Economy and Taxes Publications

Overview of State EITC Education and Outreach Activities

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April 10, 2018 - Presented to: Assembly Budget Subcommittee No. 4 on State Administration

The 2018-19 Budget: Governor's Gann Limit Estimates

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April 6, 2018 - The State Constitution limits how much the Legislature can spend from tax revenues. The administration’s 2018-19 budget proposal reflects increased “room” under this limit—essentially spending capacity—of roughly $6 billion over June 2017 levels. Notably, the administration revised its approach for estimating costs to comply with federal and court mandates, which are excluded from the limit. We find that the mandates approach is inconsistent with the implementation of the spending limit because the administration reflects costs from any mandate whereas only costs resulting from mandates imposed after 1978-79 should be excluded from the limit. We recommend the Legislature direct the administration to revise its approach going forward to be consistent with the limit, which conceivably could increase or decrease room under the limit. In addition, we make several additional recommendations that would reduce room under the limit by several billion dollars.

The 2018-19 Budget: California’s New Tax Departments

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April 4, 2018 - In 2017, the Legislature passed two laws that made major changes to tax administration and appeals in California. Prior to these laws, the Board of Equalization (BOE) had administrative and appeals responsibilities for many taxes and fees. The laws created two new departments—the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA)—and transferred most of BOE’s duties to these departments.

The 2018-19 Budget: California Hiring Tax Credits

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March 15, 2018 - In this report, we explain how the existing credit works and why so few taxpayers are claiming it. Then we describe and comment on the administration’s California Hiring Credit proposal, which would improve upon the existing credit in some respects. We conclude with some options for making more fundamental changes to the credit.

Building Reserves to Prepare for a Recession

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March 7, 2018 - Reserves are of critical importance to the health of the state's budget. These funds help cushion the impact of a budget problem that emerges during a recession. In this report, our office provides an overview of revenue losses that have occurred in past recessions to consider the magnitude of a budget problem that could emerge in the future. Then, we describe the Governor's reserve proposal for 2018-19 and compare this level to past reserves and other states. Next, to aid the Legislature as it evaluates the Governor’s proposal, we present a framework that the Legislature can use to plan for a recession and determine a target level of reserves. Finally, we conclude with our office’s comments on the Governor’s proposed level of reserves in light of this framework and present some alternatives for legislative consideration.

The 2018-19 Budget: The Administration’s Proposition 55 Estimates

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March 1, 2018 - Proposition 55 (2016) aimed to increase funding for Medi-Cal under a formula administered by the Department of Finance. In 2018-19, the first year of implementation of this calculation, the administration’s interpretations and estimates result in no additional funds to Medi-Cal. Two key choices lead to this result. First, the administration’s decision to subtract $3.5 billion from available revenues to account for its proposed optional reserve deposit significantly reduces the calculation’s starting point, eliminating a surplus that would have directed funds to Medi-Cal. Second, the administration’s workload budget approach is based on a broad definition of currently authorized services, which also has the effect of reducing the amount of potential funds for Medi-Cal under the measure. Different decisions about these two features of the measure could result in more or less funding for Medi-Cal by hundreds of millions—or even billions—of dollars in the future.

The 2018-19 Budget: California Competes Proposal

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February 21, 2018 - The Governor proposes extending the California Competes tax credit for five years. We recommend rejecting the administration’s proposal to extend the California Competes tax credit because of problems that are inherent in and unavoidable for these types of programs. If the Legislature chooses to extend California Competes, we offer several suggestions that may alleviate some of its problems.

Long-term Capacity for Debt Payments Under Proposition 2

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December 21, 2017 - Our recent Fiscal Outlook publication considers potential future requirements under Proposition 2 (2014)—including required rainy day fund deposits and payments toward certain state debts. Some have asked whether Proposition 2 debt funding payments can be used to reduce liabilities of teacher and other public employees' pension plans. As we discuss in this post, there may be little ongoing capacity to make additional commitments from Proposition 2 debt funding payments through the mid-2020s.

Review of the California Competes Tax Credit

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October 31, 2017 - California Competes awards income tax credits to attract or retain businesses considering a significant new investment in California. In this report, we reviewed California Competes’ experience to date in meeting the Legislature’s goals for the program.

The Property Tax Inheritance Exclusion

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October 9, 2017 - When a property changes hands the taxes paid for the property often increase substantially. This is not true for most inherited property. Three decades ago, the Legislature and voters decided inherited property should not be reassessed when transferred. This has been a consequential decision. Many have benefited from the tax savings this policy affords. Nonetheless, the inheritance exclusion raises some policy concerns. Because of this, the Legislature may want to revisit the inheritance exclusion. Depending on the Legislature’s goals, the existing policy may be crafted too broadly and options are available to better target its benefits.

A short video accompanies this report.

Volatility of California’s Personal Income Tax Structure

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September 28, 2017 - For many years, personal income tax (PIT) volatility has complicated budgetary planning. This report analyzes the causes of PIT volatility. We find that about 40 percent of PIT volatility is due to choices about which types of income to tax, another 40 percent is due to the progressive rate structure, and the last 20 percent is due to deductions and credits. The Legislature could choose to make the tax less volatile, but actions to reduce volatility could reduce future growth of state tax revenues.

How Will Aging Baby Boomers Affect Future Property Tax Revenues?

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June 20, 2017 - In the coming years, more and more aging homeowners likely will look to sell their homes. This surge in sales should boost local government property tax collections. These potential property tax gains are likely to be offset by an increase in the transfer of homes from parents to children which, unlike most home sales, does not trigger higher tax payments.

The 2017-18 Budget: Evaluating the State-County Assessors' Partnership Agreement Program

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March 27, 2017 - The 2014-15 Budget Act established a three-year pilot program known as the State–County Assessors’ Partnership Agreement Program (SCAPAP). Under SCAPAP, the state allocated grants to eight county assessors’ offices to improve local administration of the property tax. In this report, we look at data from the first two years of SCAPAP and attempt to gauge the program’s effect on property tax revenues. Our analysis suggests the effect of SCAPAP on property taxes has been modest. There is even a good chance the state’s fiscal benefit from SCAPAP did not exceed state costs for the program.

Do Communities Adequately Plan for Housing?

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March 8, 2017 - In this report, we review the available evidence to gauge whether housing element law--the state's primary tool to ensure that local governments adequately plan for new housing--achieves their objective of ensuring that local communities accommodate future home building. Our review suggests that housing elements fall well short of their goal. Communities’ zoning rules often are out of sync with the types of projects developers desire to build and households desire to live in. As a result, home building lags behind demand. Although we offer a few changes the Legislature could consider, real improvement can come only with a major shift in how communities and their residents think about and value new housing.

The 2017-18 Budget: The Board of Equalization

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March 7, 2017 - In this analysis, we discuss three aspects of the State Board of Equalization’s (BOE’s) budget: (1) resources redirected to board members; (2) the administration’s 2017-18 budget proposal for BOE’s major IT project; and (3) the administration’s 2017-18 budget proposals for BOE’s tobacco tax and licensing programs.