Personal Income Tax: Rate Increases. The Assembly on June 2, 2005 passed and retained AB 6 (Chan) on the Third Reading File, meaning the tax-hike measure is dead for this year. The bill, opposed by Cal-Tax, had been amended May 23 to delete actual income tax rate increases and add intent language to raise the rates an unspecified level, a parliamentary ploy to avoid the two-thirds vote requirement on state tax-hike bills. However, even making the bill subject to majority-vote approval wasn’t enough to push it out of the Assembly before this year’s house-of-origin deadline.

Income Tax Increase: New Top Brackets. The committee on a 4-2 vote, with Mr. Canciamilla abstaining approved AB 6 (Chu). Mr. Klehs said the bill was being amended to delete the proposed 10 percent and 11 percent income tax rate increases, but the action does not change the intent of the bill and Cal-Tax remains opposed, because it encourages high-income people to relocate to other states; it increases taxes on unincorporated businesses, and it increases the volatility of the state’s tax structure, resulting in big swings during economic cycles.

Including Overseas Income from Certain “Tax Haven” Countries in Water’s Edge Income. Legislation expanding the water’s edge apportionment election to income and factors of a number of countries (AB 34, Ruskin) was approved on a party-line vote. There are 39 countries that would be brought within the United States water’s edge that were identified in 2002 by the Organization for Economic Cooperation and Development as tax havens (whether or not they were actually tax havens or no longer are). The FTB estimates the bill is a $45 million tax increase in 2006-07. Included on the list are part of Great Britain, Panama, and a part of the European Community (Malta).

The OCED is an organization composed of only 30 member countries. By using the definition, Cal-Tax believes that the California Tax Law would be decided by unelected international bureaucrats representing various countries that have substantially higher taxes than the U.S. and who are apparently miffed that a number of non-member countries have low tax rates. (It is also interesting to note that Nauru and Vanuatu are no longer classified as tax havens by the OCED, although they would be such for California purposes.)

Supporting the bill are public employee unions and Lenny Goldberg of the California Tax Reform Association. Opposing the measure are Cal-Tax, the California Chamber of Commerce and the American Electronics Association.

(Editor’s note: The vote on AB 34 was perhaps the most surprising development in a year of surprises. Liberal Democrats were found to be voting for a measure that could do economic harm to some of the poorest people on the planet. And most of these are Latin Americans, Africans or Polynesians. The bill establishes an economic disincentive for multinationals to invest in 39 nations, most of whom are Latin American, African and Pacific Island countries with large populations of poor people. If companies invest in these countries, the bill provides that California will punish them by including their income and factors in the state’s formula for determining corporate taxes, which will most likely raise their California tax burden.

In fact, the bill acts like an ex-post facto law by punishing corporations that invested in these poor countries without any knowledge that California would punish them for these investments by higher taxes. The Franchise Tax Board estimates that companies that have made these investments will be collectively punished to the tune of $45 million in 2006-07. However, one way these companies can try to minimize these tax increases is by cutting jobs in California, thereby reducing California’s payroll factor, which partly determines the amount of income subject to California tax. In addition, a state policy that discourages investment in poor nations in Africa, Latin America and the Pacific may be at odds with United States foreign policy.)

Including Certain Foreign Corporations in Water’s Edge Group. AB 441 (Chu), sponsored by Treasurer Angelides, requires taxpayers to include within the water’s edge income and apportionment factors of so-called “inverted domestic corporations.” The bill, which is estimated to be a $60 million tax increase, was approved on a 5-2 party-line vote. The definition of such corporations centers on stock ownership and assets before and after they become foreign-controlled. Cal-Tax believes the bill could impact mergers of foreign and U.S. corporations. In fact, one of the provisions of the bill allows the FTB to adopt a regulation that “stock is not stock.”

Proponents, including public employee unions and organized labor, argue that the companies are locating offshore in name only. Mr. Angelides stated 18 multinationals have established “paper headquarters” in other countries. However, Cal-Tax’s Teresa Casazza argued that overseas income should not be included in the water’s edge combined return and that the bill is much broader than “mail-box only operations.” Also voicing opposition to the bill were Chris Micheli, representing the American Electronics Association, and Matt Sutton, representing the California Manufacturers and Technology Association.

Income-Tax Collections Still Rely on the Super-Rich by Daniel Weintraub as reported in the Sacramento Bee, May 5, 2005.

Reiner Preschool Initiative to Hike Taxes $2.3 Billion a Year as reported in Caltaxletter, April 22, 2005.

PIT Rate Increases. AB 1403 (Coto) imposes 10% and 11% maximum rates for taxpayers with taxable incomes over certain amounts, and imposes an 8.5% maximum rate based upon the taxpayer's alternative minimum taxable income.

Personal Income Tax Spot Bill AB 244 (Walters) makes non-substantive changes in the personal income tax and is obviously a spot bill.

Soak the Rich Some More. AB 6 (Chan) adds two additional income tax rates: a 10 percent rate for taxable income of over $100,000 (single) and an 11 percent rate for taxable income of over $200,000 (single). Passage of Proposition 63 in November already added an additional 1 percent tax on income over $1 million. (Caltaxletter, December 17, 2004)

Tax More Corporate Overseas Income as Part of Water’s Edge Election. AB 34 (Ruskin) makes income earned in foreign countries includable in income apportioned to California for corporate tax purposes. The overseas income and factors to be included are from corporations headquartered, incorporated or primarily located in a tax haven country. Apparently, the Franchise Tax Board will go into the foreign relations business by determining which countries are tax haven countries. (Caltaxletter, December 17, 2004)

Income Tax Increase: Higher Top Rates. AB 1815 (Chan) increases personal income taxes by adding 10 percent and 11 percent rates. The 10 percent rate would apply to taxable income over $100,000 single, $200,000 joint. The 11 percent rate would apply to taxable income over $200,000 single, $400,000 joint.

Democratic Majority Floor Leader Wilma Chan told the Oakland Tribune, “With a budget deficit as big as the one facing California, we all have to share in the solution. It is only reasonable that the wealthiest Californians contribute a fair share.” Cal-Tax, an opponent of the bill, noted that, speaking of fair share, the wealthiest Californians, the 10 percent making more than $100,000, already pay 75 percent of the income tax. (Caltaxletter, January 16, 2004.)

Local Income Tax Measure Hits Wall in Senate Tax Panel as reported in Caltaxletter, July 11, 2003.

Income Tax: For income taxpayers, a new 10.3 percent top income bracket, beginning with $300,000 of taxable income for a joint return and $150,000 for a single filer, would be imposed. The new bracket is estimated to increase revenue by $1.5 billion in 2003-04. The current top bracket – one of the highest in the nation – is 9.3 percent as reported in Caltaxletter May 16, 2003, in reference to the May Revise.

Tax Haven by Dale Kasler from the Sacramento Bee January 31, 2003.

Ted Turner Now a Floridian by the Associated Press from the Tampa Bay Online January 30, 2003.

Fact Sheet on Increasing the Income Tax.

As a Few Rich Guys Go, so Goes State Budget by Daniel Weintraub from the Sacramento Bee January 5, 2003.

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