BILL ANALYSIS �
AB 218
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Date of Hearing: May 27, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 218 (Wieckowski) - As Amended: May 2, 2011
Policy Committee: Revenue and
Taxation Vote: 5-3
Urgency: Yes State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill calls for a special election to amend the initiative
measure that prohibits the imposition of the estate tax to allow
for an estate tax and to 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 propose an amendment to
Proposition 6, an initiative measure enacted by the voters in
1982.
2)Dedicates the revenue generated from a proposed estate tax, in
whole or in part, to fully fund Williamson Act subventions and
to supplant the reduction of General Fund (GF) revenue as a
result of the SUT exemption for purchases of manufacturing
equipment.
3)Proposes that the exemption does not apply to any of the
following:
a) 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.
b) Any tax levied pursuant to Revenue and Taxation Code
(R&TC) Sections 6051.2 or 6201.2 (Local Revenue Fund).
c) Any tax levied pursuant to R&TC Sections 6051.5 (State
Fiscal Recovery Fund).
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d) Section 35 of Article XIII of the California
Constitution (Local Public Safety Fund).
1)Specifies that the moneys in the Estate Tax Fund shall be
continuously appropriated, without regard to fiscal year, to
pay estate tax refunds, to make subvention payments to
counties under the Williamson Act and the remaining balance
shall, on order of the State Controller (SC), be transferred
to the unappropriated surplus in the GF.
2)Provides that the estate tax will have 13 graduated tax brackets,
ranging from 7.2% to 16.8%. In the case of a non-resident
decedent, provides for an apportionment for California.
3)Exempts an estate valued at $1 million or less from the estate
tax.
4)Provides that the estate tax shall not be imposed for any period
during which a federal estate tax is payable to the United
States; 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.
5)Exempts from the estate tax the total value of all agricultural
real property and agricultural personal property, if the
aggregate value of the real and personal property exceeds 50%
of the total value of the estate. To qualify for this
exemption, the agricultural real property is required to be
maintained in agricultural production for a minimum of 10
years after the decedent's death.
6)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.
FISCAL EFFECT
1)The Controller's office estimates that the estate tax could
bring in approximately $1 billion. They also estimate
significant administrative expenses of approximately $1
million or more, to fund a new estate tax operation.
2)The BOE estimates that the partial SUT exemption proposed by
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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. The ongoing costs would appear to exceed the funds
raised through the imposition of the estate tax.
COMMENTS
1)Author's Statement . The author argues it is time to 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. The author contends 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 as it puts California at a competitive disadvantage
against other states that are fighting for these high-wage
manufacturing jobs.
2)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.
3)Will the SUT exemption lead to job growth? Prior to January
1, 2004, California had a similar tax incentive known as the
Manufacturer's Incentive Credit (MIC). The MIC was enacted in
response to the state's economic downturn during the late 80's
and early 90's. 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 Employment
Development Department (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.
4)Estate tax background . Even prior to 1916, when Congress
enacted the modern federal estate tax, many U.S. states
already routinely collected an inheritance, gift or estate
tax-so-called death taxes. By 1924, the interstate
competition to lure wealthy residents with the promise of
favorable tax rates threatened the existence of state death
taxes. Consequently, in 1924, Congress decided to allow a
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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. 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. 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 estate tax.
In 2001, Congress 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.
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) 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. This seemingly minor,
technical change erased a substantial amount of state
revenues.
5)California pick-up tax . On June 8, 1982, California voters
approved Proposition 6, a statutory initiative, to repeal the
inheritance and gift tax. 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.
Because the pick-up tax does not place a tax burden on the
estate over and above that imposed by the federal estate tax,
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it is not considered an estate tax.
6)Is this bill an impermissible 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
and cannot escape responsibility by delegating that function
to others. This bill proposes to condition the operation of
the SUT exemption upon voter approval, even though the
approval for that exemption is not required under the
California Constitution or 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.
7)Arguments in Opposition . The opponents argue that, unless
amended, AB 218 would violate Proposition 26, an initiative
that addresses the enactment of taxes and fees, and would
reenact an 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
proponents assert that a SUT exemption is a net gain for
California, not a revenue loss.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081