The 2000-01 Budget Act includes a tax reduction package, the provisions of which are summarized in Figure 1. The total fiscal effect of these provisions is estimated to be approximately $1.5 billion in 2000-01, $2.1 billion in 2001-02, and $1.2 billion in 2002-03. These tax measures consist of an acceleration of the previously adopted vehicle license fee (VLF) reduction, tax credits for credentialed teachers and child care, senior citizens' property tax and long-term care assistance, and various targeted tax benefits. The fiscal effects of these measures are shown in Figure 2 (see page 14).
|Tax Relief Measures Accompanying the
2000-01 Budget Act
|Acceleration of the 67.5 percent cumulative reduction in the vehicle license fee from 2003 to 2001 and elimination of offset.|
|Tax credit ranging from $250 to $1,500 for credentialed K-12 teachers in public and private schools.|
|Refundable tax credit for child care expenses equal to a percentage of the similar federal income tax credit.|
|One-time property tax assistance for low-income senior citizens and disabled individuals.|
|Long-term care tax credit for those families providing health care assistance to seniors at home.|
|Targeted tax benefits involving graduate student expenses, research and development expenses, net operating losses, land conservation, and rural investment.|
|2000-01 Budget Tax Package|
|Description of Provision||2000-01||2001-02||2002-03||2003-04||2004-05|
|Vehicle license fee (VLF) reduction|
|Acceleration of rate reduction||$887||$1,426a||$553||--||--|
|Elimination of interaction with non-VLF tax relief||--||116||155||$200||$255|
|Credentialed teacher tax credit||218||188||202||217||233|
|Child care tax credit||195||189||193||197||201|
|Senior homeowners' and renters' tax assistance||154||--||--||--||--|
|Targeted tax cutsb||88||161||133||136||158|
|a Of this amount, $1.165 billion is appropriated and counted as an expenditure in 2000-01.|
|b Relate to graduate student expense exclusion, long-term care credit, research and development credit, net operating loss deduction, land conservation credit, and rural investment exception.|
The budget accelerates by two years a cumulative reduction of 67.5 percent in the VLF.
The VLF is an annual fee on the ownership of registered vehicles in California, levied in place of taxing vehicles as personal property. The revenues are distributed to cities and counties. As part of the 1998-99 budget, the VLF was cut by 25 percent, with the potential of additional reductions in future years if specific revenue levels (or "triggers") are reached. Under the 1998 law, the first such trigger would have resulted in a cumulative 35 percent reduction beginning in 2001. The maximum reduction possible under that agreement would have lowered the VLF by a cumulative 67.5 percent, beginning in 2003. As part of last year's budget, the reduction was increased to 35 percent for calendar year 2000 only.
In addition, the 1998 law provided that for any year in which additional non-VLF tax relief was passed by the Legislature totaling more than
$100 million, the level of VLF tax relief would be reduced on a dollar-for-dollar basis in order to maintain the same overall level of tax relief.
Under the 1998 agreement, cities and counties continue to receive the same amount of revenues as under prior law, with the reduced VLF amounts replaced by General Fund spending. The state spent about $1.4 billion in 1999-00 to backfill revenues to local governments.
The 2000-01 budget package does two things: (1) accelerates the 67.5 percent cumulative reduction from calendar year 2003 to 2001 and (2) eliminates the VLF interaction with non-VLF tax relief. As Figure 2 shows:
Figure 3 compares the maximum VLF rate reduction percentages under the original law with that under the new law.
|Comparison of Vehicle License Fee
|Maximum possible reduction under 1998 law||35.0%||46.5%||67.5%|
|2000-01 budget reductions||67.5||67.5||67.5|
|a Rates apply to future years also.|
The adopted budget calls for credentialed teachers in K-12 public and private schools to receive tax credits linked to their years of teaching experience. The tax credit amounts will be $250 for those with at least 4 years but fewer than 6 years of experience, $500 for those with at least 6 years but fewer than 11 years of experience, $1,000 for those with at least 11 years but fewer than 20 years of experience, and $1,500 for those with 20 or more years of experience. The credit is limited to 50 percent of tax liabilities associated with teaching-related income and will result in estimated revenue losses of $218 million in 2000-01, $188 million in 2001-02, and $202 million in 2002-03.
In addition, the budget provides for a refundable tax credit for child care expenses. The credit will be 63 percent of the similar federal child care credit for those earning $40,000 or less, 53 percent for those earning between $40,000 and $70,000, and 42 percent for those earning between $70,000, and $100,000. Taxpayers earning in excess of $100,000 are not eligible for the credit. This program will result in a revenue loss of $195 million in 2000-01 and similar reductions thereafter.
Two programs currently provide property tax assistance to low-income homeowners and renters who are either senior citizens (age 62 and older), disabled, or blind. For homeowners, the tax assistance is provided in the form of a partial reimbursement of property taxes paid; for renters, the amount of assistance is based on an estimate of the property tax paid by the renter. For both programs, eligibility is limited to those with incomes of less than $34,000, and the amount of assistance provided is determined by the claimant's income level. The programs will spend an additional $154 million in 2000-01 on a one-time basis to increase their benefits by 150 percent. The budget does not change the programs' eligibility requirements.
The budget agreement also includes a tax credit for taxpayers who provide health care to qualified individuals during tax years 2000 through 2004. The credit is equal to $500 for each individual for whom the taxpayer is a qualified care giver, and is limited to taxpayers with annual incomes of less than $100,000. Generally, the credit is available to those who provide care for the elderly or certain other individuals who are unable to perform various activities associated with daily living. The credit is expected to cost $43 million in 2000-01 and similar amounts thereafter.
The budget contains an expansion of two current tax programs intended to aid in business investment and related activities. Currently, a tax credit of 12 percent is allowed for increased qualified research and development expenses. The approved budget increases the available credit to 15 percent of qualified expenses, and also increases the amount of the alternative credit that may be claimed. In addition, under current law, 50 percent of net operating losses (NOLs) may be carried forward for up to five years for the purpose of reducing taxable income. Under the tax package, the carry-over period is extended to ten years and the percentage amount that may be carried over will increase at regular increments until it reaches 65 percent in 2004.
There also is a new state sales tax exemption for qualified investments specifically targeted to assist rural counties with high unemployment rates relative to the rest of the state.
Together, these tax reductions will result in an estimated revenue reduction of $26 million in 2000-01, and increasing amounts thereafter.
The budget agreement also extends the income exclusion for employer-provided educational assistance--which was formerly only available for undergraduate education expenses--to graduate education expenses. Finally, the tax package allows a tax credit of 55 percent of the value of qualified property donated to the state, local governments, or designated nonprofit corporations for the protection of wildlife habitat, open space, and agricultural lands.
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