BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1963 HEARING: 7/3/12
AUTHOR: Huber FISCAL: No
VERSION: 5/29/12 TAX LEVY: No
CONSULTANT: Phan
LEGISLATIVE ANALYST'S OFFICE REPORT
Requires the LAO to write a report related to state revenue
volatility.
Background and Existing Law
The basic elements of California's current tax system,
including the property tax and sales tax, were already
established by the 1930s. Approximately 80 percent of the
state's revenue comes from three sources: the personal
income tax (PIT), the sales and use tax (SUT), and the
corporation tax (CT). The PIT accounts for roughly 40
percent of all state revenues, and half of General Fund
revenues.
Current law requires the Department of Finance (DOF) to
submit a tax expenditure report to the Legislature each
year by September 15th. Tax expenditures are defined to be
"a credit, deduction, exclusion, exemption, or any other
tax benefit as provided by the state." As part of the
Budget, DOF must provide to the Legislature total
recommended General Fund expenditures and estimated,
including any proposed, General Fund revenues.
Although California's current tax system is diversified and
relatively broad-based, thereby ensuring that all types of
individuals, businesses, income, and economic activity
contribute to the financing of public services, annual
fluctuations in General Fund taxes have been significant.
For example, General Fund revenues increased as much as 20%
in 1999-00, but then plunged by 17% in 2001-02. These
fluctuations have been more volatile than California's
overall economy, and more substantial than other states'
revenue fluctuations.
Revenue volatility can pose many challenges to legislators,
AB 1963 -- 5/29/12 -- Page 2
such as revenue fluctuations and less stable and
predictable program funding. A Legislative Analyst's
Office (LAO) report in 2005 recommended that the state
reduce its revenue volatility by revising its revenue
system and using a budget management strategy that
anticipates revenue volatility. Regarding the revenue
system revise, the LAO suggested the State: (1) reduce PIT
rates on capital gains, (2) use income averaging for
capital gains, (3) reduce progressivity of the PIT rate
structure, (4) increase reliance on alternative taxes, and
(5) modify the CT.
Many interested parties, including the current Governor,
have suggested ways to reform the state's tax system. Some
current ideas include increasing the PIT, expanding
California's taxes to services and E-commerce, and
reforming the property tax. However, the LAO has not
issued a recent report on how current tax reform ideas,
such as the service tax and E-commerce tax, will affect
state revenue volatility.
Proposed Law
Assembly Bill 1963 requires the LAO, on or before July 1,
2013, to submit a report to the Legislature assessing
potential changes to the state income and sales and use tax
laws.
The report must include:
A review of California's current and historical
revenue volatility, including the percentage of the
gross state product that is made up by the General
Fund budget over a period of 10 years;
Proposals for tax reforms that would end
California's revenue volatility, are sum revenue
neutral, and do not require amendments to the
California Constitution. To the extent possible, the
LAO must use dynamic revenue modeling in determining
viable proposals;
An explanation of the calculations needed to
determine revenue neutrality;
An analysis of the effect a reduction of taxation
on individual income would have upon state revenues
and revenue volatility; and,
An analysis of the effect of imposing a tax on the
sale or use of services, concurrent with a reduction
AB 1963 -- 5/29/12 -- Page 3
of the SUT rate. This analysis must include whether a
credit or exemption to the services tax should apply
to the sale of services between businesses. This
analysis must also include the revenue impact of
excluding certain services from taxation.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . AB 1963 provides the Legislature
a report that assists it in making an informed decision
about how to reduce revenue volatility. More specifically,
AB 1963 requires the LAO to analyze how lowering the PIT
and SUT, along with taxing services, could affect revenue
and budget stability and predictability. By making the
state's revenue stream more static, California's revenue
trends will correspond with economic trends. A more static
revenue stream may also alleviate some of the pressure on
future Legislatures to significantly increase spending in
good economic years. A more stable revenue stream ensures
that private vendors, schools, public safety groups, and
various state programs will be able to rely on more stable
and predictable budgets.
2. Study bill . The Legislature already receives many
reports each year related to taxation and expenditures,
such as the Commission on the 21st Century Economy report
and the DOF's required annual expenditure report. Further,
recent studies on revenue volatility exist, including the
Public Policy Institute of California's (PPIC) report in
2011 on how to reduce revenue volatility. Many research
institutions, such as the LAO, the California Research
Bureau (CRB), the Little Hoover Commission (LHC), and the
Senate Office of Research (SOR), are generally responsive
to a legislator's request for a study without the need for
a bill. Not having a bill also gives the author and the
research institution more flexibility to improve the
study's design. Because many institutions issue numerous
reports on a variety of topics, the Legislature, as a
general rule, does not pass bills that only require a study
of a topic without any policy attached. Joint Rule 10.5
AB 1963 -- 5/29/12 -- Page 4
allows for study bills only if the "bill assigns a study to
the Joint Legislative Budget Committee (JLBC) or to the
Legislative Analyst?Before the committee may act upon the
bill, it shall obtain from the JLBC an estimate of the
amount required to be expended to make the study."
Although AB 1963 meets both criteria under Joint Rule 10.5
to qualify as a bill, the Committee may wish to consider
whether a study bill, which is expensive and requires the
entire legislative process's involvement, is needed when
the author can acquire this same study without a bill.
3. Uncodified . Most bills that the Legislature passes
either amend or add a section to the State Codes. Some
bills, however, become enforceable laws but are not added
to the Codes because they expire quickly or do not fit into
any section of the Codes. Because AB 1963 requires the LAO
to submit its report on or before July 1, 2013, the
Committee may wish to consider amending the bill to make
its language uncodified so that it does not clutter the
Codes once it expires as law.
Assembly Actions
Assembly Revenue and Taxation 6-0
Assembly Floor 56-18
Support and Opposition (6/28/12)
Support : Unknown.
Opposition : Roofing Contractors Association of California.