempt use, or used in a manner not
qualifying for the SUT exemption.
xiii) Provide that the exemption applies to leases of TPP
classified as "continuing sales" and "continuing
purchases" under existing law.
b) Repeal R&TC Section 13301 that prohibits the imposition
of an estate, gift or inheritance tax, would add Part 9
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imposing a new estate tax and would amend R&TC Section
14302, relating to the distribution of estate tax revenues.
Specifically, it:
i) Specifies that the moneys in the Estate Tax Fund
shall be continuously appropriated, without regard to
fiscal year (FY), to pay estate tax refunds, and the
remaining balance shall, on order of the State Controller
(SC), be transferred to the unappropriated surplus in the
GF.
ii) Imposes an estate tax upon the transfer of the
property of every "decedent" who was:
(1) A
resident of California at the time of death, or
(2) A
non-resident of California at the time of death but
owned real or TPP situated in California that would
have been taxable under the provisions of Chapter 11
of the Internal Revenue Code (IRC), as it read as of
January 1, 2001, and other provisions of the federal
estate tax laws, as specified.
iii) Provides for 13 graduated tax brackets, ranging from
7.2% to 16.8%. In the case of a non-resident decedent,
apportions the total amount of tax to California by
multiplying that amount by a fraction, the numerator of
which is the value of the decedent's taxable estate
consisting of real and TPP located in this state and the
denominator of which is the value of the decedent's
entire taxable estate, excluding real and TPP not located
in any state (the 'fraction').
iv) Exempts an estate valued at $1 million or less from
the estate tax.
v) Allows the estate of every decedent who was a
resident of California at the time of death a credit
against the estate tax otherwise due under this bill for
the aggregate amount of all estate, inheritance, legacy
and succession taxes actually paid to any other state, as
provided, but only to the extent a credit for those taxes
is allowable under the federal estate tax laws.
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vi) Limits the amount of credit allowed for taxes paid
to any other state to a portion of the federal tax
credit.
vii) Defines "estate" as the real or personal property or
interest therein included in the gross estate of a
decedent, including intangible personal property, as
specified.
viii) Defines "gross estate" by reference to IRC Section
2051, as amended.
ix) Defines "federal estate tax" as the tax imposed
under the IRC, as amended.
x) Defines "decedent" as any person whose death gives
rise to a transfer.
xi) Defines "personal representative" as any executor or
administrator of the decedent whose death gives rise to a
transfer and, with respect to property that is included
in the gross estate for federal estate tax purposes and
which is not in the possession or control of the personal
representative, any person in possession of such
property.
xii) Defines "transfer" as the inclusion of any property
or other interest included in the estate or gross estate
of the decedent.
xiii) Requires the SC to administer and collect the estate
tax and authorizes the SC to prescribe forms and
reporting requirements necessary to implement the estate
tax.
xiv) Requires the personal representative of every estate
subject to the estate tax to file with the SC an estate
tax return and the calculation of the taxable estate in
effect on the decedent's death and to pay the estate tax
out of any moneys belonging to the estate in the
representative's control.
xv) Vests personal representatives with certain powers
and duties.
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xvi) States that the estate tax returns must be filed
within nine months after the date of the decedent's
death.
xvii) Provides that the estate tax shall be a special lien
upon the gross estate of a resident decedent and upon the
real and TPP of a nonresident decedent situated in
California for 10 years from the date of the decedent's
death. Specifies that the special lien shall be
extinguished under certain circumstances.
xviii) Provides that the estate tax shall not be imposed
for any period for which a federal estate tax is payable
to the United States (U.S.); federal laws allow a credit
for state death taxes in an amount equal to, or greater
than, the tax that would otherwise be imposed by this
part.
xix) Specifies that all estate tax moneys collected under
this bill shall be deposited in the State Treasury for
the credit of the Estate Tax Fund.
3)States that, as an amendment of an initiative statute, this
bill shall become effective only upon approval by the voters
at a statewide election. Calls for a special election to be
held throughout the state on the date of the next statewide
election.
4)Provides that the proposed amendments to Proposition 6, if
approved by the voters, may be amended by a bill passed by a
2/3 vote of the Legislature.
5)Provides that, notwithstanding Election Code Section 9040 or
any other law, the Secretary of State shall submit this bill
to the voters for their approval at the consolidated statewide
election.
6)Takes effect immediately as an act calling for an election
within the meaning of Article IV of the Constitution.
EXISTING LAW :
1)Imposes a sales tax on retailers for the privilege of selling
TPP, absent a specific exemption. The tax is based upon the
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retailer's gross receipts from TPP sales in this state.
2)Imposes a mirror use tax on the storage, use, or other
consumption of TPP purchased out of state and brought into
California. The use tax is imposed on the purchaser, and
unless the purchaser pays the use tax to an out-of-state
retailer registered to collect California's use tax, the
purchaser remains liable for the tax. The use tax is set at
the same rate as the state's sales tax and must be remitted to
the BOE.
3)Prohibits the imposition of inheritance and gift tax under
Proposition 6, but provides for a state estate tax in the form
of a "pickup" tax equal to the amount of credit allowed under
the federal estate tax law. The Economic Growth and Tax
Relief Reconciliation Act of 2001, phased out the state death
tax credit over a four year period beginning January 2002.
Effective January 1, 2005, the state death tax credit was
eliminated.
PRIOR STATE LAW : Prior to January 1, 2004, California law
contained various tax incentives �collectively referred to as
the Manufacturers' Investment Credit (MIC)] designed to
encourage investment in manufacturing equipment. Specifically,
prior state law:
1)Provided a partial SUT exemption for purchases of specified
manufacturing equipment, or an income tax credit equal to 6%
of the amount paid or incurred for qualified property placed
in service in California. Specifically, the MIC:
a) Defined a "qualified person" as any taxpayer engaged in
the manufacturing activities described in specific Standard
Industrial Classification (SIC) Manual Codes.
b) Limited the availability of the SUT exemption to a
qualified person engaged in a new trade or business.
c) Defined qualified TPP as equipment used primarily for
manufacturing, processing, refining, fabricating, or
recycling; for research and development; for maintenance,
repair, measurement, or testing of qualified property; and
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for pollution control meeting state standards. Special
purpose buildings were also included as qualified property.
2)Provided for the MIC's sunset on January 1, 2001, or on
January 1 of the earliest year thereafter, if the total
manufacturing employment in this state, as determined by the
Employment Development Department (EDD) on the preceding
January 1, did not exceed by 100,000 jobs the total
manufacturing employment in California on January 1, 1994.
FISCAL EFFECT : The BOE estimates that the partial SUT
exemption proposed by this bill will result in a revenue loss of
$600 million in FY 2011-12, $1.4 billion in FY 2012-13, and $1.4
billion in FY 2013-14.
COMMENTS :
1)Author's Statement . The author states that, "It's time we
move away from the status quo tax system that is not serving
our state well and look at smart tax reform that stimulates
job growth without adding to our state's deficit. It doesn't
make sense for California to be one of only three states in
the nation to levy a sales tax on manufacturing equipment. It
puts us at a competitive disadvantage against other states
that are fighting us for these manufacturing jobs. These are
high-wage jobs that can support California families.
"California is not alone in losing manufacturing jobs, but we
have seen a 34 percent reduction in our manufacturing
workforce in the last 10 years and we need to act quickly to
reverse course and put people back to work. We can do this,
even in an era of budget deficits, if we are truly committed
to facing our two biggest challenges - restoring jobs and
balancing our budget. AB 218 addresses both of these
challenges."
2)Arguments in Opposition . The opponents of this bill argue
that, unless amended, AB 218 would violate Proposition 26 and
would reenact onerous estate tax on grieving families. With
reference to a potential revenue loss associated with the SUT
exemption, the opponents state that this bill fails to take
into account the fact that the exemption would energize the
manufacturing industries and would increase state revenues
generated from payroll taxes, general sales taxes, corporate
taxes, and other state and local taxes and fees. Thus, the
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proponents assert that a SUT exemption "would show that? �it]
is a net gain for California, not a revenue loss."
3)The SUT Exemption:
a) Is the Proposed SUT Exemption for Business Purchases
Good Tax Policy? Most economists who study government
finance and taxation agree that business inputs (e.g.,
machinery, research equipment, raw materials, etc.) should
be exempt from sales tax because, generally, business
outputs are already subject to sales tax, and taxing both
business inputs and business outputs results in double
taxation. Indeed, this bill should probably not be viewed
as a "tax expenditure" designed to stimulate the economy,
but rather as a proposal for fundamentally reforming the
current tax structure.
At this Committee's informational hearing on March 23, 2009,
the panelists unanimously agreed that it would be good tax
policy to eliminate the SUT on business purchases.
However, before passing a measure like this one, which
arguably represents sound tax policy, the Committee was
advised to consider other reforms to the SUT Law as well.
In fact, Dr. Charles McLure, in his testimony before this
Committee, emphasized that a reduction in the taxation of
business inputs would reduce sales tax revenues and would
require both a tax base expansion and tax rate increase to
compensate for the revenue loss. (C. McLure, Jr.,
Improving California's Tax System, Testimony before the
California Assembly Revenue and Taxation Committee, March
23, 2009). For example, in most countries that use a Value
Added Tax (VAT) system, the system includes some taxation
of services (although not as inputs to businesses). The
VAT, used to finance most European governments, is
economically equivalent to a sales tax with a broad
exemption for business inputs. More precisely, it is a
sophisticated sales tax that allows VAT-registered
businesses a credit for taxes paid on purchases against tax
liability on sales. However, Committee Members were urged
against implementing a VAT in California before the
enactment of a VAT at the federal level. Instead, it was
suggested, California may simply move in this direction by
considering a range of services and non-TPP that should be
taxed.
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While this bill proposes a way to compensate for the
revenue loss that would result from the partial SUT
exemption, it does not address the outdated structure of
our SUT Law, which was enacted in 1933 and 1935,
respectively.
b) Will the SUT exemption lead to job growth? Prior to
January 1, 2004, California had a similar tax incentive
known as the MIC. The MIC was created in response to the
state's economic downturn during the late 80s and early
90s. During this time, the state lost about 300,000 jobs
and had a 45% reduction in aerospace alone. The MIC
expired on January 1, 2004 after the EDD found that jobs on
the preceding January 1 did not exceed the total
manufacturing jobs in California on January 1, 1994 by more
than 100,000. EDD stated that from January 1, 1994 to
January 1, 2002, the total net increase in manufacturing
employment was 35,150.
c) Qualified Manufacturing Activities. Under this bill,
purchases of qualified TPP would be eligible for the
partial SUT exemption if the purchaser is primarily engaged
in manufacturing activities described in NAICS Codes 311 to
3399, or computer software publishing, or publishing and
reproduction described in Code 5112. As explained in the
BOE staff analysis of AB 218, "Software publishing
establishments carry out the functions necessary for
producing and distributing computer software, such as
designing, providing documentation, assisting in
installation, and providing support services to software
purchasers. The software publishing industry produces and
distributes information? usually? by methods such as by
CD-ROMs, the sale of new computers already preloaded with
software, or through distribution over the Internet, rather
than in printed form."
d) Definition of Useful Life : This bill provides that TPP
does not include consumables with a normal useful life of
less than one year. This bill, however, does not provide
any guidance on how normal useful life is to be measured.
Because the normal useful life of one item may vary
depending on the type of industry, it is important to
create a clear objective standard for determining the
useful life of an item. To reduce potential audit
disputes, this bill should be amended to include some
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mechanism for determining useful life.
e) Partial Exemptions . Usually, partial SUT exemptions
complicate return preparation and processing and are
difficult for both retailers and the BOE. According to the
BOE analysis, currently, there are five partial SUT
exemptions in California that apply only to the state tax
portion of the applicable SUT (the 6% GF rate and 0.25%
Fiscal Recovery Fund for a total of 6.25%). AB 218
proposes a 6% exemption, which would create a new exemption
category. BOE staff notes that the new exemption would
require "a revision to the sales and use tax return and
result in a new, separate computation on the return."
Thus, this bill would add a new level of complexity in the
administration of the SUT Law.
f) Effective Date . The introduced version of AB 218
proposed a partial SUT exemption that would have applied to
purchases that take place on or after January 1, 2012. The
latest version of this bill, however, deletes that date.
Presumably, if this bill is approved by the voters as an
amendment to Proposition 6, the partial SUT exemption
proposed by this bill would become effective immediately.
Retailers generally rely on official notices of tax law
changes from the BOE. The Committee may wish to consider
amending this bill to include a delayed operative date for
the SUT exemption, which would allow BOE to provide proper
advance notice to retailers.
g) Sunset Date . Committee staff notes that, unlike the
previous MIC, this bill does not contain a sunset date,
which means that the SUT exemption would remain a permanent
part of the tax code absent a supermajority vote to repeal
or modify it. Arguments in favor of not providing a sunset
include the promotion of certainty needed for long-term
planning purposes. Arguments in favor of a sunset include
providing the Legislature the ability to review the
exemption's effectiveness in the future.
h) Delegation of Legislative Authority ? As a general rule,
the Legislature is vested with a non-delegable power to
make laws for the State of California (Dougherty v. Austin
(1892) 93 Cal. 601, 606-607; Sec. 1, Art. IV) and cannot
escape responsibility by delegating that function to
others. This bill proposes to condition the operation of
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the SUT exemption upon voter approval, even though the
approval for that exemption is not required under the
California Constitution nor any other statute. Although
the SUT exemption is proposed as an amendment to
Proposition 6, an initiative measure, it is unclear whether
this amendment is relevant to, or changes the scope and
intent of, that proposition. While Proposition 6, which
repealed the inheritance and gift tax, deals with taxes,
the question remains as to whether the scope of that
proposition may be reasonably interpreted to include a SUT
exemption.
i) Related Bills in the Current Legislative Session :
i) AB 204 (Halderman) would create a partial SUT
exemption for purchases of equipment by a biomass energy
facility, as defined, for use in its biomass energy
production activities. AB 204 is set for a hearing in
this Committee on March 7, 2011.
ii) AB 303 (Knight) would reinstate the partial SUT
exemption for purchases of qualifying TPP by new trades
or businesses engaged in manufacturing. AB 303 is
currently pending in this Committee.
iii) SB 47 (Alquist) would provide a partial SUT
exemption for the purchases of qualifying TPP used by
entities engaged in manufacturing, research and
development, newspaper printing, and software production,
and for semiconductor, biotechnology and pharmaceutical
clean rooms and equipment. SB 47 has been referred to
the Senate Governance and Finance Committee.
iv) SB 395 (Dutton and Strickland) would provide a
partial SUT exemption for purchases of certain TPP
purchased by qualified persons engaged in manufacturing,
research and development, and software production, as
specified and defined. SB 395 has been referred to the
Senate Governance and Finance Committee.
4)The Estate Tax:
a) Background . Even prior to 1916, when Congress enacted
the modern federal estate tax, many U.S. states already
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routinely collected an inheritance, gift or estate tax
(so-called 'death taxes'). �See, e.g., Eugene E. Oakes,
Development of American State Death Taxes, 26 Iowa L. Rev.
451, 468 (9141)]. By 1924, the interstate competition to
lure wealthy residents with the promise of favorable tax
rates threatened the existence of state death taxes. (See,
e.g., Jeffrey A. Copper, Interstate Competition and State
Death Taxes: A modern Crisis in Historical Perspective, 33
Pepp L. Rev. 835, 838). Consequently, in 1924, Congress
decided to allow a dollar-for-dollar federal credit to a
taxpayer's federal estate for all or a portion of the state
death taxes paid by the estate. In 1926, the maximum
amount of the credit was increased to 80% of the federal
estate tax otherwise payable to the federal government.
The credit eliminated the need for taxpayers to relocate to
other states just because of the different estate tax
systems and allowed states to collect revenues without
imposing an additional tax burden on decedents' estates.
The federal estate tax credit "was the great equalizer for
the states, enabling states to impose death taxes without
fear of competitive disadvantage." (Id. at p. 839). By
2001, 38 states have adopted a tax known as a "pick-up tax"
- a state estate tax equal to the maximum amount of the
federal credit - while the other 13 states imposed both a
pick up tax and a separate state "death" tax. �Federation
of Tax Administrators, State Responses to Estate Tax
Changes Enacted as Part of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA) (2002)].
Essentially, the state and federal governments used to
share the total estate tax amount collected from a
decedent's estate.
In 2001, Congress enacted EGTRRA, which phased out the
federal estate tax over 10 years and eliminated it
completely in 2010. The federal tax credit for the amount
of state "death" taxes was phased out as well, but over
four years. Each year from 2002 to 2004, the maximum
allowable credit was reduced by 25% until no credit was
allowed in 2005. For decedents dying after 2004, the state
death tax credit was repealed and replaced with a deduction
for death taxes actually paid to any State or the District
of Columbia. In those states where the "pick up" tax was
the sole estate tax, the change to the federal law resulted
in a considerable revenue loss for many states.
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The entire estate tax system was scheduled to revert back in
2011 to what it was in place in 2001, including a federal
tax credit for state "death taxes." However, the Tax
Relief, Unemployment Insurance Reauthorization and Job
Creation Act of 2010 (Public Law 111-312), which extended
EGTRRA through 2011 and 2012, did not reinstate a federal
credit for the payment of state "death taxes." It simply
extended the federal deduction provisions until 2013. By
eliminating the federal credit, EGTRRA accomplished a shift
of revenue from states to the federal government without
attracting much attention to the problem. But this
seemingly minor, technical change erased a substantial
amount of state revenues.
b) Is There a Place and Reason for an Estate Tax ? Scholars
disagree as to the exact date when estate taxes were first
imposed in the U.S., but they all do agree that, during
World War I, the estate tax was in place. The estate tax
has always been controversial and a subject of much debate.
In fact, many opponents of the tax used to argue that it
was unconstitutional. The issue was put to rest in 1913,
when the U.S. Supreme Court upheld the constitutionality of
the estate tax as an indirect tax on transfers of property
rather than an ownership of property. (N.Y. Trust Co. v.
Eisner (1921) 256 U.S. 345).
Generally, the proponents of the estate tax believe that it
was first implemented to reduce "the wealth amassed by
powerful families to avoid the creation of a natural
aristocracy in this country, a controversial reason to
which many Americans were opposed, and which continues to
meet with strong resistance today." (Susan K. Hill, Leaping
Before We Look? Repeal of the State Estate Tax Credit and
the Consequences for States, Americans, and the Federal
Government, 32 Pepp. L. Rev. 151, 158). Some suggest that
high concentrations of wealth correlate with poor economic
performance in the long run �See, e.g., James R. Repetti,
Democracy, Taxes, and Wealth, 76 N.Y.U. L. Rev. 825, 831
(2001)] and that high concentrations of wealth have an
adverse effect "on the effectiveness of democracies to the
extent that an objective of a democracy is to give all
participants an equal voice." �Tye J. Klooster, Repeal of
the Death Tax? Shoving Aside the Rhetoric to Determine the
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Consequences of the Economic Growth and Tax Relief
Reconciliation Act of 2001, 51 Drake L. Rev. 633, 639
(2003)]. Furthermore, proponents argue that the estate tax
is largely imposed on the wealth that has not been
previously taxed because much of an estate is due to
accumulated wealth such as real estate purchased many years
ago or intangible assets such as stocks and bonds.
(Krisanne M. Schlachter, Repeal of the Federal Estate and
Gift Tax: Will It Happen and How Will It Affect our
Progressive Tax System? 19 Va. Tax Rev. 781, 783). In
other words, the estate tax is a tax imposed on wealth that
would have been income had it been sold before the decedent
died, thus, serving "as a backstop to the income tax by
ensuring that wealth accumulated through
'income-tax-preferred sources' does not escape taxation
altogether." (Ibid.). Finally, it has been argued that
estate taxes encourage taxpayers to make charitable
contributions (which could considerably reduce the value of
the decedent's gross estate due to a credit).
In contrast, critics of the estate tax argue that it
generally causes people to be taxed twice on the same
assets and, thus, is immoral. Many believe that death is
"an illogical time to impose taxes at best, and a morally
repugnant one at worst." �W. G. Gale & Joel B. Slemrod, A
Matter of Life and Death: Reassessing the Estate and Gift
Tax, 88 Tax Notes 927, 929 (2000)]. The opponents also
claim that the estate tax actually hinders economic
activity in America because "it reduces incentives to save
and invest" and unfairly punishes "owners of small
businesses, family farms, and savers who amass wealth
during their lifetimes through hard work and thrift."
(Gary Robbins, Estate Taxes: An Historical Perspective,
1719 Backgrounder 2, pp. 5- 6 (2004)]. Finally, the
opponents assert "that, in addition to taxing prudent
behavior, the estate tax is unfairly imposed" because "the
wealthiest Americans do not, in fact, pay the highest
estate taxes, largely due to the availability of estate
planning." (Susan K. Hill, 32 Pepp. L. Rev. 151, 162,
citing Gary Robbins, Id.).
c) California "Pick Up" Tax . On June 8, 1982, California
voters approved Proposition 6, a statutory initiative, to
repeal the inheritance and gift tax. Thus, as a general
rule, there is no estate tax in California. R&TC Section
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13301, which was added to the Code by Proposition 6,
specifically prohibits the imposition of "any gift,
inheritance, succession, legacy, income, or estate tax...
on the estate or inheritance of any person... by reason of
any transfer occurring by reason of a death." In place of
the inheritance tax, however, California established a
state "pick-up" tax (R&TC Section 13302). That tax is
operated in the form of a federal estate tax credit in the
amount equal to the maximum amount of the credit allowed
under the federal estate tax law. Because the "pick-up"
tax does not place a tax burden on the estate over and
above that imposed by the federal estate tax, it is not
considered an estate tax. Since the federal credit was
phased out 2005, California has not collected any revenues
attributable to the "pick up" tax since that time. While
California citizens are entitled to a deduction for the
state estate taxes paid, the state is not able to collect
any revenues because California does not impose an estate
tax. Its system is based entirely on the federal credit,
which no longer exists since it was replaced by a
deduction.
Proposition 6 does not provide for a legislative amendment or
repeal of R&TC Section 13301 without the approval by voters
and California courts have expressly recognized this
constitutional provision. In essence, Proposition 6
prohibits a reinstatement of an estate tax if there is no
federal estate tax credit.
d) Does This Bill Impose a Death Tax ? AB 218 does not
impose an estate tax but only proposes to the voters an
amendment to the initiative measure - Proposition 6 - to
repeal the prohibition on the imposition of a California
"death tax." The proposed amendment would carve out an
exemption from the new death tax for an estate valued at
more than $1 million. Furthermore, the new death tax would
be operative only if no federal estate tax credit is
allowed. In other words, whenever a federal estate tax is
payable to the U.S. and federal tax laws allow a credit for
state death taxes in an amount equal to, or greater than,
the death tax proposed by this bill, then the new tax would
be suspended and California would collect only its share of
the "pick up" tax.
AB 218
Page 18
e) Proposed Amendments : Committee staff understands that
the SC's Office has proposed several technical amendments
to this bill and the author is currently working with that
office to resolve the SC's concerns.
f) Related Bills :
AB 2818 (Corbett), Chapter 363, Statutes 2000, clarified the
definition of property included in a decedent's gross
estate and conformed the interest rate charged for
overpayments on estate taxes to federal law, effective
January 1, 2001.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Taxpayers' Association
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098