BILL ANALYSIS �
AB 1963
Page 1
Date of Hearing: May 7, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1963 (Huber) - As Amended: April 25, 2012
Majority vote.
SUBJECT : Personal Income Tax Law: Sales and Use Tax Law:
Legislative Analyst's Office: report
SUMMARY : Requires the Legislative Analyst's Office (LAO) to
assess the changes to the Personal Income Tax (PIT) Law and the
Sales and Use Tax (SUT) Law proposed in the introduced version
of this bill (Introduced Proposal). Specifically, this bill :
1)Requires the LAO to make recommendations on both of the
following:
a) How the state could "diversify, in a revenue-neutral
manner, the tax revenue it would have received as a result
of" the Introduced Proposal, so that annual state tax
revenues are less subject to volatile fluctuations due to
economic upturns and downturns; and,
b) The impact on state tax revenues of excluding the
following service categories from the service tax contained
in the Introduced Proposal:
i) Necessary medical services;
ii) Services related to education;
iii) Automotive repair services;
iv) Tax preparation and filing services;
v) Licensed legal services;
vi) Services relating to agriculture and livestock; and,
vii) Services relating to housing, real estate, and
banking.
AB 1963
Page 2
2)Requires these recommendations to be issued in a report to the
Legislature on or before July 1, 2013.
EXISTING LAW imposes:
1)Taxes under the PIT Law based upon taxable income, at
specified rates, and allows a taxpayer to elect to take a
standard deduction, as provided.
2)A sales tax on retailers for the privilege of selling tangible
personal property (TPP), absent a specific exemption. The tax
is based upon the retailer's gross receipts from TPP sales in
this state.
3)A complementary use tax on the storage, use, or other
consumption in this state of TPP purchased from any retailer.
The use tax is imposed on the purchaser, and unless the
purchaser pays the use tax to a retailer registered to collect
California's use tax, the purchaser remains liable for the
tax, unless the use is exempted. The use tax is set at the
same rate as the state's sales tax and must generally be
remitted to the State Board of Equalization.
FISCAL EFFECT : Committee staff estimates that this bill would
have no impact on General Fund revenues.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
According to the Legislative Analyst's Office, the basic
elements of California's current state tax system were put
in place in the late 1920s and early 1930s. With the
exception of Prop 13, California's tax system has remained
largely unchanged.
Approximately 80 percent of the state's own-source revenue
comes from three sources: the personal income tax (PIT),
the sales and use tax (SUT) and the corporation tax (CT),
with the largest source of �General Fund] dollars being
derived from the PIT.
As a result, the current tax system has failed to adapt to
a "21st Century" economy where services and E-commerce play
AB 1963
Page 3
a major role. The �General Fund] has become heavily
dependent upon the PIT, which accounts for roughly 40
percent of all state revenues and one-half of General Fund
revenues. This is problematic because most of the PIT is
generated by a relatively small number of taxpayers with
the highest incomes, thus making the PIT revenue stream
very volatile - producing huge surpluses in the good
economic times and huge deficits when the economy take�s] a
turn for the worse.
AB 1963 seeks to examine what effect diversifying and
stabilizing the state's revenue stream would have on
stabilizing our manic tax revenue structure. Specifically,
this bill requires the Legislative �Analyst's] Office to
(1) assess the tax reforms proposed by the introduced
version of AB 1963 (lowering the personal income tax,
lowering the sales tax and extending sales taxes to
services), (2) make recommendations on how the state could
diversify, in a revenue neutral manner, the tax revenue it
would have received as a result of those proposed tax
reforms so that annual state tax revenues are less subject
to volatile fluctuations due to economic upturns and
downturns and (3) make recommendations on the impact
exempting various services from the proposed sales tax on
services would have on state revenues.
By making the revenue stream more static, huge deficits can
be avoided in the future. It would also alleviate some of
the temptation the future Legislatures may have to
significantly increase spending in good economic years. By
avoiding extreme increases and decreases in revenue,
California would have a revenue trend that corresponds with
the state of the economy. This ensures that private
vendors, schools, public safety groups, and various state
programs will be able to rely on more stable and
predictable budgets.
2)Committee Staff Comments:
a) What does this bill do? : This bill would require the
LAO to assess the changes to both the PIT Law and the SUT
Law contained in the Introduced Proposal. Specifically,
this bill would require the LAO to make recommendations on
"�h]ow the state could diversify, in a revenue-neutral
manner, the tax revenue it would have received as a result
AB 1963
Page 4
of" the Introduced Proposal, so that annual state tax
revenues are less volatile. The LAO would also be required
to "make recommendations" on the state revenue impact of
excluding various service categories from the Introduced
Proposal's broad-based service tax. Finally, the LAO would
have to issue these recommendations in a report to the
Legislature on or before July 1, 2013.
b) The Introduced Proposal : The Introduced Proposal would
have modified the state's tax laws in numerous respects.
First, the Introduced Proposal would have collapsed the
state's six PIT rates into two rates (2.75% and 6.5%),
while increasing the standard deduction. Second, the
Introduced Proposal would have reduced the rate of the
state SUT to 4%. Finally, the Introduced Proposal would
have imposed a broad-based 4% state SUT on services, with
an exemption for the following service categories:
necessary medical services, services related to education,
automotive repair services, tax preparation and filing
services, licensed legal services, and services relating to
agriculture and livestock.
c) Clarifying amendments may be useful : This bill could
potentially benefit from amendments clarifying the precise
scope of the LAO report. For example, this bill would
require the LAO to make recommendations on "�h]ow the state
could diversify, in a revenue-neutral manner, the tax
revenue it would have received as a result of" the
Introduced Proposal. Does this mean that the LAO would
first have to estimate the combined revenue impact of the
Introduced Proposal and then suggest additional
modifications to the state's tax laws to achieve even
greater revenue stability in a revenue-neutral manner?
Moreover, what does the term "revenue-neutral" mean in this
context?
This bill also requires the LAO to "make recommendations" on
the state revenue impact of excluding various service
categories from the Introduced Proposal's broad-based
service tax. Is the LAO to confine its analysis to the
projected fiscal impact of these exemptions, or is the LAO
to make policy recommendations on whether the individual
service categories should be exempted? In addition, the
service categories contained in the Introduced Proposal
were rather vague and could make any attempt to estimate
AB 1963
Page 5
revenues difficult. For example, what services are
included within those "relating to agriculture and
livestock"? Amendments clarifying these issues would
likely assist the LAO in providing a useful report.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098