November 30, 2009
Pursuant to Elections Code Section 9005, we have
reviewed the constitutional initiative relating to state and local
taxation (A.G. File No. 09‑0051, Amdt. #1-S).
Background
California currently levies a variety of
state-level taxes, including the personal income tax (PIT), the bank and
corporation franchise tax and income tax (CT), the state portion of the
sales and use tax (SUT), the insurance tax, various excise taxes, and
state-assessed property taxes. At the local level, local governments
levy locally assessed property taxes, the local portion of the SUT, and
other miscellaneous taxes.
The PIT represents the largest state revenue
source. The PIT is a tax on income earned in the state. The PIT tax rate
increases with income, although the effective tax paid by individuals
also reflects exemptions and credits for things such as mortgage
interest deduction. The second largest revenue source, SUT, is a
5 percent tax levied on the final sale of tangible personal property
with exemptions for certain products such as food and medicine. (The
state SUT is temporarily set at 6 percent.) The CT is the state's third
largest revenue source, imposing an 8.8 percent tax on income earned by
corporations that is attributable to California business activity. The
state also levies certain excise taxes (on tobacco and alcohol), an
insurance tax, and a vehicle license fee. Total state tax revenues from
existing sources totaled $114 billion in 2006-07.
At the local level, about 80 percent of local
government revenue comes from local property taxes and the local portion
of the SUT. The property tax imposes an average of about 1.1 percent tax
on residential and commercial property. The local SUT averages about
3 percent. Other local revenues come from utility taxes, Mello-Roos
assessments, parcel taxes, and other sources. Additionally, local
governments have the authority to levy special taxes and fees upon voter
approval. In 2006-07, total local government tax revenues totaled
$58 billion.
Proposal
Tax Provisions
The measure limits state and local taxes to the
following: (1) a land tax levied on the monthly rental value of land;
(2) a personal income tax on income above $150,000 annually; (3) taxes
on alcohol, tobacco, marijuana, and motor fuels; and (4) a severance tax
on natural resources such as timber, minerals, and oil. The changes in
the measure would take effect on July 1, 2011. At that time, all other
existing state and local taxes would cease. The new taxes are discussed
briefly below.
New Tax on the Rental Value of Land.
The measure establishes a new tax on the rental value of land. Land
would be assessed at its fair-market monthly rental value. The measure
would not tax improvements, such as houses or buildings, except in cases
where the rental value of improvements could not be reasonably
distinguished from the rental value of land. The land tax rate would be
set at 75 percent of each parcel's assessed monthly rental value. This
rate could not be changed. Residential and agricultural land would be
assessed annually. All other land having rental value would be assessed
semi-annually. The measure also allows land tax exemptions from land
owned by the government and for land that (1) serves a public purpose,
(2) is used for religious worship, or (3) is a burial ground for the
dead. The measure also authorizes the Legislature to offer exemptions in
other situations.
Modified Personal Income Tax. The
measure alters the existing PIT in two major ways. First, the measure
exempts the first $150,000 of each person's annual income from the tax.
This means that most people would not pay this tax. Second, the tax rate
on personal income would be limited to 8 percent. Under existing law,
the top PIT rate will be 10.25 percent in 2011.
Special Taxes. The measure allows
taxes on the use; manufacture; sale; purchase; exchange; and storage of
alcohol, tobacco, marijuana products, and motor fuels.
Severance Taxes. Under this
measure, taxes could be levied on natural resources when they are
severed from land. Resources that could be taxed include oil and natural
gas, minerals, timber, and other forestry products.
Tax Credits. The measure creates
new tax credits. First, it creates a PIT tax credit for land tax
payments paid by businesses. When the land tax is paid by a company for
which an individual is a shareholder or partner, the tax credit would
allow the individual to deduct from PIT the amount of the land tax that
is proportional to the equity share held in the business interest.
Similarly, the measure creates a credit for severance tax payments made
by a person or business entity against land taxes paid on the land from
which the resource was taken.
Deferrals During Phase-In Period.
During the initial implementation of the measure, land taxes could be
deferred under specific conditions. Specifically:
-
Persons 60 years or older could defer land
taxes for a period of up to nine years.
-
Land used for agricultural uses could be
deferred for up to three years.
-
Land used primarily for residential purposes
that contains three or fewer units could be deferred for up to three
years.
These deferrals would be payable at the end of
the specified deferral period. Deferred taxes would accrue interest at a
rate set by the Department of Finance.
Other Provisions
Local Government Apportionment.
Counties, cities, and other local governments would receive a portion of
the land tax revenue. The measure requires that, in the fiscal year
following the passage of the measure, the apportionment would be at
least equal to the annual average amount of total revenues collected by
each entity during the three-year period from July 1, 2008 to June 30,
2011.
Administration. The Board of
Equalization would be responsible for administering the land tax.
Counties would collect the tax. The board would work with county
governments to develop procedures for consistent assessments of land
values. The measure does not specify how the other taxes would be
administered.
Fiscal Effects
This measure restructures the overall state and
local tax system. Some of these changes would generate very significant
behavioral and economic responses from taxpayers. Given factors such as
these, the fiscal estimates provided below are subject to considerable
uncertainty.
Additionally, the impact of the measure would
depend on a wide variety of implementation decisions. The measure, for
instance, does not set tax rates in many instances. As a result, the
measure could result in billions of dollars of revenue gains or losses
each year depending on how the new taxes are implemented by the state.
Impact From New Taxes
The measure would eliminate most of the existing
state and local tax system and create a new system of taxes. Taxes under
the current system totaled about $170 billion annually. We estimate the
new tax system could generate roughly equivalent revenues. There would
be significant administrative changes as well.
Land Tax. We estimate the
tax on land would generate revenues of $130 billion to $160 billion
annually. Our estimate is subject to considerable uncertainty, however,
due to the difficulty in estimating the current fair market value of
land.
PIT. We estimate the revised PIT
would generate about $20 billion dollars at the proposed maximum tax
rate of 8 percent. (In addition, we assume there would be additional
revenues for the existing 1 percent tax that supports the Mental Health
Services Act [Proposition 63].) This also assumes the continuation of
current PIT credits, exclusions, and deductions.
Other Taxes. The measure does not
specify a tax rate for these taxes. Therefore, we cannot estimate the
fiscal effect of the measure's authorization for these taxes. Assuming,
however, that current alcohol, gasoline, and tobacco excise taxes would
not be affected, these taxes would continue to bring in about $4 billion
each year.
Indirect Effects
Behavioral Effects. The measure
proposes major changes to the way California raises revenues to fund
public services. By reducing and removing existing taxes on business
income, sales of goods, and property, economic theory suggests that the
measure could increase investment and stimulate economic activity in the
state. In the long run, greater economic activity would enhance income
and land's rental value, and generate higher tax revenues. The size of
these indirect effects is unknown.
Summary of Fiscal Effects
The measure would have the following major fiscal
effect:
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