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California Budget Tax Package - 2000-01

The nearly $100 billion California state budget for 2000-01, signed into law on June 30 by Governor Gray Davis, includes an omnibus tax package that, over three years, reduces taxes by more than $4.5 billion.

This summary was prepared by Cal-Tax Chief Tax Consultant David R. Doerr and Research Analyst Lisa Martin, with help from Chris Micheli, tax specialist with the firm of Carpenter Snodgrass and Associates. The first half of the summary describes the tax package, followed by a synopsis of other major funding priorities outlined by the California Legislative Analyst's Office. The last portion of the summary depicts five-year growth of California expenditures, starting in 1996-97.

Part One: The Budget Tax Package
As part of budget negotiations, the Legislature and Governor Davis agreed on measures that, taken together, are estimated to reduce state taxes by $1.519 billion in 2000-2001; $1.972 billion in 2001-2002, and $1.089 billion in 2002-2003.

The table below shows the estimated tax relief by provision:

Tax Package Provisions:
VLF Reduction Acceleration:
Prior law. Under a 1998 law, the vehicle license fee ("car tax") or VLF was scheduled to be reduced from its old 2 percent rate by a series of triggers based on revenue growth. For 2000, the tax rate was reduced by 35 percent and, due to the triggers, the reduction has continued at 35 percent in 2001. The maximum reduction, beginning in 2003, was set at 67.5 percent of the old 2 percent rate (or a .65 percent rate). All observers predicted that revenues would be sufficient to trigger the 67.5 percent reduction in 2003. In addition, the 1998 "compromise" provided that for any year non-VLF tax relief was passed totaling $100 million or more, the VLF tax relief would be reduced by a dollar-for-dollar basis.

Tax package provision. The tax package (AB 511, Alquist) accelerates the 67.5 percent VLF cut to 2001 and makes it permanent. The new rate for the VLF will be 0.65 percent. The bill also repeals the offset provision requiring a cut in VLF tax relief if other tax relief is passed.

For 2001 and 2002, the VLF reduction will be accomplished by a refund mechanism. Taxpayers will pay the VLF at prior year rates (1.3 percent for 2001) and then be refunded the difference between the prior rate and 0.65 percent. In addition, the bill authorizes the governor to direct the controller to include with the refund a notice that it constitutes a "prosperity dividend" approved by the Legislature and signed by Governor Davis.

These measures taken together, are expected to reduce taxes by $1.519 billion in 2000-2001.

Senior Property Tax Assistance Increase:
Prior law. For years, the state has had a "circuit breaker" program that reimburses a portion of the property tax paid by low income senior and disabled homeowners and renters (as the property tax is built into rent payments). The amount paid varies inversely by income. Those eligible are individuals 62 or over (or disabled) with household income of $33,132 or less.

Tax package provision. A one-time 150 percent increase in the relief available under the Senior Citizens' Property Tax Relief Program is included in the tax package (SB 1664, Karnette). The increase is for fiscal year 2000-2001 only. The Franchise Tax Board estimates average assistance payments of $330 for homeowners and $508 for renters.

Graduate Education Income Exclusion:
Prior law. California law only excluded from an employee's gross income amounts received or expenses paid by an employer for the employee's undergraduate education.

Tax package provision. Employees are allowed to exclude from gross income (up to $5,250) amounts an employer pays or incurs for employee graduate level courses in pursuit of a law, business, medical or other advanced degree (AB 511, Alquist).

Long Term Care Tax Credit:
Prior law. Taxpayers were allowed a deduction for qualified long-term care costs as part of the medical deduction (subject to the floor of 7.5 percent of adjusted gross income (AGI)).

Tax package provision. Eligible care givers are allowed a $500 non-refundable tax credit each year for each qualified individual for whom care is needed. No credit is allowed caregivers with AGIs of $100,000 or more (AB 511, Alquist).

It does not appear from the language that the taxpayer is actually required to provide long-term care, only that he or she meet the requirement of being an eligible caregiver for an individual for whom care is needed.

Land Donation Tax Credit:
Prior law. Under prior law, taxpayers could qualify for a deduction for the contribution of property to government (subject to charitable contribution limits and the alternative minimum tax). Prior law did not provide tax credits for donations.

Tax package provision. Taxpayers are eligible for a 55 percent tax credit for donation of qualified land to state or local agencies or eligible non-profit groups. The aggregate amount of credits that may be claimed cannot exceed $100 million (SB 1647, O'Connell).

Rural Investment Sales Tax Exemption:
Prior law. Under prior and current law, purchases of specified manufacturing equipment by new businesses are exempt from the 5 percent rate of the state sales tax.

Tax package provision. Purchases of qualified personal property (generally machinery or equipment not eligible for the manufacturers investment tax credit) for use in high-unemployment areas are exempted from the 5 percent rate of the state's sales tax. The California Infrastructure and Economic Development Bank board (in the Trade and Commerce Agency) must develop a program to determine who is eligible.

To be eligible, a business must:

• Locate or expand in a county with an unemployment rate 3 points above the statewide average.
• Make and maintain for 24 months a new investment of at least $150 million.
• Employ at least 175 new full-time employees and at least 500 employees for a total of 24 months.

The credit sunsets in 2006 (AB 511, Alquist).

Employees are allowed to exclude from gross income (up to $5,250) amounts an employer pays or incurs for employee graduate level courses in pursuit of a law, business, medical or other advanced degree.

NOL Conformity Increase:
Prior law. Under prior law, most taxpayers could only carry forward 50 percent of net operating losses (NOLs) for up to 5 subsequent years.

Tax package provision. The package (AB 511, Alquist) increases NOL carry forward as follows:

Tax Years	Percentage Loss  Carryforward	Length of Time
2000-2001	55%	10 years
2002-2003	60%	10 years
2004 &  beyond	65%	10 years

R&D Credit Increase to 15 Percent:
Prior law. Under prior law, taxpayers could claim a 12 percent state tax credit for "qualified" expenses for research and development.

Tax package provision. The tax package increases the research and development credit to 15 percent for income years beginning on or after January 1, 2000 (AB 511, Alquist).

Alternative Incremental Research Credit Increase:
Prior law.
Under prior law, the state's alternative incremental research expenses tax credit was 80 percent of the federal credit amount.

Tax package provision. The tax package increases the alternative incremental research expenses tax credit to 90 percent of the federal credit amount in effect on June 30, 1999 for income years beginning on or after January 1, 2000 (AB 511, Alquist).

Credentialed Teacher Tax Credit:
Prior law. Under prior law, there was no tax credit for the occupation of teacher.

Tax package provision. Credentialed teachers who are teaching at an eligible school may claim a personal income tax credit, as follows:

The tax credit cannot exceed 50 percent of the tax that would have been imposed on the teacher's salary. Teachers with any other income will have to compute two tax returns (one for all income, and one for teacher salary income only) to claim the credit.

Credentialed teachers include teachers in public, private, military, federal or Indian reservation schools (AB 2879, Jackson).

The tax credit cannot exceed 50 percent of the tax that would have been imposed on the teacher's salary.

Dependent Care Tax Credit:
Prior law. A state child care tax credit expired at the end of 1993.

Tax package provision. Taxpayers may claim a refundable dependent care tax credit as follows:

The maximum amount to which the credit can be applied (from federal law) is $2,400 in expenses for one dependent and $4,800 in expenses for two or more dependents. Dependents include children under 13 years of age or any person incapable of self care.

While the bill is refundable, it is computed as a percentage of the "allowable federal credit, without taking into account whether there is a federal tax liability." It is not clear if the refund applies to those who do not file federal tax returns, or only to those who file a federal return with no tax liability (AB 480, Ducheny).

The credit also makes no distinction between single filers and married couples.

Sales Tax on Gasoline Earmarked for Transportation:
Prior law. Revenues from the sales tax on gasoline were deposited in the general fund and used for general purposes, such as education, welfare, corrections, etc.

Tax package provision. For 2000-2001, $500 million of state revenues from the sales tax on gasoline is transferred from the general fund to the new Traffic Congestion Relief Plan.

For 2001-2002 through 2005-2006, all state revenues from the sales tax on gasoline are transferred from the general fund to a new Transportation Infrastructure Fund (AB 2928, Torlakson).

Part Two: Other Budget Highlights
Part Two covers highlights of other major funding priorities of the 2000-01 state budget. Total state spending amounts to $99.4 billion, including $78.8 billion from the general fund, $15.6 billion from special funds, and $5 billion from bond funds. Figure 1 below reflects total expenditures by these funds, reflecting over 75 percent of state spending on education; health and human services, and business, transportation and housing.

Other major spending priorities reflected in the 2000-01 budget are in the areas of education, health, transportation, and housing. As described by the Legislative Analyst's Office, these funding priorities include:

K-12 education. The budget includes major funding increases for education. It provides $6,696 in per pupil funding for K-12 education, an 11.1 percent increase from the 1999-00 Budget Act amount. It includes a $1.8 billion increase in general purpose funding (deficit reduction), a block grant for teacher recruitment and retention, and an augmentation for beginning teacher salaries.

Higher education. The budget also includes substantial funding increases for the University of California, California State University, and California Community Colleges, as well as funding for expanded financial aid for students.

Health. A significant boost in funds to health and social services programs will be expended on a variety of provider rate increases for physicians, hospitals, and other health care providers, as well as funding increases for the governor's Aging with Dignity initiative, and a variety of other related programs.

For 2000-2001, $500 million of state revenues from the sales tax on gasoline is transferred from the general fund to the new Traffic Congestion Relief Plan.

Transportation. The budget includes a general fund commitment of $2 billion for transportation, financed by a one-time direct general fund appropriation of $1.5 billion and a diversion of $500 million of sales taxes from the general fund to a transportation special fund to support traffic congestion relief efforts. In the five subsequent years, all general fund sales taxes on gasoline and diesel fuel (about $1 billion per year) would be diverted for this purpose. (See Budget Tax Package above for further discussion.)

Housing. Approximately $500 million has been reserved for various housing-related augmentations, with an emphasis on multifamily housing.

Vetoes. Before signing the budget, the governor used his line-item veto authority to delete $1.1 billion in 2000-01 budget spending, of which about $1 billion is from the general fund. The general fund vetoes include:

• $210 million from health and social services programs, including legislative augmentations for mental health programs and various provider rate increases.
• $173 million from K-12 education, including funds for child care and a school safety block grant.
• $151 million from youth and adult corrections, including $121 million for juvenile justice programs.
• $176 million from higher education, including community college apportionments and funding for the student aid commission. The governor also reduced or deleted various legislative augmentations in resources, environmental protection, and arts programs.

Expenditure Growth
Figure 2 depicts the annual growth of state expenditures (including the general fund, special fund and selected bond funds) over a five-year time frame. As reflected on the chart, expenditures increased from $75.2 billion in 1998-99 to $86.7 billion in 1999-00. Due to a booming economy and increased revenues, this rise of roughly $11.5 billion depicts the largest year-to-year percentage growth (15.3 percent) in this five-year period.

Comparing the most recent fiscal years (from 1999-00 to 2000-01), expenditures, fueled by an unexpected $12 billion revenue bonanza, are estimated to increase by an additional $12.7 billion, or 14.6 percent. When the 1996-97 expenditure total of $64.5 billion is compared to the projected expenditure of $99.4 billion for 2000-01, total spending will have risen by approximately $34.9 billion, or 54 percent, in five years.