Background on SB 1255

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Friends Committee on Legislation

Facts about SB 1255
Analysis
Letter to Author
Action Alert

Facts about SB 1255 (Burton)
Restoring "Top Bracket" Tax Rates

SB 1255 by John Burton (D., San Francisco) restores the "top bracket" personal income tax rates that were repealed in 1996. During recessionary periods, it would temporarily increase the personal income tax rates on family taxable incomes above $250,000 from 9.3% to 10% and to 11% for family taxable incomes above $500,000.

The Problem
California needs to be better prepared to deal with recessions. Recessions happen, and when they happen State revenues decline ? sometimes dramatically ? forcing cuts in vital services at the same time rising unemployment increases the need for services.

Background

The 10% and 11% top brackets were first adopted in 1971 under legislation authored by George Deukmejian and signed by Governor Ronald Reagan. These top brackets were re-instituted by Governor Pete Wilson on a temporary basis (1991-1995) to help balance the State?s budget during the last recession. A single taxpayer with $200,000 in taxible income pays about $500 in additional state taxes each year when the top brackets are in effect.

Recommendation Support SB 1255.

Reasons

The pain of an economic down-turn should be as equitably distributed as possible among all citizens. The Top Bracket Budget Stabilization Plan would moderate State revenue declines during periods of economic downturn to prevent excessive spending cuts.

When State revenues fall during recessions, it is poor families, low wage workers, and low income seniors and people with disabilities who often bear the brunt of the resulting budget cuts. The Top Bracket Budget Stabilization Plan provides additional revenues to reduce the need for these cuts while making sure that the burden of balancing the State budget is borne by the most affluent not just by the poorest Californians.

Whether or not California is in a recession, it has tremendous unmet needs that the State recently has begun to address, including improving our schools, expanding access for the 7 million Californians without health care, and beefing up public safety in response to September 11th. In the absence of temporary revenue increases to offset the steep drop in State revenues, the threat of deep budget cuts will reverse progress in addressing these and other priorities.

Voters Oppose Cutting Most Programs. While polls have shown varying levels of voter support for cutting spending to balance the State budget, they have consistently found that voters oppose cuts to most specific services, including education, health care, mental health, and child care. Even in the case of welfare, a recent poll found that 85% of voters think spending on welfare should be maintained at the same level or increased during a recession, while only 12% thought welfare spending should be cut.

The advantage of the temporary top bracket increases as a budget stabilizer in an economic downturn is that they impact only the wealthiest 2% of Californians who are best able to withstand a recession. Because these taxpayers can deduct their state income taxes on their federal tax returns, the net effect of the temporary top bracket increase on these taxpayers will be reduced by more than one-third. As a result, the federal government will contribute more than a billion dollars toward balancing the State budget during recessions. Moreover, this same top 2% of taxpayers also is enjoying large federal income tax cuts as a result of the Bush tax cut.

Prepared by the Friends Committee on Legislation, 926 J Street #707, Sacramento, CA 95814 - March 19, 2002

DETAILED DESCRIPTION OF AB 1255 (John Burton, D-San Francisco)

SB 1255, as introduced. Personal income tax: rates.

Under the Personal Income Tax Law, taxes are imposed at specified rates up to a maximum of 9.3% based on the amount of the taxpayer's taxable income and a maximum of 7% based on the taxpayer's alternative minimum taxable income.

This bill would, for taxable years beginning on or after January 1, 2002, and before a specified fiscal threshold is reached, impose 10% and 11% maximum rates for taxpayers with taxable incomes over certain amounts, and impose an 8.5% maximum rate based upon the taxpayer's alternative minimum taxable income.

This bill would result in a change in state taxes for the purpose of increasing state revenues within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature.

The bill would take effect immediately as a tax levy.

The bill restores the "top bracket" personal income tax rates that were repealed in 1996, when the state was receiving income from the thriving "dot-com" market. This measure will supply about $2 billion in revenue in the coming budget. The cost to a single taxpayer with $200,000 in taxible income will be about $500 in additional tax liability.

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The following letter is to the author concerning SB 1255:

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Friends Committee on Legislation
926 J Street * Sacramento, CA 95814 * (916)443-3734

March 20, 2002

John Burton
Senate President Pro Tempore
State Capitol, Sacramento

Re: Senate Bill 1255 (Burton), Support

Dear Senator Burton:

The Friends Committee on Legislation supports SB 1255 to restore the "top bracket" personal income tax rates that were repealed in 1996. This measure will supply an important boost in revenue during the coming budget year, and will enable the legislature to reach a more just budget than would be possible otherwise. A single taxpayer with $200,000 in taxible income will only pay about $500 in additional state taxes if SB 1255 becomes law. The bill affects the wealthiest 2% of Californians who are best able to withstand a recession. Because these taxpayers can deduct their state income taxes on federal tax returns, the net effect of the bill on these taxpayers is reduced by about one-third. For the forgoing reasons, we support SB 1255.

Yours very truly,

STEVE BIRDLEBOUGH
Legislative Advocate

CC: Jack Scott, Chair, Senate Revenue and Taxation Committee

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