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HomeMy WebLinkAboutMINUTES - 10271992 - 2.2 TO: BOARD OF SliPERVISORS Contra FROM: Phil Batchelor, County Administrator Costa Count DATE: October 22, 1992 Y SUBJECT:PROPOSITION 167 - INITIATIVE STATUTE TO CHANGE STATE AND LOCAL TAX POLICY SPECIFIC REQUEST(S)OR RECOMMENDATION(S)&BACKGROUND AND JUSTIFICATION RECOMMENDATION: Adopt a position of OPPOSITION to Proposition 167 on the November 3, 1992 ballot. BACKGROUND: The State of California imposes three major types of taxes to fund the programs and services it provides . These taxes are the personal income tax, sales and use taxes, and bank and corporation taxes . Local governments in California receive most of their tax revenue from the property tax and sales and use tax. Personal income taxes are imposed on the net income of individuals and vary according to how much income each individual earns in a year. Similarly, bank and corporation taxes are imposed on the net income of businesses, but are assessed at a constant rate of 9 . 3 percent. Sales and use taxes are imposed on most goods purchased in California. Because there are both state and local governmental components of this tax, the total sales tax rate varies from county to county. It averages, however, about 8 percent statewide (the sales and use tax is currently 8 .25 percent in Contra Costa County) . State law does not allow the sales tax to be imposed on certain items . The tax does not apply, for example, to most food items sold for home consumption. CONTINUED ON ATTACHMENT: X YES SIGNATURE: RECOMMENDATION OF COUNTY ADMINISTRATOR RECOMMENDATION OF BOARD COMMITTEE APPROVE OTHER October 27, 1992 SIGNATURE(S): ACTION OF BOARD ON -- October 27 , 1992 APPROVED AS RECOMMENDED OTHER The Board TABLED consideration of this report . VOTE OF SUPERVISORS 1 HEREBY CERTIFY THAT THIS IS A TRUE XX UNANIMOUS(ABSENT ) AND CORRECT COPY OF AN ACTION TAKEN AYES: NOES: AND ENTERED ON THE MINUTES OF THE BOARD ABSENT: ABSTAIN: OF SUPERVISORS ON THE DATE SHOWN. CC: Please see Page 5 ATTESTED October 271, 1992 PHIL BATCHELOR,CLERK OF THE BOARD OF SUPERVISORS AND COUNTY ADMINISTRATOR :;i- (10/88) BY X.*�� ��`r""'�� ,DEPUTY Property taxes are imposed on individuals and businesses who own property. They are based on each property's assessed value. As long as the property has the same owner and there is no new construction, its assessed value does not change from year to year, except for a small increase for inflation. The California Constitution limits the property tax rate to 1 percent of the assessed value of the property. Proposition 167 makes changes to each of these taxes . The attached table, which is copied from the analysis prepared by the Legislative Analyst, identifies each provision of Proposition 167, describes how the current system works, and explains the proposed changes . However, in summary, Proposition 167 would do all of the following: 1 . Reduce the statewide sales tax rate from 6 . 0 percent to 5 . 75 percent effective January 1, 1993 and from 5 .5 percent to 5.25 percent on July 1, 1993 . 2 . Exempts candy, snack food, bottled water, newspapers and periodicals from the sales tax, effective January 1, 1993. 3 . Reduces the taxable income to which the 11 percent income tax rate applies from $272,230 to $238,000, effective for taxable years beginning on or after January 1, 1992 . 4 . Makes both the currently temporary income tax rate of 10 percent and 11 percent permanent, rather than allowing them to expire on December 31, 1995 . 5 . Imposes a new income tax rate of 12 percent on taxable income of more than $340,000 per year. 6 . For those taxpayers, any of whose income is taxed at the 12 percent level, the alternative minimum tax is increased from 8. 5 percent to 9 . 3 percent. 7 . Extends the renters credit to all renters, rather than only to low and moderate income renters. 8 . Increases the corporate income tax from 9 . 3 percent to 10 . 3 percent. 9 . Increases the alternative minimum tax on businesses ' income from 7 . 0 percent to 7 . 7 percent. 10 . Eliminates the "in-lieu" tax for banks and financial corporations and instead subjects these firms to local business and personal property taxes . 11 . Limits the size of corporations which can take advantage of Subchapter S accounting provisions to corporations with gross income of less than $10 million per year. 12 . Limits deductions which can be taken against income by banks and financial corporations for losses from bad loans to actual losses from bad loans rather than allowing all funds set aside as reserves to pay for such losses to be deductible. 13 . Requires businesses to deduct the expenses associated with exploration for oil and natural gas over a longer period of time, whereas under current law these costs can be deducted in the year the expenses occurred. 14 . For businesses with more than 1,000 employees, limits the amount of compensation paid to executives that can be deducted for tax purposes by eliminating a deduction for any compensation which exceeds 25 times the average compensation paid by a corporation to all its employees . 2 15 . Changes the rules regarding the amount of income a corporation which does business in California as well as outside of California by requiring the consideration of income earned only in the United States and by increasing the significance of a company' s California sales relative to the rest of the country. 16 . Requires the Assessor to reassess property whenever 50 percent of the interest in a business is sold, and to assume that this occurs once in every three-year period, unless it is proven not to have been sold, rather than reassessing the property only when more than 50 percent of the interest in the business is obtained by a single purchaser. 17 . Increases the tax insurance companies pay on the amount of premiums from insurance policies which are sold from 2 . 35 percent to 2 .46 percent. 18 . Establishes an oil severance tax on companies that extract more than 1 .2 million gallons of oil a month equal to 3 percent of the value of oil extracted. Currently a fee is imposed which varies from year to year but is currently 2 .5 cents per barrel, about 0 .2 percent of the value of the oil . The increase in personal income taxes and business taxes would result in additional State General Fund revenue of about $1 billion in the 1992-93 fiscal year and $1.5 billion in 1993-94 . These revenue increases would be partly offset by a reduction in the sales tax rate, by the exemption of various items from the sales tax, and by the extension of the renters ' credit to all renters, regardless of income. Together, these three changes would decrease state revenues by approximately $660 million in 1992-93 and $1 . 3 billion in 1993-94, leaving a net State General Fund increase in revenue of about $340 million for the 1992-93 fiscal year and $200 million for the 1993-94 fiscal year. The provision that requires more frequent reassessments of business properties would increase local property tax revenue by $1 billion to $2 billion annually, beginning in the 1993-94 fiscal year. Approximately $350 million to $700 million of these revenues would be allocated to schools (because of the operation of Proposition 98) . The remaining $650 million to $1 . 3 billion would be allocated to cities, counties and special districts . In addition, the provision that allows local agencies to impose personal property. and local business taxes on financial institutions would increase local revenues on a statewide basis, potentially in the range of $120 million. The exemption from the sales tax would decrease local revenues from the sales tax by roughly $95 million in 1992-93 and $200 million annually thereafter. In total, cities, counties and special districts would lose roughly $95 million in 1992-93 . Beginning in 1993-94 , however, they would gain between $550 million. to $1 .2 billion annually. This measure would result in roughly a 20 percent increase in the total amount of income taxes paid by businesses in California, and a 10 percent to 20 percent increase in the amount of property taxes imposed on businesses . Faced with these increases, some businesses may choose to reduce their business activities or their investments in new plant and equipment in California. Businesses may find, for example, that they would be more profitable operating in nearby states that have lower business taxes . To the extent that this occurs, this measure would reduce the future growth in tax revenues . We believe that at some point, policy makers in California (and the voters) must carefully consider the message that is being sent to business by the tax policy which is adopted in the State. A policy which says (whether the message is intended or not) that business is not encouraged to locate or relocate in California, to hire Californians as employees and to increase their profits in 3 California, may be sending a message which is not intended. The current economic problems faced in California cannot be solved without a healthy private business sector which is able to hire more employees and operate at a profit. The economic and regulatory climate for businesses in California is already viewed as being so negative that many businesses are moving operations (and therefore jobs) from California to other states, often with the active involvement of officials from the other states . Other states offer lucrative tax incentives for businesses to relocate or expand to their states . Personal and business tax policy can and should be a powerful tool by which policy makers advance their social agenda, in addition to simply increasing revenue for the State and local governments . Any proposed tax policy change should be carefully viewed in terms of what message it will send to those it will affect and what actions the affected parties are likely to take in response to the policy change. While the tax reductions outlined above will no doubt benefit middle and lower-middle income tax payers, the advantages of this tax decrease need to be weighed against the message which is being sent to those who will be paying increased taxes . It is not unlikely that the message those being asked to pay more tax will receive is that they are not welcome in California and should, therefore, take themselves, their taxable income, business operations and employees to other states, leaving the poor, lower- middle income and middle income tax payers with modest tax breaks. This Proposition does not distinguish between "desirable" and "undesirable" businesses, in terms of tax policy. If "clean" , service industry or light manufacturing businesses are seen as "desirable" , why are they treated for tax purposes the same as a hazardous waste incinerator or major air polluter? The message which may be received by the private sector is that to the extent a business is profitable, it may be better off in another state, whereas a business which is struggling to make any profit may be better off in California. The Proposition does not reward profitable businesses which hire more unemployed residents of California. If a business can remain profitable or return to profitability by not hiring anyone, it is welcome to do so in terms of the tax policy which is reflected in this Proposition. There is nothing here to encourage a labor-intensive business from locating in California. There is no incentive in this Proposition for socially acceptable heavy manufacturing to locate or expand in California, bringing with it what are generally higher salary skilled labor jobs to the State. There is no incentive for well-off, law-abiding, middle-aged individuals whose children are grown to remain in California, even when they are using relatively few public services . These individuals no longer use the public schools, they do not often use the courts, they do not use the welfare system or public health care system. They are actually generally net contributors to the tax balance of the community. However, under this Proposition, they may feel encouraged to move themselves, their assets, and their income to another state, leaving behind those who need to use the public schools, welfare system, and public health care system and those who violate the laws of the State and must be confined in its prisons at public expense. While Proposition 167 can popularly be seen as a measure which taxes those who can afford to pay higher taxes, it also taxes at a higher level those who do not have to remain here to pay those higher taxes . We would suggest that the relatively small net tax gains the lower-middle and middle income tax payer will see from this Proposition does not offset the potential impact on the State from a seemingly conscious effort to discourage anyone with money from remaining in California a moment longer than is absolutely necessary. We are, therefore, urging that the Board of Supervisors 4 adopt an OPPOSE position in regard to Proposition 167 . cc: Members, Board of Supervisors County Administrator Auditor-Controller Treasurer-Tax Collector County Assessor Director, GMEDA County Counsel 5 :s>'csi'4��'�'"''q-x_'�"s'!'�g%c5� .^r*;v-•+R�?fvgp?�r.a..m.�� :�aae,�s�lew�en- How Does Proposition 167 Change Existing Law? Provision Current System Proposed Change Sales Tax Sales Tax Rate Current statewide rate is 6 percent until Reduces statewide rate to 5.75 percent July 1993,then will drop by'/p percent to on January 1, 1993 and to 5.25 percent 5.5 percent. on July 1, 1993. Sales Tax Exemptions Sales tax applies to sales of candy,snack Exempts these items from sales tax. food, bottled water, newspapers, and periodicals. Personal Income Tax Personal Income Temporary 10 percent and 11 percent 1. Lowers income level at which the 11 Tax Rates income tax rates for upper-income percent rate applies and makes both the taxpayers (rates expire in 1996). 10 percent and 11 percent rates permanent. 2. Creates new 12 percent rate. Alternative Minimum Tax Taxpayers who claim many tax' Raises the minimum rate to 9.3 percent on Personal Income deductions and exemptions must pay a for high-income taxpayers. minimum tax of 8.5 percent of specified income. Renters'Credit Income tax credit provided to low-and Extends this credit to all renters. moderate-income renters. Bank and Corporation Taxes Corporate Franchise Most corporations are subject to a tax on. Raises the tax rate to 10.3 percent. (Income) Tax Rate their net income of 9.3 percent. Alternative Minimum Tax Corporations that claim many tax Raises the minimum tax rate to 7.7 on Businesses'.Income deductions and exemptions must pay a percent. minimum tax of 7 percent of specified income. "In-lieu"Tax for Banks and financial corporations are Makes banks and financial corporations Banks and Financial exempt from local business taxes and subject to local business and personal Corporations personal property taxes,and instead pay property taxes. Eliminates "in-lieu' "in-lieu"income taxes to the state. income taxes. Tax on Certain Certain, generally smaller, corporations Limits which corporations can take Small Corporations have special rules regarding the advantage of these special rules to those (Subchapter S accounting of profits and losses for tax corporations with gross income of les, Corporations) purposes. These rules usually lower than$10 million per year. taxes owed to the state. Deductibility of Loan Loss Banks and other financial corporations Limits deductions to actual losses from Reserves for Banks can deduct from their income any funds bad loans. that they set aside as reserves to pay for losses from bad loans. Deductibility of Companies can deduct from their Requires businesses to deduct these Drilling Costs income most expenses associated with expenses over a longer period of time. exploration for oil and natural gas in the year the expenses occurred. Deductibility of Corporations can deduct from their Limits the amount of compensation. Executive Salaries income the compensation they pay to paid to executives that businesses car their employees. deduct for tax purposes.Limits apply tc businesses with more than 1,00( employees. I 7Desition 167 Change Existing Law? Current System Proposed Change Bank and Corporation Taxes--continued Interstate and To determine income taxes,companies Changes the rules regarding this International doing business in other states or determination by (1) requiring the Businesses countries must determine what portion consideration of income earned only in of their income is due to business the United States and (2) increasing the activity in California using specific rules significance of a company's California that consider how much property, sales relative to the rest of the country. payroll,and sales a company has inside and outside of the state. Property Taxes Property Taxes Real estate property owned by business Requires county tax assessors to reassess (Change in Ownership) is generally reassessed when more than property whenever 50 percent of the 50 percent of the interest in the business. interest in a business is sold, and to is obtained by a single purchaser. presume this occurs once in every three-year period, unless it is proven not to have been sold.. Other Taxes Insurance Companies Most insurance companies pay tax at a Raises the tax rate to 2.46 percent. rate of 2.35 percent on the amount of premiums from insurance policies sold. Oil Severance Tax The state imposes a fee for the Establishes a tax on oil that is extracted regulation of companies extracting oil in California.Tax would be 3 percent of from California based on the amount of the value of oil extracted and would oil produced.The rate of this tax varies apply only to companies extracting from year to year and is currently set at more than 1.2 million gallons a month. 2.5 cents per barrel (about 0.2 percent of the value of the oil).