December 14, 2007
Pursuant to Elections Code Section 9005, we have
reviewed the statutory initiative relating to state taxation (A.G. File
No. 07‑0080).
Background
Residential and commercial property in California
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. For owner-occupied housing, the base value on which this
tax is levied is reduced by a $7,000 homeowner’s exemption.
The state also 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, including a credit available to
renters whose adjusted gross income is $50,000 or less.
Provisions of the Initiative
Increases the Homeowner’s Exemption.
The measure raises the homeowner’s exemption, beginning with the
2009‑10 fiscal year, from $7,000 to the lesser of 25 percent of the full
value of a dwelling or $100,000. After 2009‑10, the $100,000 cap is
adjusted annually for inflation.
Increases the Renter’s Credit. The
renter’s credit is currently equal to $120 for married taxpayers filing
jointly, heads of household, and surviving spouses; and $60 for other
taxpayers. For taxable years beginning on or after January 1, 2009, the
measure triples the amount of these renter’s credits and indexes them
annually for inflation beginning in 2010.
Fiscal Effects of the Initiative
Reduction in Property Taxes
We estimate that this measure would reduce
property taxes by approximately $3 billion per year. The measure would
increase state General Fund costs by an equivalent amount, because the
state is constitutionally required to reimburse local governments for
these reduced revenues.
Impact on Personal Income Taxes
This measure would produce two offsetting effects
on PIT collections.
Increase in Renter’s Credit. The
increase in the renter’s credit from this measure would reduce PIT
collections by approximately $150 million annually.
Reduced Property Tax Deductions.
The reduction in property taxes described above would result in a
reduction in property tax itemized deductions reported on PIT returns.
This would result in increased PIT revenues of approximately
$200 million annually.
Summary of State and Local Fiscal
Effects
This measure would have the following major
fiscal effects:
-
Increase in state costs of approximately
$3 billion annually to compensate local governments for reduced
property tax collections.
-
Net increase in state personal income tax
revenues of approximately $50 million annually from increases in the
renters’ credit and decreases in property tax deductions.
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