August 16, 2007
Pursuant to Elections Code Section 9005, we have
reviewed the statutory initiative relating to state taxation (A.G. File
No. 07‑0029).
Background
The state levies a personal income tax (PIT) on
the California income of individuals and noncorporate businesses, such
as sole proprietors and partnerships. The rates of the tax range from
1 percent to 9.3 percent, depending upon the taxpayer’s income level. An
extra 1 percent tax is levied on the portion of taxpayers’ incomes
greater than $1 million. The PIT allows various deductions from income
and credits against any tax owed. Finally, residential and commercial
property is subject to a local ad valorem property tax rate of up to
1 percent annually, plus any additional tax needed to pay off
voter-approved indebtedness.
In 1988, voters enacted Proposition 98,
establishing a minimum annual funding level for kindergarten through
grade 12 schools and community colleges (K-14 education). Each year, the
school funding requirement is calculated based on the amount of General
Fund revenues the state receives, among other factors.
Provisions of the Initiative
This measure contains the following main
provisions:
Establishes a Wealth Tax. The
measure institutes a state wealth tax levied on the net assets of
individuals with values in excess of about $40 million as of January 1,
2008. The wealth tax would be based on the tax rates established by the
federal estate tax, which has a progressive structure and whose top rate
in calendar year 2007 will be 45 percent. However, the measure specifies
that the tax rate applied must not be less than 45 percent, meaning that
this rate would most likely apply to estates of all sizes. It appears
that the wealth tax would be levied on taxpayers in the state on a
one-time basis, with revenues to be deposited in the newly created
Global Warming Fund in 2008‑09 and 2009‑10. The monies in this fund
would be used to acquire a majority interest in outstanding voting
common stock of various petroleum and automotive companies as well as
for other environmental protection-related purposes.
Taxes People When They Die or Leave the
State. The measure imposes a new tax on the income of specified
individuals when they die or move out of California. It defines this
income to include both income that would ordinarily be reported and any
gains in asset values. Individuals with incomes greater than $5 million
would be subject to the tax, and associated revenues would be deposited
in the Global Warming Fund. Whether these provisions would impair
interstate commerce, and thus violate the U.S. Constitution, might be
subject to court review.
Makes Changes to the PIT. The
measure imposes an additional tax under PIT for joint-return taxpayers
equal to 17.5 percent of their total taxable incomes if greater than
$250,000, with an additional tax of 17.5 percent (for a 35 percent total
additional tax) on incomes greater than $500,000. For single taxpayers,
these additional taxes would be applied to incomes greater than $150,000
and $350,000, respectively. In addition, the measure establishes several
new tax programs that would reduce PIT revenues, including refundable
tax credits for: (1) particular designated organizations, (2) the costs
of purchasing health insurance for certain individuals, (3) income
earned by teachers, (4) higher education tuition and fees, and (5)
property tax payments. The first $7.5 billion of net annual PIT revenue
from these changes would be allocated to the General Fund, with the
remaining additional revenues directed to the Global Warming Fund.
Fiscal Effects of the Initiative
This measure would make major changes in the
state and local tax system. Some of these changes could generate very
significant behavioral and economic responses from taxpayers. For
example, the taxes on people leaving the state and the additional PIT
rates could have a significant negative impact on future economic
activity and revenues to the state and local governments. Given factors
such as these, the fiscal estimates provided below are subject to
considerable uncertainty.
Impact From New Taxes
One-Time Increase From the Wealth Tax.
The measure would result in a one-time increase in state revenues
(realized in 2008‑09 and 2009‑10) as a result of the establishment of
the wealth tax. The combined increase for both years could be in the
range of the low hundreds of billions of dollars. The one-time revenues
generated by the wealth tax would be deposited in the Global Warming
Fund.
The above estimated one-time revenue effects
assume no behavioral changes on the part of taxpayers. These changes and
their impacts could be very significant, in which case the estimates
above would be overstated.
Ongoing Increase From Tax on People Dying
or Leaving the State. The revenue gain from the tax upon those
dying or leaving the state is unknown, and would depend upon taxpayer
behavior, but would potentially result in additional revenues in the
billions of dollars annually. These revenues also would be deposited in
the Global Warming Fund. This effect assumes no behavioral changes on
the part of taxpayers. These changes and their impacts could be very
significant, in which case the estimates above would be overstated.
Impact of PIT Changes
Ongoing Revenue Impact. The revenue
gain from changes to PIT tax rates would—absent behavioral
impacts—result in additional revenues in the range of the high tens of
billions of dollars annually. Offsetting these additional revenues would
be reductions associated with various tax programs. The largest of these
reductions involve the proposed refundable health insurance tax credit,
teacher tax credit, and property tax credit. These and other provisions
would reduce state revenues (or result in increased expenditures in the
case of refundable credits in excess of tax liabilities) in the tens of
billions of dollars annually. The net increase of all of the ongoing PIT
changes would be potentially in the tens of billions of dollars
annually. The first $7.5 billion of additional revenue would be
allocated to the General Fund annually, with any additional revenue
above this amount allocated to the Global Warming Fund.
The above estimated ongoing revenue effects
assume no behavioral changes on the part of taxpayers. These changes and
their impacts could be very significant, in which case the estimates
above would be overstated.
Other Effects
Proposition 98 Impact. This measure
exempts the additional revenue from tax increases from being used in the
Proposition 98 calculation. However, it does not appear to exempt from
this calculation the reduced revenue from the additional tax credits.
This would drastically reduce the revenue base upon which the school
funding requirement is calculated, and, correspondingly, would
dramatically reduce the Proposition 98 minimum funding requirement in
the short term. As such, during that time, decisions regarding K-14
education funding levels would be determined by the Legislature based on
the state’s overall fiscal situation rather than by a minimum
requirement.
Behavioral Effects. If significant
behavioral effects occur that reduce economic activity in
California—such as employment, personal income, and investment
decisions—then state and local government revenues would be adversely
affected. The magnitude of these potential revenue losses is unknown but
potentially in the tens of billions of dollars annually.
Summary of Fiscal Effects
The measure would have the following major fiscal
effects:
·
One-time increase in state revenues potentially in the low
hundreds of billions of dollars from imposition of a wealth tax, and
ongoing increase in state revenues potentially in the billions of
dollars from imposition of the tax on certain people dying or leaving
the state. This revenue would be allocated to accomplish various goals
related to environmental protection.
·
Potential annual net increase in PIT revenues in the tens
of billions of dollars annually. The first $7.5 billion annually would
be allocated to the state General Fund with additional revenue allocated
for environmental protection.
·
Unknown state and local revenue reductions—potentially in
the tens of billions of dollars annually—due to changes in taxpayer
behavior.
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