California  Spending Plan 2001-02 Chapter 2

Tax Relief Provisions

As summarized in Figure 1, there are a number of tax relief and tax assistance provisions associated with the 2001-02 Budget Act. These include an agricultural and rural tax relief package and increased senior citizens' property tax assistance. These tax relief measures will have a total fiscal effect of $121.9 million in 2001-02 and $136.1 million in 2002-03. Additional information on the fiscal effects of these measures is shown in Figure 2 (see next page).

The budget also reduces from 4 percent to 3 percent the reserve threshold necessary to trigger on or off a one-quarter cent sales and use tax (SUT) that was adopted in 1991, and makes several other changes to the trigger language. In addition, the Legislature has agreed to place on the ballot a constitutional amendment which would dedicate the SUT levied on gasoline to transportation-related projects (see the "Transportation" section in Chapter 3).

The Governor's January budget proposal originally called for several additional tax relief measures including expansion of the manufacturers' investment credit for personal income tax and bank and corporation tax filers, a three-day sales tax holiday for certain education-related purchases, and several other sales tax and income tax incentives. These measures ultimately were dropped as part of the budget package in favor of the adopted provisions.

Sales Tax Trigger

A budget compromise was reached which revises the process by which the one-quarter cent sales tax will trigger on or off.

Original Trigger Language. Originally approved as a means to address the budget shortfall in 1991, the one-quarter cent sales tax was structured at that time such that it would trigger off in any calendar year that the Director of the Department of Finance (DOF) certified by the preceding November 1 that the Special Fund for Economic Uncertainties (SFEU) (1) exceeded 4 percent of General Fund revenues in the prior fiscal year and (2) was projected to do so in the current fiscal year. In contrast, the tax would trigger on if the 4 percent threshold was not met in any subsequent year. The one-quarter cent sales tax triggered off for the first time in calendar year 2001.

New Trigger Language. The budget agreement restructured the trigger language for the one-quarter cent sales tax. Under the new provisions, the one-quarter cent sales tax will trigger off on any January 1 (beginning in 2002) if the Director of DOF determines on the preceding November 1 that both of the following have occurred: (1) the SFEU at the end of the fiscal year is at least 3 percent of General Fund revenues (excluding revenues derived from the one-quarter cent sales tax) and (2) actual General Fund revenues for the period May 1 through September 30 equal or exceed the May Revision forecast for that year. The tax would subsequently trigger on if either threshold was not met in any following year.

Tax To Trigger On In 2002. The 2001-02 budget projects that the one-quarter cent sales tax will trigger on again in 2002 (as it would have under the original trigger language as well). Revenues for 2001-02 associated with the one-quarter cent sales tax equal $550 million (half-year effect).

Senior Citizens' Property Tax Assistance

Two programs currently provide property tax assistance to low-income home owners and renters who are either senior citizens (age 62 and older), disabled, or blind. For home owners, the tax assistance is provided in the form of a partial reimbursement of property taxes paid; for renters, the amount of assistance is based on an estimate of the property tax paid by the renter. For both programs, eligibility is limited to those with incomes of less than $35,000 and the amount of assistance provided is determined by the claimant's income level. For the 2000 tax year, the benefits paid to each claimant were increased by 150 percent over their 1999 levels on a one-time basis. The budget increases the benefits paid over the 1999 levels by 45 percent on an ongoing basis. It provides a $75 million augmentation to the $140.6 million base budget for this purpose.

Agricultural and Rural Tax Assistance

The Legislature also approved a tax relief package for agricultural businesses and rural residents consisting of certain exemptions from the SUT (see Figures 1 and 2). The following measures are scheduled to take effect beginning September 1, 2001, unless the State Board of Equalization determines that this date is infeasible, in which case the exemption will begin on October 1, 2001. Specifically, the budget includes the following tax relief measures designed to assist the agriculture industry and provide rural tax relief.

• Liquified Petroleum Gas. Under the budget agreement, liquified petroleum gas purchased for rural household use (for example, heating and cooking) or by certain agricultural businesses, is exempted from the state and local SUTs. The exemption for rural residential use equalizes tax treatment with other energy sources used for similar purposes, such as electricity and natural gas. The General Fund revenue reduction from this exemption is estimated to be $6.9 million in
  2001-02 and $8.3 million in 2002-03.
• Farm and Forestry Machinery. The budget exempts from the General Fund portion of the SUT (1) farm equipment and machinery for use in agricultural activities and (2) off-road equipment and machinery used in timber harvesting operations. The revenue reduction from this exemption is estimated to be $20.1 million in 2001-02 and $24.5 million in 2002-03. The measure is partially intended to extend to agriculture and forestry activities preferential SUT treatment provided to manufacturing activities.
• Diesel Fuel. Diesel fuel purchased for use in farming activities and food processing will be exempted from the portion of the SUT that currently results in revenues to the General Fund and Public Transportation Account. Farming activities include not only those related to activities at the production site, but also the transportation and delivery of farm products to the marketplace. The combined General Fund and special funds revenue reduction from this exemption is estimated to be $18.6 million in 2001-02 and $22.7 million in 2002-03.
• Racehorse Breeding Stock. The budget establishes an exemption from the General Fund portion of the SUT for purchases of thoroughbred racehorses used for breeding purposes. For purposes of the exemption, the purchaser must state that the purchaser's sole intent is to use the horse for breeding purposes. The revenue reduction from this exemption is estimated to be $1.3 million in 2001-02 and $1.6 million in 2002-03.