California Tax Facts. An Overview of the Golden State s Tax Structure

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1 California Tax Facts An Overview of the Golden State s Tax Structure 1

2 2 CALIFORNIA TAX FACTS

3 California Tax Facts An Overview of the Golden State s Tax Structure 3

4 ABOUT THE CALIFORNIA TAX FOUNDATION The California Taxpayers Association (CalTax) established the California Tax Foundation as its research and education arm more than 30 years ago. The foundation has won several national research excellence awards, and impacted the development of public policy, while developing a reputation for factual, objective research, advancing discussions on important public policy issues. The California Tax Foundation is a 501(c) (3), not-for-profit organization, dedicated to promoting sound tax policy through independent, objective, nonpartisan research and thoughtprovoking policy work. This report was prepared by Robert Gutierrez, director of the California Tax Foundation. To purchase copies of this report or other publications, call , foundation@caltax.org or visit the California Tax Foundation s website at The California Tax Foundation is located at 1215 K Street, Suite 1250, Sacramento, California California Tax Foundation. All Rights Reserved. Printed in the United States of America. ISBN: CALIFORNIA TAX FACTS

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7 Contents The American River, Sacramento County CHAPTER ONE Principles of Sound Tax Policy Page 1 CHAPTER TWO California s Tax Structure Page 3 CHAPTER THREE Personal Income Tax Page 10 CHAPTER FOUR Corporate Franchise and Income Tax Page 17 CHAPTER FIVE Property Taxes Page 22 CHAPTER SIX Sales and Use Tax Page 33 CHAPTER SEVEN Excise Taxes Page 40 CHAPTER EIGHT Employment Taxes Page 49 CHAPTER NINE Other State and Local Taxes Page 51 CHAPTER TEN Tax Administration Page 59 7

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9 Chapter 1 Principles of Sound Tax Policy Tax experts continue to argue over measurements of tax equity, and what can be done to improve the economy. However, policymakers, scholars and think tanks overwhelmingly agree on a number of overarching principles of sound tax policy. In practice, the principles below may be difficult to achieve, but nonetheless, they are worth pursuing, as sound tax policies are the foundation for relevant tax discussions. Certainty Changes within a tax structure should be kept to a minimum. Frequent changes in rates or bases disrupt taxpayers behavior and their ability to make long-range investment and business decisions. Arbitrary application of taxes also creates unpredictability, making it more difficult for taxpayers to comply with tax laws. Neutrality The primary purpose of a tax should be to collect revenue. Market distortions should be minimized or avoided altogether. Tax neutrality ensures that policymakers are not discriminating against certain industries, activities or products. Stability Governments should strive toward a revenue and spending system that is balanced and not prone to unpredictable fluctuations. Volatile revenue and expenditures result in less certainty for taxpayers and government programs, and often produce budgetary deficits. Equity and Fairness Equity generally is measured by a taxpayer s ability to pay a particular tax. Tax fairness can be evaluated by horizontal equity (comparing tax burdens of taxpayers in similar circumstances) and vertical equity (the distribution of tax burdens for taxpayers in different circumstances). Transparency Taxpayers should understand how taxes are assessed and collected. Taxpayers should be able to identify the tax associated with a purchase or transaction. Open government meetings also are important, so taxpayers can be part of the legislative and regulatory processes. Chapter One: Principles of Sound Tax Policy 1

10 Principles of Sound Tax Policy Simplicity Layer upon layer of taxes, multiple tax forms and intricate filing requirements make a tax structure complex, and compliance difficult. Simplified tax systems reduce the cost of compliance for taxpayers, and reduce the need for enforcement tools for government. Taxpayers who do business in multiple jurisdictions often face major burdens complying with complex reporting requirements. State governments can reduce the complexity by developing more uniform state and local tax policies that complement each other. Broad Bases and Low Rates A revenue structure with broad bases and low rates can help mitigate volatility. Low rates minimize the impact of the tax on taxpayers behavior, and improve economic competitiveness. However, in some cases, narrowing a tax base through exemptions or other tax policies may improve the equity or neutrality of a tax. Sufficient Revenue A stable tax structure should be able to generate a revenue stream to support effective and efficient government. In instances where revenue is insufficient to support existing programs, fiscal policies should be restructured in a manner that does not require policymakers to make frequent spending cuts or tax increases. Complementary Tax Bases A tax structure should address the relationships between state and local governments. State government can limit or expand taxing authority for local government. State policymakers must understand the division of power between state and local governments with regard to developing sound tax policy. Local taxes should be uniform in their application and collection, with similar bases. Taxes levied at the state and local levels of government should share similar bases and application to the greatest extent possible. No Retroactivity There should be no retroactive tax increases. Taxpayers need to be aware of their potential tax liabilities. Retroactive taxes can create financial hardship for taxpayers, and hinder investment planning, savings and economic growth by introducing changes that were not accounted for in taxpayers budgets or planning. 2 CALIFORNIA TAX FACTS

11 Chapter 2 California s Tax Structure I n 2010, voters clarified the definition of state and local taxes by approving Proposition 26, building upon prior legal interpretations of taxes under Proposition 13 and Proposition 218. To increase an existing tax or impose a new tax, a two-thirds vote of the Legislature is required for state taxes. At the local level of government, a vote of the electorate is required to impose a tax. Local taxes earmarked for a specific government program require a two-thirds vote of the electorate. Local taxes that are not earmarked require approval by the majority of the electorate. Under Proposition 26, a tax is any charge, exaction and other levy, with some exceptions (as seen on the following page). Three types of impositions are identified by Proposition 26: Asilomar State Beach, Pacific Grove Levy. Includes any tax increase or new tax. Also includes repeal of an existing exemption, deduction, exclusion or credit that results in a taxpayer paying a higher tax. Charge. A monetary demand imposed on an individual or entity for a service, an intangible benefit, or a product provided to the payer for the charge. A charge will not necessarily be compulsory, since not all individuals or entities desire or need a particular service, benefit or product. Exaction. A monetary demand by the government, with no benefit to the payer. An exaction is more forceful than a 3 levy or charge.

12 What Is a State Tax Under Prop. 26? To determine if a state statute contains a tax, follow the flowchart below. Could the proposal result in any individual or entity paying a higher levy, charge or exaction? No Yes What does the proposal include: a levy, a charge or an exaction? Levy or Exaction Charge Can the government demonstrate by a preponderance of the evidence that the charge: 1) is no more than necessary to cover the reasonable costs of the governmental activity; and 2) bears a reasonable relationship to the payer s burden on, or benefits received from, the governmental activity? NOT A TAX Answer the following questions with yes or no. Some questions may not be applicable. Is the charge intended to provide a specific benefit to those who pay? Is the charge for a specific government service or product, requested by the payer and not enjoyed by anyone who does not pay the charge? Is the charge for a regulatory purpose and limited to the cost incidental to issuing licenses and permits, performing investigations, inspections and audits, or enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof? Is the charge for a user-related cost, such as admission for entrance to or use of a state or local government property, or the purchase or lease of government property? Is the charge related to a violation of law, such as a penalty, fine or other reasonable monetary charge imposed by the judicial branch of government or the state? Excluding the questions that were not applicable, did you answer yes to ALL of these questions? Yes No Yes No TAX Requires a 2/3 vote of the Legislature 4 CALIFORNIA TAX FACTS

13 What Is a Local Tax Under Prop. 26? To determine if a local levy is a tax, follow the flowchart below. Does the proposal include a levy, charge or exaction of any kind? No Yes Answer the following questions with yes or no. Some questions may not be applicable. Is the charge intended to provide a specific benefit to those who pay? Is the charge for a specific government service or product, requested by the payer and not enjoyed by anyone who does not pay the charge? Is the charge for a regulatory purpose and limited to the cost incidental to issuing licenses and permits, performing investigations, inspections and audits, or enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof? Is the charge for a user-related cost, such as admission for entrance to or use of a state or local government property, or the purchase or lease of government property? Is the charge related to a violation of law, such as a penalty, fine or other reasonable monetary charge imposed by the judicial branch of government or the state? Is the charge part of a property development agreement, imposed as a condition of development? Excluding the questions that were not applicable, did you answer yes to ALL of these questions? What does the proposal include: a levy; a charge; an exaction; or a property-related assessment or benefit assessment that follows the provisions of Prop. 218? * Charge Can the government demonstrate by a preponderance of the evidence that the charge is reasonable? Yes No Levy or Exaction Prop. 218 assessment * Requires voter approval follow Proposition 218* TAX Requires a 2/3 vote of the public NOT A TAX Yes No Does the proposal raise funds for a general or special purpose? Special General TAX Requires a majority vote of the public * Proposition 218, approved by voters in 1996, requires local governments to obtain voter approval prior to increasing or imposing a new property-related assessment. Chapter Two: California s Tax Structure 5

14 California s Budget Historically, volatility has been a challenge for California s general fund budget. $105 Billion General Fund Budget $100 Billion $95 Billion $90 Billion $85 Billion $80 Billion $75 Billion $70 Billion Fiscal Year Revenue Expenditures Source: Legislative Analyst s Office. California s Budget California s state budget relies heavily on the personal income tax. Data shows that approximately 46 percent of California s total revenue came from the personal income tax (see page 8). Because revenue from this tax is volatile, this has created a number of budget challenges for the state, as seen in the chart above. The base of California s personal income tax is quite small. The wealthiest 5 percent of Californians pay about 70 percent of the personal income tax (see page 12). This means that the state government s fiscal outlook depends on a relatively small number of the state s top income earners taxpayers whose income is largely tied to capital gains in the stock market and other investments, and therefore may vary greatly from year to year. Capital gains, which are taxed at the same rate as other taxable income, have fluctuated significantly (see page 7). According to the Franchise Tax Board, net capital gains match the booms and busts of California s economy. For example, FTB figures show that Californians reported gross capital gains of $130.7 billion in 2007, but by 2008, they reported losses of $3.7 billion, reflecting the collapse of the housing market. General fund revenue significantly declined from $102.5 billion in to $82.7 billion in CALIFORNIA TAX FACTS

15 Volatility of Capital Gains Capital gains and losses fluctuate with the economy creating significant cyclical swings in personal income tax revenue. The chart below shows the net gains and losses reported by personal income taxpayers. $140 Billion $120 Billion $100 Billion $80 Billion Net Capital Gains $60 Billion $40 Billion $20 Billion $0 -$20 Billion Tax Year Source: Franchise Tax Board. Chapter Two: California s Tax Structure 7

16 Major Taxes and Fees in California General fund and special fund budget revenue comes from a number of sources. Below are the key sources of state tax revenue for fiscal year Sales and Use Tax, $34.9 Billion, 23.9% Investment Income, Unclaimed Property and Other Funds, $19.8 Billion, 13.5% Alcohol Tax, $351 Million, 0.2% Cigarette and Tobacco Tax, $812 Million, 0.6% 3.8% Insurance Gross Premium Tax, $2.3 Billion, 1.6% Personal Income Tax, $68 Billion, 46.5% Source: Legislative Analyst s Office. Corporate Franchise and Income Tax, $8.1 Billion, 5.5% Motor Vehicle Fuel Tax, $6 Billion, Motor Vehicle 4.1% Registration Fee, $4 Billion, 2.7% Motor Vehicle License Fee (Car Tax), $2.1 Billion, 1.4% 8 CALIFORNIA TAX FACTS

17 Where Do Our Tax Dollars Go? In fiscal year , general and special fund expenditures totaled $140.2 billion. Corrections and Rehabilitation, $11.5 Billion, 8.2% Natural Resources, $3.7 Billion, 2.6% Government Operations, $967.8 Million, 0.7% Labor and Workforce Development, $750.7 Million, 0.5% Environmental Protection, $2.6 Billion, 1.8% Business, Consumer Services and Housing, $1.4 Billion, 1.0% Transportation, $8.2 Billion, 5.9% General Government, $6.5 Billion, 4.7% Health and Human Services, $45 Billion, 32.1% Legislative, Judicial, and Executive, $5.3 Billion, 3.8% K-12 Education, $43 Billion, 30.6% Source: Legislative Analyst s Office. Higher Education, $11.4 Billion, 8.1% Chapter Two: California s Tax Structure 9

18 Chapter 3 Personal Income Tax C alifornia first imposed a personal income tax in At that time, the base of the tax generally conformed to federal tax laws, but with some key differences, including personal and dependent exemptions that were different from federal law. Thus, from the tax s inception, California adopted a policy of selective conformity. Today, the personal income tax is the state government s largest source of revenue, generating $68 billion annually. How the Tax Works California s personal income tax is levied on residents and nonresidents. Sole proprietorships, partnerships, estates, trusts and certain Subchapter S corporations also must comply with personal income tax law. For residents, the tax is applied to worldwide income, including, but not limited to, wages, salaries, interest, dividends, business income and capital gains. For nonresidents, the tax is applied to sources of income derived from California (California-source income). Taxpayers utilize an index to calculate their personal income tax liability. An index is used to avoid increasing taxes on taxpayers whose taxable income rises due to inflation. Personal income taxes are withheld from a taxpayer s pay based on the employee s withholding allowance Form W-4 or DE-4. State and federal law require employers to withhold from employee s TAX wages. While the personal income tax is CALIFORNIA FACTS 10 an Joshua Tree National Park

19 administered by the Franchise Tax Board, withholding is administered by the Employment Development Department. Personal income tax appeals are heard by the State Board of Equalization. A taxpayer who loses an appeal may take the matter to court, but, in most cases, must pay the tax that is in dispute before initiating litigation (a requirement described by tax administrators as a pay to play provision). Taxpayers subject to California s personal income tax first must compute their federal adjusted gross income. Federal AGI is a taxpayer s total gross income, reduced by allowable deductions, such as alimony, trade or business expenses, and deductible contributions to an IRA. Taxpayers then subtract any itemized deductions (such as home mortgage interest and charitable contributions) or the standard deduction from their AGI to determine their taxable income. Taxpayers then may subtract from their tax liability any credits, such as the dependent exemption credit and the renter s credit. Due to the lack of federal tax conformity (discussed below), differences exist between federal and state income and deduction determinations and credits. California voters have approved various changes to the tax, adding certain provisions, as well as surcharges. Passage of Proposition 30 in 2012 added three additional brackets, bringing the top tax rate to 13.3 percent (which includes a mental health surcharge approved in 2004). Proposition 30 sunsets in California s personal income tax return has the same due date as the federal tax return (April 15 for calendar-year filers), and similar penalties apply for late returns and payments. Federal Tax Conformity There are two conformity methods used throughout the United States: automatic conformity with federal law and selective conformity (the current policy used in California). Some states don t conform at all, but use a totally separate, different state income tax (such as a flat tax). Under the selective conformity method, California law does not automatically conform to changes to federal tax law, except under specified circumstances. Instead, the California Legislature and governor must affirmatively conform to federal changes. Despite the many changes that Congress makes to federal tax law every year, California lets years go by without a conformity bill. Currently, for example, California generally conforms to federal income tax laws as they read on January 1, 2009, for taxable years beginning on or after January 1, Policy Considerations The progressive nature of the personal income tax reflects the ability-to-pay theory. The tax achieves equity by distributing the tax burden to those who can best afford to pay the tax. The most significant problem with the personal income tax is that the revenue obtained from the tax is unstable. The cyclical nature of the economy creates a volatile revenue stream. When markets perform well, PIT revenue increases. When economic growth slows or the economy enters a recession, revenue decreases. Volatility of the PIT, and revenue obtained from capital gains in particular, adds to the volatility of the state budget. Recent changes to the state s rainy day fund may mitigate some of this volatility. Under Proposition 2 of 2014, revenue from capital gains in excess of a certain amount may be deposited into the state s reserve account (some conditions apply). Other challenges arise in the areas of transparency and simplicity. The personal income tax is a complex tax. Nonconformity to federal tax laws adds to the complexity, and taxpayers have to grapple with many differences between state and federal tax provisions. Chapter Three: Personal Income Tax 11

20 Who Pays the Personal Income Tax? Since the 1990s, the share of the personal income tax paid by the top 5 percent of income earners has increased. In fiscal year , the top 5 percent paid 70 percent of the personal income tax. Income Distribution Among PIT Filers for Fiscal Year % 70% Top 5% of Resident Returns All Other Resident Returns Concentration of Resident Returns 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: Franchise Tax Board. Chart Title Tax Year 12 CALIFORNIA TAX FACTS

21 The Tax on Millionaires In 2004, voters approved Proposition 63, which added a 1 percent surcharge to the personal income tax for filers with a taxable income of $1 million or more (regardless of filing status). The surcharge, which is earmarked to mental health programs, generated $1.5 billion in tax year $1.8 Billion $1.6 Billion $1.4 Billion $1.2 Billion Proposition 63 Revenue $1 Billion $800 Million $600 Million $400 Million $200 Million $0 Source: Franchise Tax Board Tax Year Chapter Three: Personal Income Tax 13

22 Personal Income Tax Revenue Personal income tax revenue (which includes taxes on capital gains) has fluctuated with changes in the economy. Revenue plunged during both the 2000 dot-com bust and the housing market crash in In fiscal year , the tax totaled $67.98 billion. $75 $65 Personal Income Tax Revenue (in Billions) $55 $45 $35 $25 $ Source: Legislative Analyst s Office. 14 CALIFORNIA TAX FACTS

23 2014 Personal Income Tax Rates* Taxpayers filing personal income tax returns can calculate their 2014 liability from the chart below. Filing Status Single or Married Filing Separately Married Filing Jointly and Qualifying Widow(er) Head of Household If the Taxable Income Is Over But Not Over Tax Is Of amount over $ 0 $ 7,749 $ 0 + 1% $ 0 $ 7,749 $ 18,371 $ % $ 7,749 $ 18,371 $ 28,995 $ % $ 18,371 $ 28,995 $ 40,250 $ % $ 28,995 $ 40,250 $ 50,869 $ 1, % $ 40,250 $ 50,869 $ 259,844 $ 2, % $ 50,869 $ 259,844 $ 311,812 $ 21, % $ 259,844 $ 311,812 $ 519,687 $ 27, % $ 311,812 $ 519,687 and over $ 50, % $ 519,687 $ 0 $ 15,498 $ 0 + 1% $ 0 $ 15,498 $ 36,742 $ % $ 15,498 $ 36,742 $ 57,990 $ % $ 36,742 $ 57,990 $ 80,500 $ 1, % $ 57,990 $ 80,500 $ 101,738 $ 2, % $ 80,500 $ 101,738 $ 519,688 $ 4, % $ 101,738 $ 519,688 $ 623,624 $ 43, % $ 519,688 $ 623,624 $ 1,039,374 $ 54, % $ 623,624 $ 1,039,374 and over $ 101, % $ 1,039,374 $ 0 $ 15,508 $ 0 + 1% $ 0 $ 15,508 $ 36,743 $ % $ 15,508 $ 36,743 $ 47,366 $ % $ 36,743 $ 47,366 $ 58,621 $ 1, % $ 47,366 $ 58,621 $ 69,242 $ 1, % $ 58,621 $ 69,242 $ 353,387 $ 2, % $ 69,242 $ 353,387 $ 424,065 $ 28, % $ 353,387 $ 424,065 $ 706,774 $ 36, % $ 424,065 $ 706,774 and over $ 68, % $ 706,774 *Taxable income in excess of $1 million is also subject to a 1 percent surcharge, regardless of filing status. Source: Franchise Tax Board. Chapter Three: Personal Income Tax 15

24 How the Income Tax Affects Taxpayers Californian s personal income tax liability can differ greatly depending on income and filing status. California Tax Liability Carla Dick & Carol Larry Ron & Betty Kirk Single Married Filing Jointly Head of Household Married Filing Jointly Single Taxable Income $75,000 $75,000 $75,000 $2,500,000 $2,500, California Tax Rate California Income Tax Liability Mental Health Surcharge 9.3% 6% 9.3% 12.3% 12.3% $4,484 $2,450 $3,065 $280,691 $294,095 $0 $0 $0 $15,000 $15,000 Total Tax $4,484 $2,450 $3,065 $295,691 $309,095 Source: Franchise Tax Board, based on California Tax Foundation calculations. 16 CALIFORNIA TAX FACTS

25 Chapter 4 Corporate Franchise and Income Tax C alifornia s corporate franchise and income tax is levied on a corporation s net revenue. Subchapter C and S corporations, financial institutions and other business entities subject to California s Corporation Tax Law that earn income from sources in California are subject to the tax. Nonprofit organizations, such as churches and charitable groups, generally are exempt from the tax, and insurance companies are subject to the gross premiums tax in lieu of this tax. Most multistate taxpayers are required to determine tax liabilities by utilizing the single sales factor apportionment formula. The tax is administered by the Franchise Tax Board. Franchise Tax vs. Income Tax The corporate franchise tax is imposed on all corporations (including limited liability companies electing to be taxed as corporations) that are: incorporated or organized in California; qualified or registered to do business in California; or doing business in California, whether or not incorporated, organized, qualified or registered under California law. There is a minimum franchise tax of $800 that must be paid annually by these entities. The corporate income tax is imposed on all corporations (including limited liability companies electing to be taxed as corporations) that derive income from sources within California, but are not doing business in California. 17 World War II Home Front National Park, Richmond

26 2014 Corporate Tax Rates Entity Type Corporations (Excluding Banks and Financial Institutions) Banks and Financial Institutions Tax Rate 8.84% ($800 minimum tax for franchise taxpayers only) 10.84% Alternative Minimum Tax 6.65% S Corporations (Excluding Banks and Financial Institutions) S Corporations (Banks and Financial Institutions) Source: Franchise Tax Board. 1.50% ($800 minimum tax for franchise taxpayers only) 3.50% Apportionment and Combined Reporting Many of the disputes about California s corporate tax involve the issue of apportionment. Apportionment is the process by which business income is divided between taxing jurisdictions. The apportionment formula calculates the percentage of the property, payroll and sales of a unitary business that are attributable to California. The total business income of the unitary business is multiplied by this percentage to derive an estimate of the amount of business income apportioned to this state. Two or more corporations that are members of a commonly controlled group and engaged in a unitary business must file a combined report with the FTB. Combined reports reflect a corporation s income from California sources when the corporation is part of a unitary business that conducts business inside and outside California. California s water s-edge election was first available in the 1988 taxable year, and was enacted to address controversies relating to worldwide combination. The election allows taxpayers to limit California s taxation of activities conducted outside of the United States. Taxpayers making a water s-edge election may take into account in a combined report only the income or loss and apportionment factors of corporations that meet specified criteria. Prior to 1993, California followed the model Uniform Division of Income for Tax Purposes Act (UDITPA) formula, a three-factor formula that gave equal weight to the property, payroll and sales of the business. For the 1993 through 2010 taxable years, the apportionment formula was modified to double-weight the sales factor. However, taxpayers in extractive, agricultural, savings and loan, and bank and financial industries had to continue to use the three-factor formula. For the 2011 and 2012 taxable years, California 18 CALIFORNIA TAX FACTS

27 allowed an apportioning trade or business to make an annual, irrevocable election to use a single sales factor (see page 21). Again, taxpayers in extractive, agricultural, savings and loan, and bank and financial industries had to continue to use the three-factor formula. For sales of other-than-tangible personal property, taxpayers had to use market assignment (to the extent the purchaser of the service received the benefit of the services in California) for California sales factor purposes if they elected the single sales factor apportionment formula. For those who used the three-factor formula, those sales were assigned using the cost-of-performance method. Other changes came in 2012, when voters passed Proposition 39, making the single sales factor mandatory for most taxpayers, starting with the 2013 taxable year (extractive, agricultural, savings and loan, and bank and financial industries that derive more than 50 percent of their gross receipts from those activities must continue to use the three-factor formula). Proposition 39 also requires sales of other-than-tangible personal property to be assigned for sales factor purposes using market assignment for all taxpayers, with exceptions. Single Sales Factor Apportionment Calculation of the tax liability begins with determining how much of the business sales were in California. The sales factor reflects the market forces of where a business makes its sales throughout the year. Sales include all gross receipts from business transactions. The value of a sale generally includes the cost of state and federal excise taxes, any returns or exchanges, and various service charges or commissions. Federal Tax Conformity California law generally conforms to federal law as it read on January 1, 2009, under the Corporation Tax Law. However, California imposes an $800 annual minimum tax on many entities. As with the personal income tax, California selectively conforms to federal tax provisions, with exceptions. For an explanation of conformity, see Federal Tax Conformity under the Personal Income Tax section (page 11). Policy Considerations The basic principle behind business income apportionment is that California cannot tax income that is earned beyond its borders. The principle is based on Article I, Section 8 of the U.S. Constitution, which states that Congress has the sole power of regulating interstate and foreign commerce. The constitutional limitation on what each state can tax stems from problems experienced under the Articles of Confederation, including a lack of national control over trade and the economy. Limitations on state taxation first were delineated in Brown v. Maryland (1827) 25 US 419. In that case, Chief Justice John Marshall explained: The taxing power of the states must have some limits. It cannot reach and restrain the action of the national government within its proper sphere. The goal of California s apportionment formula is to fairly estimate how much of a business income was earned in the state. Chapter Four: Corporate Franchise and Income Tax 19

28 Corporate Tax Revenue The corporate franchise and income tax generated $8.1 billion in revenue in fiscal year $14 $13 $12 $11 Revenue (in Billions) $10 $9 $8 $7 $6 $5 $ Fiscal Year Source: Legislative Analyst s Office. 20 CALIFORNIA TAX FACTS

29 Single Sales Factor Apportionment Under the single sales factor formula, businesses income or franchise tax liabilities are calculated by multiplying the percentage of sales they have in California by the net income. To determine the percentage of service-related sales (or sales of other-than-tangible personal property) in California, market-based sourcing is used with the single sales factor apportionment method. Once a total is calculated, it is multiplied by the corporate tax rate to determine how much tax is owed. Proposition 39 of 2012 requires most California businesses to calculate their corporate tax liability using the single sales factor apportionment formula. x x = Tax Liability PERCENTAGE OF SALES IN CALIFORNIA WATER S-EDGE OR GLOBAL BUSINESS INCOME CALIFORNIA CORPORATE TAX RATE Chapter Four: Corporate Franchise and Income Tax 21

30 Chapter 5 Property Tax I n California, locally elected officials may impose a property tax based on values determined by county assessors and the State Board of Equalization. Property tax rates and values are limited by the California Constitution. California s Constitution requires property to be taxed in an equal and uniform manner. In 1879, the State Board of Equalization, was established to provide intercounty equalization as well as to value specified properties. The property tax was the state s primary source of revenue until 1910, when the state relinquished the tax to local government. In response to increasing property taxes during the 1960s and 1970s, California voters approved Proposition 13, known as the People s Initiative to Limit Property Taxation, in Despite Proposition 13 s tax limitations, the assessed value of property has continued to rise since In addition to property taxes, local governments also impose parcel taxes and other property-related charges. How the Tax Works California s property tax consists of locally assessed property and state-assessed property. Most real property in California subject to the property tax is taxed locally, under Proposition 13. The property tax is determined by multiplying the property 22 CALIFORNIA TAX FACTS tax rate of 1 percent by the assessed value. Counties Northridge

31 Assessed Property Values* In fiscal year , locally assessed property subject to Proposition 13 had an assessed value of $4.51 trillion. After several years of decline, property values began to recover in $4.55 $4.50 Assessed Values (in Trillions) $4.45 $4.40 $4.35 $4.30 $4.25 $ *The chart reflects the value of locally assessed property subject to Proposition 13, with the exception of tax-exempt property owned by schools, hospitals, veterans groups, churches and others. Source: State Board of Equalization. may exceed the 1 percent limit if local voters have approved any specified indebtedness (bonds). Property taxes then are allocated by statute through a complex formula. Proposition 13 limits the value for locally assessed real property to the lower of the property s market value or acquisition value (or purchase price indexed for inflation not to exceed 2 percent). Specified changes in ownership of a property will trigger a new market-value assessment. If a property owner adds new construction (such as an additional bedroom), the assessed value will increase. Locally assessed properties under Proposition 13 include most residential, commercial, industrial, agricultural, open space, timberland, and vacant land. Certain properties may be exempt from the property tax, such as government property and property used for religious or charitable purposes. Household personal property also is exempt (but business property, including office furniture, computers, etc., is subject to property tax). Locally assessed personal property that is subject to tax also is assessed at market value. Some properties are not assessed by locally elected assessors under Proposition 13, but instead by the State Board of Equalization. Properties assessed by the state (known as state assessees ) generally include railroad and Chapter Five: Property Tax 23

32 utility properties. Unlike locally assessed property, most state-assessed property is assessed at market value, and has limited exemptions. Determining Value When property must be reassessed, the value is determined for most property at its highest and best use using a comparative sales approach, a cost approach or an income approach. The highest and best use method requires an assessor to determine the most valuable use a property may have, even if that use is something other than the property s current use. This method, considered one of the most basic forms of appraisal, was one factor that led to escalating property taxes prior to passage of Proposition 13. The comparative sales method requires an assessor to review sales of comparable properties within a given region, and within a given timeframe, to determine the value of a property. While no two pieces of land or property are exactly the same, comparable properties can be used to determine a reasonable assessed value. However, in some cases there are no properties that truly are comparable to the one being assessed. The cost approach determines the value of a property by estimating what the replacement cost of the property would be. Reassessments Locally assessed property is reassessed when ownership changes or there is new construction. According to state law, a change in ownership occurs when a present interest in real property is transferred, when the beneficial use of a property is transferred, and when the property rights transferred are substantially equivalent in value to the fee interest (all tests must be met). A change in ownership also can be triggered when a person or legal entity gains control of more than 50 percent of an entity s ownership interests. Voters have approved a number of change-inownership exclusions. For example, when a parent or specified grandparent dies or transfers ownership of property to his or her children or grandchildren, the property is not reassessed. Assessment Limits California s property tax law specifies that for property that does not change ownership, the assessed value under Proposition 13 cannot increase more than 2 percent per year, except when decline-in-value assessments increase to their Proposition 13 limit or a new construction reassessment occurs. What Is New Construction? Project Removing orchard trees for replanting. Converting a residential garage into a living area. Converting a warehouse into office space. Replacing a roof. Reinforcing masonry to protect property from earthquakes. Source: State Board of Equalization. Outcome Not New Construction New Construction New Construction Not New Construction Not New Construction 24 CALIFORNIA TAX FACTS

33 Growth of Proposition 13 Assessments Since passage of Proposition 13, business property taxes have increased at a higher rate than homeowner property taxes. From through , the average annual growth of property taxes for business property was 7.34 percent, compared to 6.82 percent for homeowner property. Homeowner property is owner-occupied property used as a principal residence that receives the homeowners exemption, while business property includes business and investment property, and other nonhomeowner-occupied property subject to Proposition 13 assessment limits. Homeowner Property 6.82% Business Property 7.34% Source: State Board of Equalization. Under Proposition 8 of 1978, properties assessed under Proposition 13 may obtain a temporary reduction in assessed value. A decline-in-value assessment occurs when the market value is less than the property s assessed value on January 1 (the lien date). Once a decline-in-value assessment is applied, the property s value will be reviewed annually to determine if the value has returned to its earlier value. During the housing market crisis of the 2000s, many properties received decline-in-value assessments, as the market values were less than the properties purchase prices. When real property prices rise, Proposition 13 allows a maximum 2 percent annual increase in the property s taxable value (for inflation). This factored Proposition 13 value can also decline temporarily when real property prices drop. Under the new construction laws, reassessment is triggered if the construction results in any substantial addition to land or improvements including fixtures, any physical alteration of any improvement to a like-new condition, major rehabilitation (as specified) or substantial renovation or modernization. Splitting the Property Tax Roll When all properties are not assessed in a similar manner, or Chapter Five: Property Tax 25

34 are not subject to the same tax rate, this is called a split roll. Since passage of Proposition 13, opponents of the measure have advocated for split-roll assessments, claiming that business property does not change ownership as often as homeowner property, and therefore is undertaxed. When analyzing the property tax burden on homeowner and business property under Proposition 13, it is important to understand the differences between these properties. Property owned by individuals who claim the homeowners exemption (available only for a home used as a principal place of residence) is considered homeowner-occupied property. All other property under Proposition 13 is considered nonhomeowner property, or business property. This is because apartments, duplexes, single-family residential rentals, and other business properties are used for business or investment purposes. Data from the State Board of Equalization from through shows that taxes have increased faster on non-homeowner property subject to Proposition 13 than on homeowner-occupied property. Parcel Taxes Proposition 13 authorizes cities, counties and special districts to impose special taxes on real property, but bans any new ad valorem property taxes (taxes based on the value of the property). The courts have determined that parcel taxes are legal because they are imposed on a per-parcel basis, rather than a value basis. A California Tax Foundation survey of local governments found that property owners paid more than $1.9 billion in parcel taxes in fiscal year alone. For tax purposes, a parcel is a property or part of a property located in one revenue district (known as a tax rate area ). Some parcels are quite large, and others are quite small. Possessory interests are treated as separate parcels. A tax rate area is formed by the invisible boundaries of a school, hospital, fire, police or other special district, or a county or city. There are many crisscrossing lines of revenue districts, and California has thousands of tax rate areas. The most common parcel taxes are those imposed on a flat-rate basis and those applied to the square-footage of the property s land and/or improvements. Other types of parcel taxes may be based on a complex single-family equivalent or benefit unit calculation; or in rare cases, the number of habitable sleeping areas on a property, or the number of employees at a business. Parcel taxes must be approved by a two-thirds vote of the voters in the tax rate area. The election may be either a primary or general election, special election or special mail ballot election. Many parcel taxes do not include a sunset date, and often increase annually to adjust for inflation. Policy Considerations Determining the value of a property involves many factors that can contradict the sound tax principles of certainty and simplicity. While appraisal methods are accepted norms in real estate, appraisal involves making calculated decisions that may be arbitrary. Tax policy is best when taxpayers know that a tax will be applied in a predictable manner that does not create burdensome complexities. 26 CALIFORNIA TAX FACTS

35 Tax Burden for Proposition 13 Property Since passage of Proposition 13, the burden of the property tax has not shifted. Homeowners are the greatest beneficiaries of Proposition Assessment Period Assessment Period Business and Non-Homeowner- Occupied Property Subject to Proposition 13 Assessment Limits 58.16% Homeowner- Occupied Property 41.84% Business and Non-Homeowner- Occupied Property Subject to Proposition 13 Assessment Limits 61.85% Homeowner- Occupied Property 38.15% Note: Business property includes all non-homeowner-occupied property (including commercial, industrial and residential investment property) subject to Proposition 13 assessments. Source: State Board of Equalization. Chapter Five: Property Tax 27

36 Average Property Tax Rates While Proposition 13 caps the property tax rate at 1 percent of a property s assessed value, the rate may exceed this cap to pay off voter-approved bonds. 10 Counties With the Highest Property Tax Rates (Fiscal Year ) Alameda, 1.214% Santa Clara, 1.203% Los Angeles, 1.198% San Francisco, 1.170% Fresno, 1.166% San Benito, 1.155% Kern, 1.150% 1.8% or more % % % % % % % % Less than 1% Solano, 1.149% San Bernardino, 1.149% Contra Costa, 1.138% Source: State Board of Equalization. 28 CALIFORNIA TAX FACTS

37 What Is Homeowner Property? The homeowners exemption is an important indicator for measuring the property tax burden. California provides a homeowners exemption a $7,000 reduction in the taxable value of a home that may be claimed only by taxpayers who own and occupy a home in California as their principal residence. For purposes of measuring the property tax burden, the exemption is the most accurate available indicator of what property is homeowner property. In fiscal year , the homeowners exemption was claimed by 5,302,201 property owners. 5,600,000 Number of Homeowners Exemptions Claimed 5,500,000 5,400,000 5,300,000 5,200,000 5,100,000 5,000, Fiscal Year Source: State Board of Equalization. Chapter Five: Property Tax 29

38 Stability of Proposition 13 Assessments After reviewing California s tax structure, the Commission on the 21st Economy in 2010 noted that Proposition 13 s acquisition-value assessments have helped create the most stable of major state and local sources of revenue. 30% 20% Percentage Change From Prior Year 10% 0% -10% -20% -30% -40% Fiscal Year Property Tax Revenue Personal Income Tax Revenue Sources: State Board of Equalization and Legislative Analyst s Office. 30 CALIFORNIA TAX FACTS

39 How Property Taxes Fund Schools Formulas adopted by the state determine what percentage of property taxes goes to schools. Property taxes are allocated to California s local governments based on a formula set in state statute. The formula generally reflects the share of the property tax received by local governments prior to passage of Proposition 13. Because California has many local governments, changing the allocation formula has proven difficult over the years, leaving some local governments and school districts receiving more property tax revenue than others. The state equalizes funding for schools. In counties with more property tax revenue, schools receive less state aid, while schools in counties with less property tax revenue receive more state aid. 75%-100% 70%-74% 65%-69% 60%-64% 55%-59% 50%-54% 40%-49% 0-39% Counties With the Highest Percentage of Property Taxes Earmarked to Schools (Fiscal Year ) 77% Madera County Counties With the Lowest Percentage of Property Taxes Earmarked to Schools (Fiscal Year ) 34% Sierra County 75% Stanislaus County 31% City and County of San Francisco 71% Lassen County 26% Alpine County Source: State Board of Equalization. Chapter Five: Property Tax 31

40 California s Other Property Tax Parcel Taxes by Funding Purpose Infrastructure 26% Library Services 3% Park and Recreation 7% Note: Percentages have been rounded. Source: Piecing Together California s Parcel Taxes: An In-Depth Survey of Local Special Taxes on Property, California Tax Foundation, September What is a parcel tax? Parcel taxes are unique to California, and became popular after passage of Proposition 13. A parcel tax is a tax on parcels within a tax rate area that is approved by a two-thirds vote of the electorate to finance a city, county, school, fire district, or other local government. 32 CALIFORNIA TAX FACTS Public Safety 2% Health Care 15% Other 3% Fire Protection 5% Education 37% Emergency Medical Services 2% By the Numbers $1.9 Billion Amount that property owners paid in parcel taxes in fiscal year $270.7 Million The single largest parcel tax, in terms of cumulative cost to property owners, imposed in Los Angeles County at $ per square foot of building improvements to fund emergency medical care. 1,138 The number of parcel taxes identified in the California Tax Foundation s 2014 survey of cities, counties, school districts, fire districts, park districts and other local entities. 41% The percentage of the 1,138 parcel taxes identified in California that contain an effective date and are imposed without a sunset.

41 Chapter 6 Sales and Use Tax Fair Oaks Village, Fair Oaks The sales and use tax has been imposed since the mid- 1930s, and consists of three pieces: a statewide rate, a local rate, and an optional add-on rate that varies by local government. The state sales and use tax is administered and collected by the State Board of Equalization, which also hears appeals relating to the tax. Local sales and use taxes also are administered by the BOE, so long as local governments agree to certain uniformity standards. The Sales Tax The sales tax is imposed on retailers for the privilege of selling tangible personal property within California. The combined state and local sales and use tax rate is 7.5 percent. A number of cities, counties and special districts impose additional transactions and use taxes. The average combined state and local sales and use tax with local add-ons is 8.4 percent, with rates as high as 10 percent in some localities. Retailers are responsible for paying sales tax on tangible personal property sold in California. The sales tax is imposed on the retail sales price of property for sale, and if retailers miscalculate the tax, they are liable for underpaid taxes, plus penalties and interest. Retailers may seek reimbursement for the sales tax by passing the tax on to customers, if a customer agrees to pay the tax. It is presumed that a customer has agreed to pay the sales 33

42 tax owed by a retailer if a retailer separately lists the tax on the customer s receipt, or a sign is posted on the business premises stating that sales tax will apply to purchases. If a retailer collects excess sales tax from a customer, the retailer must return the amount to the customer or submit the excess to the BOE. All businesses and individuals that regularly sell tangible personal property must obtain a seller s permit from the BOE. A seller s permit can be obtained at no cost to the retailer. The Use Tax The use tax typically is imposed on consumers for purchases of tangible personal property from out-of-state retailers, for use in California. Generally, both the sales tax and the use tax have the same base and exemptions. Common consumer purchases subject to the use tax include purchases from out-of-state mail-order catalogs, Internet sites, and television shopping networks. Other activities subject to use tax include withdrawing taxable merchandise from a business inventory for personal use, and purchasing a vehicle, mobile home, watercraft or aircraft from a seller who doesn t have a seller s permit. In certain cases, the use tax may be imposed on retailers, if it is determined that an out-of-state retailer is engaged in business in California. Business activity in California is determined based on several factors, including whether a business has a sales office, warehouse, or sales staff in California; receives rental income for equipment in California; or has some other form of physical presence in the state. Sales and Use Tax Exemptions Tangible personal property exempt from the tax includes food, prescription drugs, and other specified tangible personal property. Beginning July 1, 2014, certain manufacturing and research-and-development equipment is exempt from the state portion of the sales and use tax through Policy Considerations There are many administrative issues with the sales and use tax, but it generally is a transparent tax that is a reliable and stable source of revenue. Problems associated with the tax include: the imposition of the tax is not understood by most taxpayers; business inputs are not exempt, which creates pyramiding; and the tax negatively impacts low-income taxpayers. Sales and use tax exemptions serve as an instrument to achieve equity and promote economic growth, but tax experts have urged policymakers to use exemptions judiciously. Taxpayers may find it difficult to ascertain what purchases are exempt from the sales and use tax if too many unnecessary exemptions are created. On the other hand, business purchases and purchases made by low-income taxpayers often are considered areas where exemptions are necessary. Excluding some purchases from the base of the tax improves the fairness of the sales tax. 34 CALIFORNIA TAX FACTS

43 Where Is the Highest Sales Tax? For rates effective October 1, 2014, the highest sales and use tax rate in California was 10 percent, imposed in the Los Angeles County cities of Pico Rivera, La Rivera and South Gate. Each city that imposes a sales and use tax at a rate higher than the county rate is identified below. 9% 8.75% 8.5% County Rates 8.225% to 8.25% 8% 7.5% to 7.625% City Rates 10% 9.5% to 9.875% 9.25% to 9.375% 8.875% to 9.125% 8.625% to 8.75% 8.375% to 8.5% 8.125% to 8.25% 7.875% to 8% 7.75% Note: Tax rates effective October 1, Source: State Board of Equalization. Chapter Six: Sales and Use Tax 35

44 2015 Sales and Use Tax Rates Tax How the Funds Are Allocated Rate Authority State Sales and Use Tax Bradley- Burns Local Sales Tax State General Fund % RTC 6051 and RTC 6201 State General Fund 0.25% RTC 6051 and RTC 6201 State Fiscal Recovery Fund 0.25% RTC 6051 and RTC 6201 Local Public Safety Fund 0.50% California Constitution Article XIII, 35 Local Revenue Fund (Health and Social Services) 0.50% RTC and RTC Local Revenue Fund (2011 Realignment) % RTC and RTC Education Protection Account 0.25% Proposition 30 (RTC 6001) Total State Sales and Use Tax Rate 6.5% County Transportation Budgets 0.25% RTC 7200 City/County General Operations 0.75% RTC 7200 Total Local Sales and Use Tax 1.00% City and County Transactions and Use Tax Imposed by cities, counties and special districts for general or special purposes. Rates vary by jurisdiction, but generally cannot exceed 2 percent. State law authorizes some jurisdictions to exceed the 2 percent cap for special purposes. Levies are in increments of percent. Rate Varies RTC 7285 Combined Minimum State and Local Sales and Use Tax Rate: 7.5% Average State and Local Sales and Use Tax Rate With Local Add-Ons:* 8.4% Source: Board of Equalization. *Percentage represents average local sales and use tax rates. 36 CALIFORNIA TAX FACTS

45 Sales and Use Tax Rates Total state and local tax rates effective October 1, ALAMEDA CO. 9.00% EL DORADO CO. 7.50% City of Lakeport 8.00% MENDOCINO CO % City of Albany 9.50% City of Placerville 8.00% LASSEN CO. 7.50% City of Fort Bragg 8.625% City of Hayward 9.50% City of South Lake Tahoe 8.00% LOS ANGELES CO. 9.00% City of Point Arena 8.125% City of San Leandro 9.25% FRESNO CO % City of Avalon 9.50% City of Ukiah 8.125% City of Union City 9.50% City of Huron 9.225% City of Commerce 9.50% City of Willits 8.125% ALPINE CO. 7.50% City of Reedley 8.725% City of Culver City 9.50% MERCED CO. 7.50% AMADOR CO. 8.00% City of Sanger 8.975% City of El Monte 9.50% City of Atwater 8.00% BUTTE CO. 7.50% City of Selma 8.725% City of Inglewood 9.50% City of Gustine 8.00% CALAVERAS CO. 7.50% GLENN CO. 7.50% City of La Mirada 10.00% City of Los Banos 8.00% COLUSA CO. 7.50% HUMBOLDT CO. 7.50% City of Pico Rivera 10.00% City of Merced 8.00% City of Williams 8.00% City of Arcata 8.25% City of San Fernando 9.50% MODOC CO. 7.50% CONTRA COSTA CO. 8.50% City of Eureka 8.25% City of Santa Monica 9.50% MONO CO. 7.50% City of Antioch 9.00% City of Trinidad 8.25% City of South El Monte 9.50% Town of Mammoth Lakes 8.00% City of Concord 9.00% IMPERIAL CO. 8.00% City of South Gate 10.00% MONTEREY CO. 7.50% City of El Cerrito 9.50% City of Calexico 8.50% MADERA CO. 8.00% City of Carmel-by-the-Sea 8.50% City of Hercules 9.00% INYO CO. 8.00% MARIN CO. 8.50% City of Del Rey Oaks 8.50% Town of Moraga 9.50% KERN CO. 7.50% Town of Corte Madera 9.00% City of Greenfield 8.50% City of Orinda 9.00% City of Arvin 8.50% Town of Fairfax 9.00% City of Marina 8.50% City of Pinole 9.00% City of Delano 8.50% City of Larkspur 9.00% City of Pacific Grove 8.50% City of Pittsburg 9.00% City of Ridgecrest 8.25% City of Novato 9.00% City of Salinas 8.00% City of Richmond 9.00% KINGS CO. 7.50% Town of San Anselmo 9.00% City of Sand City 8.00% City of San Pablo 9.25% LAKE CO. 7.50% City of San Rafael 9.25% City of Seaside 8.50% DEL NORTE CO. 7.50% City of Clearlake 8.00% MARIPOSA CO. 8.00% City of Soledad 8.50% Note: For more detailed information, refer to Source: State Board of Equalization. Chapter Six: Sales and Use Tax 37

46 Sales and Use Tax Rates Total state and local tax rates effective October 1, NAPA CO. 8.00% City of La Mesa 8.75% SANTA CRUZ CO. 8.25% City of Ceres 8.125% NEVADA CO % City of National City 9.00% City of Capitola 8.75% City of Oakdale 8.125% City of Grass Valley 8.125% City of Vista 8.50% City of Santa Cruz 8.75% SUTTER CO. 7.50% City of Nevada City 8.50% SAN FRANCISCO CO. 8.75% City of Scotts Valley 8.75% TEHAMA CO. 7.50% Town of Truckee 8.375% SAN JOAQUIN CO. 8.00% City of Watsonville 9.00% TRINITY CO. 7.50% ORANGE CO. 8.00% City of Lathrop 9.00% SHASTA CO. 7.50% TULARE CO. 8.00% City of La Habra 8.50% City of Manteca 8.50% City of Anderson 8.00% City of Dinuba 8.75% PLACER CO. 7.50% City of Stockton 9.00% SIERRA CO. 7.50% City of Farmersville 8.50% PLUMAS CO. 7.50% City of Tracy 8.50% SISKIYOU CO. 7.50% City of Porterville 8.50% RIVERSIDE CO. 8.00% SAN LUIS OBISPO CO. 7.50% City of Mount Shasta 7.75% City of Tulare 8.50% City of Cathedral City 9.00% City of Arroyo Grande 8.00% SOLANO CO % City of Visalia 8.25% City of Palm Springs 9.00% City of Grover Beach 8.00% City of Fairfield 8.625% TUOLUMNE CO. 7.50% SACRAMENTO CO. 8.00% City of Morro Bay 8.00% City of Rio Vista 8.375% City of Sonora 8.00% City of Galt 8.50% City of Paso Robles 8.00% City of Vacaville 7.875% VENTURA CO. 7.50% City of Sacramento 8.50% City of Pismo Beach 8.00% City of Vallejo 8.625% City of Oxnard 8.00% SAN BENITO CO. 7.50% City of San Luis Obispo 8.00% SONOMA CO. 8.25% City of Port Hueneme 8.00% City of Hollister 8.50% SAN MATEO CO. 9.00% City of Cotati 9.25% YOLO CO. 7.50% City of San Juan Bautista 8.25% City of Half Moon Bay 9.50% City of Healdsburg 8.75% City of Davis 8.50% SAN BERNARDINO CO. 8.00% City of San Mateo 9.25% City of Rohnert Park 8.75% City of West Sacramento 8.00% City of Montclair 8.25% SANTA BARBARA CO. 8.00% City of Santa Rosa 8.75% City of Woodland 8.25% City of San Bernardino 8.25% City of Santa Maria 8.25% City of Sebastopol 9.00% YUBA CO. 7.50% SAN DIEGO CO. 8.00% SANTA CLARA CO. 8.75% City of Sonoma 8.75% City of Wheatland 8.00% City of El Cajon 9.00% City of Campbell 9.00% STANISLAUS CO % Note: For more detailed information, refer to Source: State Board of Equalization. 38 CALIFORNIA TAX FACTS

47 What Generates Sales Tax Revenue? In 2013, the State Board of Equalization reported the following taxable transactions by NAICS 1 code: Specific Merchandise Stores 25% 20% 15% 10% 5% 0% Sporting Goods, Hobby, Book and Music Stores, 1.7% Home Furnishing Stores, 1.8% Health Care Stores, 1.9% Electronics and Appliance Stores, 2.5% Food/Beverage Stores, 4.3% Building Materials, Garden Equipment and Supplies, 5.5% Clothing and Clothing Accessories, 5.7% Specific Merchandise Stores, 23% Motor Vehicle and Parts Dealers, 12% Gasoline Stations, 10% All Other Outlets 35% 30% 25% 20% 15% 10% 5% 0% Other (Including Public Administration), 5.2% Other Services, 1.4% Information, 1.6% Construction, 1.9% Real Estate, 3.1% Manufacturing, 6.6% Wholesale Trade, 11.9% All Other Outlets, 31% Food Services and Drinking Places, 11% General Merchandise Stores, 10% Miscellaneous Stores (Florists, Office Supplies, and Others) 2, 3% Non-Store Retailers, 1% 1) The North American Industry Classification System (NAICS) was developed by the federal government for purposes of collecting data on the economy. 2) Miscellaneous Stores includes all businesses under the 453 NAICS codes, including florists, office supplies and used merchandise stores. Source: State Board of Equalization. Chapter Six: Sales and Use Tax 39

48 Chapter 7 Excise Taxes E xcise taxes are targeted taxes imposed on goods and services, often to influence behavior. In some cases, excise taxes are imposed to establish a user-benefit payment system, whereby the tax is imposed to provide a benefit to the taxpayer. Excise taxes may be paid at the point of retail or at the production or distribution stage by businesses, and eventually are passed on to consumers in the form of higher prices. Policy Considerations When used as a tool to change taxpayer behavior, excise taxes create market distortions. Taxes should seek to achieve neutrality by not discriminating against certain industries, activities or products. Economists believe that consumers benefit most when their decisions in the marketplace are unaffected by price distortions. Also, while an excise tax is designed to target consumption of a particular good or service, consumption often is not affected as policymakers intended instead, consumers reduce their consumption of other goods or services to offset higher prices in the marketplace, which negatively impacts a broad range of economic activity. Also, excise taxes often promote inequities for lower-income and middle-income taxpayers by consuming a larger share of these taxpayers income. 40 CALIFORNIA TAX FACTS Napa Valley

49 Alcohol Tax Revenue by Fiscal Year Revenue (in Millions) $365 $355 $345 $335 $325 $315 $305 $295 $285 $275 $ Fiscal Year Source: State Board of Equalization. Alcoholic beverages are taxed at different rates depending on the type of beverage. The State Board of Equalization administers the tax, while sales are regulated by the Department of Alcoholic Beverage Control. California s Per Capita Consumption Fiscal Year Annual Per Capita Consumption (in Gallons) Source: State Board of Equalization. Beer Wines Spirits Chapter Seven: Excise Taxes 41

50 2015 Alcohol Tax Rates Beer Hard Cider Sparkling Wine 1 Wine Distilled Spirits (100 Proof or less) Distilled Spirits (More than 100 Proof ) California Per- Gallon Tax California Per- Gallon Surcharge $0.04 $0.02 $0.30 $0.16 $0.18 Federal Tax $18 per barrel 2 $0.226 per wine gallon 2 State and Federal Tax Rate No Surcharge $3.40 per wine gallon for naturally sparkling wine $0.78 per gallon 2 $0.43 per gallon 2 $3.70 per gallon $0.01 (for wine with 14% or less alcohol) or $0.02 (for wine with more than 14% alcohol) $0.19 (for wine with 14% or less alcohol) or $0.18 (for wine with more than 14% alcohol) Per gallon rates by alcohol content: $1.07 (14% or less); $1.57 (over 14%-24%); $3.15 (over 21%-24%) $1.27 to $3.35 per gallon (depending on alcohol content) $2.00 $4.00 $1.30 $2.30 $13.50 per gallon 2 $13.50 per gallon, plus additional amounts depending on the alcohol content. 2 $16.80 per gallon 2 $20.10 per gallon 1 Includes champagne. 2 Reduced federal rates may apply, depending on a winery s output, or the wine and flavor content. Sources: State Board of Equalization and U.S. Department of the Treasury. 42 CALIFORNIA TAX FACTS

51 Fuel Taxes Taxes on motor vehicle fuels generally are paid by motorists, and revenue generated by the tax historically has been deposited into the Highway Users Account for funding transportation infrastructure. Fuel taxes are administered by the State Board of Equalization. California levies several major fuel taxes that motorists pay at the pump: Motor Vehicle Fuel Tax. The so-called gas tax is imposed on fuel distributors on a per-gallon basis. The tax is imposed on the removal of motor vehicle fuel from a terminal, if the fuel is removed at the rack. The tax also may be imposed on the removal of fuel from any refinery, or entry of fuel into the state for consumption, use or warehousing. Diesel Fuel Tax. This tax is imposed on fuel distributors for the sale and delivery of diesel fuel, and is collected quarterly. California s tax rate is automatically linked to the federal rate, so if the federal rate declines, California s rate increases to maintain an overall rate that does not change. Use Fuel Tax. Imposed on each gallon of fuel used. The tax generally is levied on alternative fuels, such as compressed natural gas, liquefied petroleum gas, and ethanol. Rates are adjusted if federal rates change, similar to the Diesel Fuel Tax. Effective July 1, 2010, a fuel tax swap took effect, lowering the sales and use tax rate on gasoline (excluding aviation fuel), while Revenue by Fiscal Year $6 Billion $5 Billion $4 Billion $3 Billion $2 Billion $1 Billion $ Source: State Board of Equalization. Gasoline Tax Revenue Diesel Fuel Tax Revenue raising the state excise tax on gasoline. 1 For diesel fuel, the swap increased the sales tax rate while lowering the rate of the excise tax, beginning July 1, In addition to taxes on gas and diesel fuel, California imposes taxes on jet fuel and household fuels. Other fees also are imposed for various environmental programs. 1 Assembly Bill X8-6 (Chapter 11, Statutes of 2010), Senate Bill 70 (Chapter 9, Statutes of 2010), and Assembly Bill 105 (Chapter 6, Statutes of 2011) Chapter Seven: Excise Taxes 43

52 Taxes Included in the Price of Gas For motor vehicle fuel priced at $3.00 per gallon, taxpayers pay approximately $0.63 in federal and state taxes and fees for each gallon purchased. State Fuel Tax, $0.36 per gallon Approximate Taxes and Fees on a Gallon of Gas $0.63 Remaining State Sales Tax on Gas After the Gas Tax Swap, 2.25% * Federal Fuel Tax, $0.184 per gallon Underground Storage Fee, $0.014 per gallon *Note: California partially exempts fuel from the sales and use tax under the state s gas tax swap (Chapter 11, Statutes of 2010; Chapter 9, Statutes of 2010; and Chapter 6, Statutes of 2011). Currently, motor vehicle fuel is subject to a state sales and use tax rate of 2.25 percent, plus applicable local sales and use tax rates. Beginning on July 1, 2010, the retail sale of motor vehicle fuel became partially exempt from the sales and use tax. For the period July 1, 2010 through June 30, 2011, the partial exemption was applied to 6 percent of the state sales and use tax. Subsequently, beginning on July 1, 2011, the state sales and use tax rate was reduced by 1 percent. The BOE notes that on July 1, 2011 the sales and use tax rate was reduced, but because the statewide rate decreased by 1 percent on this date, the retail sales on or after July 1, 2011, will still be subject to sales and use tax at the rate of 2.25 percent plus applicable district taxes. Other state policies, such as the cap-and-trade program, also increase the price of gas, but have not been included in the illustration above. Source: State Board of Equalization. 44 CALIFORNIA TAX FACTS

53 Insurance Tax California s insurance gross premiums tax has remained relatively stable. In fiscal year , the tax generated $2.29 billion. Insurance Gross Premiums Tax Revenue (In Billions) $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $ Source: Legislative Analyst s Office. The gross premiums tax has seen a number of voterapproved constitutional changes. Insurers generally are taxed at a rate of 2.35 percent of their gross premium income (see table on the right). Federally exempt pension and profitsharing plans are taxed on the gross amount of premiums sold to policyholders in California. The tax is in lieu of all other state and local taxes and licenses, except property taxes and motor vehicle fees. The tax is administered by the Department of Insurance, the State Board of Equalization, and the State Controller s Office. Tax Rate Authority Federally Exempt Pension and Profit- Sharing Plans 0.5% RTC Ocean Marine Insurers 5% RTC Surplus Line Insurers and Non- Admitted Insurers All Other Insurers 2.35% 3% RTC Source: California Constitution and California Revenue and Taxation Code. California Constitution Article XIII 28 Chapter Seven: Excise Taxes 45

54 Tobacco Taxes Excise taxes on tobacco products are used for the general fund and various special fund programs. Cigarette taxes and the other tobacco products surtax are paid by distributors through tax stamps. Each package of cigarettes contains a stamp affixed to the bottom that can be read by an electronic scanner. The purpose of the stamp is to indicate that taxes were paid. The tax is imposed on a percigarette basis, but the rate is commonly described in terms of how it impacts the cost of a pack of 20 cigarettes. Cigars, smoking tobacco, chewing tobacco, snuff, and other products consisting of 50 percent or more tobacco are subject to the other tobacco products surtax, which is set at a rate calculated annually by the State Board of Equalization. Cigarette taxes are a declining source of revenue, so government programs that obtain funding from cigarette taxes often are left with fewer dollars each year. When the tax on cigarettes is increased or a new surtax is imposed, a portion of the higher tax often is earmarked to provide a backfill or to offset revenue losses incurred by the new tax. As a result, when cigarette taxes are increased, a portion of the additional revenue is earmarked from the tax to older existing programs. The amount of a backfill payment is calculated by the BOE each year. Data from the BOE shows that since the tax first went into effect in fiscal year , consumption has fallen. In , Californians consumed cigarette packs per capita, and in fiscal year , they consumed 24.5 cigarette packs per capita. Product Rate Purpose Authority Cigarettes Other Tobacco Products Source: State Board of Equalization. $0.10 per pack Deposited into the state s general fund. AB 1172 of 1958 and SB 556 of 1965 (RTC 30101) $0.25 per pack Funds childhood tobacco use prevention, hospital services, medical research for tobacco-related diseases, environmental protection programs, and state and local park and recreational programs. Proposition 99 of 1988 (RTC 30121) $0.02 per pack Funds breast cancer research and treatment. AB 478 of 1993 (RTC 30101) $0.50 per pack Funds anti-tobacco education, and early childhood development programs. Total State Tax on Cigarettes: $0.87 per pack (add an additional $1.01 per pack for federal taxes) percent on the wholesale cost of the product. Deposited into the state s general fund. Rate is set annually by the BOE. Proposition 10 of 1998 (RTC 30131) RTC CALIFORNIA TAX FACTS

55 Tobacco Taxes Over the years, the cigarette tax has become a declining source of revenue. Cigarette Tax and Other Tobacco Products Surtax Revenue (in Millions) $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 Proposition 10 increased the cigarette tax from $0.37 per pack to $0.87 per pack, effective January 1, $ Fiscal Year Source: State Board of Equalization. Cigarette Tax Other Tobacco Products Surtax Chapter Seven: Excise Taxes 47

56 Vehicle Taxes California imposes several motor vehicle taxes and fees, including the vehicle license tax and the vehicle registration fee. The vehicle license tax is based upon the purchase price of the vehicle or the value of the vehicle when it was acquired, while the registration fee covers the costs of regulating motor vehicles. These and other levies for motorcycles and commercial vehicles are administered by the Department of Motor Vehicles (DMV). The vehicle license tax is due at the time a vehicle is registered with the DMV, and every year thereafter, for automobiles, commercial vehicles with a gross operating weight less than 10,001 pounds, motorcycles and trailer coaches. The tax is 0.65 percent of the vehicle s value, which decreases each year for the initial 11 years, based on a depreciation schedule. The vehicle registration fee is determined by the county in which the vehicle is registered, and is based on the type of vehicle. In 2010, voters approved Proposition 22, which prohibits the Legislature from making any change in the allocation formula of vehicle license tax revenue. Motor Vehicle Taxes and Charges Rate Authority California Highway Patrol Fee. Provides funding to the Highway Patrol. Cargo Theft Interdiction Program Fee. Funds California Highway Patrol activities to combat theft from commercial trucking. Motorcycle Safety Fee. Funds state program that promotes motorcycle safety programs throughout the state. Smog Abatement Fee. Vehicles six or fewer years old are exempt from smog requirements, and instead pay this annual levy. Vehicle License Tax. Funds primarily are transferred to local government. Vehicle Registration Fee. Funds the registering of a vehicle with the Department of Motor Vehicles. Abandoned Vehicle Tax. Local governments may impose this tax to fund abandoned vehicle clean-up programs. Requires voter approval. $23 annually when registering or renewing registration for a vehicle, or $39 per commercial vehicle with a gross weight of 10,001 lbs. or more. $3 annual fee paid by owners of vehicles that also are liable for weight fees. VC VC VC $2 annually upon initial registration and renewal of registration. VC 2935 $20 annually at the time of registration. HSC percent of the value of the vehicle. RTC RTC Varies depending on vehicle type and county of residence. VC 4000 $1 annual fee at the time of registration; $3 for commercial vehicles. VC Reflectorized License Plate Fee. Funds reflectorization of license plates. $1 fee imposed at the time new license plates are obtained. VC 4850 Commercial Vehicle Weight Fee. Funds transportation infrastructure and maintenance. Planned Non-Operation Fee. Covers costs of registering a nonoperational vehicle. Source: Department of Motor Vehicles. Rates effective December Annual fee based on a commercial vehicle s unladen weight, ranges from $332 to $2,064. VC 9400 $19 annually at the time of registering a vehicle. VC CALIFORNIA TAX FACTS

57 Chapter 8 Employment Taxes C alifornia imposes three types of employment taxes: Unemployment Insurance (UI) and the Employment Training Tax (ETT), both paid by employers; and State Disability Insurance (SDI) paid by employees. All three are administered by the Employment Development Department. How the Taxes Work The UI program is part of a national program administered by the U.S. Department of Labor under the Social Security Act. UI provides partial wage replacement to unemployed people looking for work. UI is paid by employers at an initial 3.4 percent rate, also known as the employer s contribution rate. This rate changes for the employer after three years. The rate then is adjusted based upon the condition of the employer s fund and the number of UI claims made by the employer s workers. ETT is an employer-paid tax that amounts to 0.1 percent of the first $7,000 in wages for each employee, each year. The maximum amount is $7 per employee. The tax is set by statute at 0.1 percent of the unemployment insurance taxable wages for employers with unemployment insurance reserves. SDI, funded by a deduction from employees wages, provides short-term insurance benefits to replace lost wages due to non-job-related illness, injury or pregnancy. SDI is paid by employees via income withholding at a rate that changes Computer Hardware, Silicon Valley 49

58 2015 Employment Tax Rates Employment taxes, as well as the personal income tax withholding program, are administered by the Employment Development Department. Tax Purpose Rate Authority Employment Training Tax Funds employee training in targeted industries. Employers pay 0.1% on the first $7,000 in wages paid to each employee, with a maximum tax of $7 per employee. UIC State Disability Insurance Tax Provides short-term benefits to eligible workers who suffer a loss of wages when they are unable to work due to a non-work-related illness or injury, or due to pregnancy or childbirth. Employees pay 0.9% on the first $104,378 of wages, for a maximum tax of $ UIC 984 Unemployment Insurance Provides partial wage replacement to unemployed Californians. For the first 2-3 years of business, employers pay 3.4% on the first $7,000 in wages paid to each employee. Thereafter, the rate may increase to as much as 6.2%, for a maximum tax of $434 per employee. UIC , UIC 982 Source: Employment Development Department. each year. SDI tax also provides paid family leave (PFL) benefits. PFL is a component of SDI and extends benefits to individuals unable to work because they need to care for a seriously ill family member, or bond with a new child. The SDI rate is set annually by the Legislature and governor. The SDI tax rate fluctuated between 0.5 percent and 1.18 percent from 1998 to The SDI rate for 2015 is 0.9 percent, and the maximum wage base is $104,378 (so the maximum employee withholding is $939.40). 50 CALIFORNIA TAX FACTS

59 Chapter 9 Other State and Local Levies In addition to the major taxes discussed in previous chapters, many other taxes, fees, charges, assessments and other levies are imposed by California and its more than 4,000 local governments. At the state level, approximately $19.8 billion comes from revenue sources other than those already discussed. These sources include unclaimed property, taxes on horse racing, and other minor revenue sources. At the local level, a number of levies, including the business license tax, the hotel tax, and the utility users tax, are key sources of revenue. Lake Tahoe 51

60 Business License Tax More than 450 cities require businesses to purchase an annual license for the privilege of doing business in the city. Certain county ordinances also require a license to be obtained at the county level if business is conducted within unincorporated areas. Doing business in a city or county without a license can result in penalties and legal action. Business license tax rates vary by jurisdiction, with some imposed at a flat rate, and others based on gross receipts, payroll and other factors. Business license taxes imposed by cities generated approximately $1 billion in fiscal year , the most recent year for which data exists. $1.15 Billion Business License Tax Revenue $1.1 Billion $1.05 Billion $1 Billion $950 Million $900 Million $850 Million $800 Million Fiscal Year Source: State Controller s Office. 52 CALIFORNIA TAX FACTS

61 Hotel Tax Hotel taxes imposed by cities and counties generated approximately $1.4 billion in fiscal year , the most recent year for which data exists. $1.6 Billion $1.4 Billion Hotel Tax Revenue $1.2 Billion $1 Billion $800 Million $600 Million $400 Million $200 Million $ * Fiscal Year County Revenue City Revenue *Note: The City of San Diego failed to submit data for fiscal year Source: State Controller s Office. Hotel taxes, also known as transient occupancy taxes, are imposed on occupants of rooms or living space at hotels, inns, rental tourist houses, homes, motels, camp sites, or other spaces at campgrounds or recreational vehicle parks. Under current law, a city or county may impose such a tax. Hotel taxes are charged if the stay lasts 31 days or less, and are based on the cost of the room. Owners of time-share units and members of co-owner campground sites are exempt from the tax. Authority to levy a hotel tax is outlined in Revenue and Taxation Code Section Chapter Nine: Other State and Local Levies 53

62 Utility Users Tax Utility users taxes imposed by cities and counties generated approximately $1.8 billion in fiscal year , the most recent year for which data exists. Utility Users Tax Revenue $2 Billion $1.8 Billion $1.6 Billion $1.4 Billion $1.2 Billion $1 Billion $800 Million $600 Million $400 Million $200 Million $ Fiscal Year Source: State Controller s Office. County Revenue City Revenue The utility users tax is imposed on many utility services, including, but not limited to, electricity, gas, water, sewer, telephone (including cell phones and longdistance calling), sanitation and cable television. A new, altered or expanded utility users tax requires voter approval a majority vote in most cases, or a two-thirds vote if it is a special tax with revenue earmarked for a specific purpose. The tax is levied at the city or county level, and is collected by the utility as part of its billing procedure and later remitted to the city or county. Many existing utility users taxes were adopted by local government prior to the early 1980s. Taxpayers initially thought utility users taxes may be illegal, since state law specifically says that a sales and use tax cannot be applied to gas, electricity or water services (RTC 6353). However, in 1971, the California Supreme Court ruled that these taxes are different than a sales and use tax and, therefore, the exemption does not apply (Rivera v. City of Fresno (1971) 6 Cal. 3d 132). 54 CALIFORNIA TAX FACTS

63 Other State Levies Levy Purpose Rate and Imposition Authority California Tire Fee Funds tire cleanup and recycling programs to reduce landfill disposal of used tires. $1.75 per tire paid by owners of motor vehicles and business equipment. PRC Cap-and-Trade Auction Funds statewide emission reduction programs, California s high-speed rail project, and programs benefitting disadvantaged communities. Allowance prices vary by auction period. HSC Childhood Lead Poisoning Prevention Fee Funds lead poisoning prevention programs to establish care standards for children at risk of lead poisoning. Tax on motor vehicle fuel, paint and lead releases paid by petroleum, paint and ambient air industries. Rate is reestablished each reporting cycle. HSC Electronic Waste Recycling Fee Funds the recycling of video display devices that contain hazardous materials. Imposed on retailers selling electronics with video displays: $6 for products more than 4 inches, but less than 15 inches. $8 for products at least 15 inches, but less than 25 inches. $10 for products 35 inches or more. PRC Emergency Telephone Users Surcharge Funds the operation of the state s system percent imposed on intrastate telecommunication services, paid by telephone users. RTC Energy Resources Surcharge Ongoing energy programs and projects. $ per kilowatt hour, paid by electricity consumers and utilities. RTC , and Chapter Nine: Other State and Local Levies 55

64 Other State Levies Levy Purpose Rate and Imposition Authority Fire Prevention Fee Funds fire prevention services provided by the California Department of Forestry and Fire Prevention to properties located in the State Responsibility Areas. For fiscal year , the fee was $ per habitable structure, defined as a building that can be occupied for residential use. Properties that pay a local fire protection tax may have their bill reduced to $ per habitable structure. State law requires the rate to be adjusted annually. PRC , and Hazardous Waste Environmental Fee Funds the collection, disposal and recycling of hazardous waste. Charged on use of materials that contain hazardous waste, and paid by any business that uses, generates, stores or conducts activities using hazardous waste. Up to $13,850, depending on the number of employees. HSC Hazardous Waste Generator Fee Funds the collection, disposal and recycling of hazardous waste. Up to $81,880, depending on generator size, paid by businesses producing hazardous waste of five tons or more. HSC , , and Hazardous Waste Disposal Fee Funds the collection, disposal and recycling of hazardous waste. Up to $253.98, depending on type of waste, paid by businesses that produce and dispose hazardous waste. HSC Hazardous Waste Facility Fee Funds the collection, disposal and recycling of hazardous waste. Varies by size of facility, type of permit, and type of hazardous waste. HSC , and Hazardous Waste Activity Fee Funds the collection, disposal and recycling of hazardous waste. Varies by size of facility and type of activity. Charge is applied to services provided by the Department of Toxic Substances Control and is paid by any business that requests services from the department. HSC 25153, , , and CALIFORNIA TAX FACTS

65 Other State Levies Levy Purpose Rate and Imposition Authority Hazardous Waste Integrated Waste Management Fee Funds the reduction, recycling and reusing of solid waste. Applied to disposal of solid waste at landfills by disposal facility operators. Fees for solid waste are $1.40 per ton, and for non-hazardous waste are $0.75 per ton. RTC 45001; PRC Horse Racing Levies Funds the state s general fund. 0.4 percent to 2 percent, depending on the type of horse racing, wagers, and the location where the wager is placed. California Constitution, Article IV, Section 19 Lumber Products Assessment Funds timber industry oversight. 1 percent of the sales price of lumber and engineered wood products, paid by consumers. PRC 4629 Marine Invasive Species Fee Funds the protection of state waters from non-indigenous aquatic species. $850 per marine vessel voyage, paid by owners or operators of marine vessels that arrive in California from outside the state. RTC and Natural Gas Surcharge Funds energy conservation and low-income assistance programs. Applies to natural gas, but rate varies by property type and location. Paid by utilities and utility customers. PUC Occupational Lead Poisoning Prevention Fee Funds lead poisoning prevention program. Paid by employers with a potential for occupational lead poisoning. Varies by number of employees and type of employer. HSC and Oil Recycling Fee Funds programs to encourage the recycling and reclamation of used oil and to reduce illegal disposal. Retailers, consumers and importers pay $0.16 per gallon for lubricating oil. PRC Water Rights Fee Funds programs relating to water quality improvement. Charged on permits to appropriate water, paid by water customers. Varies by project and permit. WC 1525, 1530, and Sources: State Board of Equalization and California Air Resources Board. Chapter Nine: Other State and Local Levies 57

66 Other Local Levies California s local governments obtain revenue from many different sources, as seen below. In fiscal year , cities alone generated more than $54 billion in tax and fee revenue Act Assessments 1982 Act Assessments Abandoned Vehicle Fee Abatement District Assessments Admissions Tax Airport Special Tax Ambulance/Paramedic Mello-Roos Tax Birth Certificate Fee Business Improvement District Assessment Business Gross Receipts Tax Card Room Tax Cemetery Special Tax Child Care Facility Special Tax Child Care Facility Insurance Special Tax Community College District Special Tax Community Service District Special Tax County Airport Special Tax County Service Area Special Tax Criminal Justice Services Mello-Roos Tax Death Certificate Fee Documentary Transfer Tax Drug Abuse/Crime Prevention Tax Fire Protection and Prevention Special Tax Flood and Storm Water Special Tax Tax Geological Hazard Abatement District Assessment Graffiti Prevention Tax Harbor Improvement or Development Special Tax Hazardous Substance Cleanup Services Special Tax Health Care Special Tax Hospital Special Tax Library Contract Special Tax Library Facility and Services Special Tax Library Facility and Services Mello-Roos Tax Lighting and Landscaping Assessment Lighting Mello-Roos Tax Marijuana Tax Marriage License Fee Marks-Roos Bond Act Assessment Mello-Roos Act Tax Memorial Halls, Buildings, or Meeting Places Special Tax Mosquito Abatement Tax Municipal Affairs Special Tax Museum and Cultural Facilities, Operation and Maintenance Special Tax Municipal Utilities Special Tax Musical Performances Special Tax Paramedic Special Tax Parks and Recreation Special Tax Parks, Parkways, and Open Space Facilities and Maintenance Mello-Roos Tax Pest Abatement Special Tax Police Protection Special Tax Port Operation and Maintenance Special Tax Public Employee Pension Special Tax Oil Severance Tax Regional Parks and Open Space Preservation Special Tax Resort Improvement Special Tax Resource Conservation Special Tax Road Mainteance Special Tax Sanitation and Health Special Tax School Special Tax School Facilities Mello-Roos Tax Seismic Safety Mello-Roos Tax Sidewalk Installation Tax Single-Use Carry-Out Bag Charge Snow Plowing Mello-Roos Tax Soil Deterioration Repair and Abatement Special Tax Standby Charges Street Improvement Assessment Street and Road Maintenance Mello-Roos Tax Trade, Commerce and Immigration Special Tax Trail-Riding Tax Tourism and Commerce Special Tax Utility Undergrounding Mello-Roos Tax Vector Control Special Tax Veteran Buildings, Memorial and Cemeteries Special Tax Veteran Homes Special Tax Water Special Tax Zoo Facilities Mello-Roos Tax 58 CALIFORNIA TAX FACTS

67 Chapter 10 Tax Administration C alifornia has three major tax agencies responsible for administering and enforcing the state s tax laws the Franchise Tax Board, the State Board of Equalization and the Employment Development Department. Other state departments also administer various fee and regulatory programs that affect taxpayers. Local governments also are responsible for Venice Beach administering and enforcing local tax laws. County assessors and tax collectors, as well as some special districts, may be responsible for additional tax administration. For taxpayers with questions on state tax issues, the state tax agencies have partnered together to form the California Tax Service Center to answer questions at 59

68 Franchise Tax Board The Franchise Tax Board (FTB) was created in 1929 to administer the state s newly adopted franchise tax. The FTB has since grown to oversee the personal income tax and corporate income tax. Administering delinquent debt collections also is a function of the FTB. The board is comprised of the state controller, the chair of the State Board of Equalization, and the director of the California Department of Finance. State Board of Equalization The State Board of Equalization (BOE) was established in 1870 to carry out provisions of the California Constitution requiring taxation to be equal and uniform throughout the state, and for property to be taxed in proportion to its value. The BOE oversees property taxes, sales taxes and other excise taxes and fees. The board is comprised of five elected officials, four of whom represent taxpayers in districts of equal population (they are elected to four-year terms, and may serve a maximum of two terms), and the state controller. The board members oversee BOE staff, collection activities and practices, and act as a tax appeals body for cases involving BOE and Franchise Tax Board audits. Employment Development Department The Employment Development Department (EDD) was established in 1935 and is part of the Labor and Workforce Development Agency. The EDD administers the collection, accounting and auditing of California s payroll tax, making it the largest of California s tax collection agencies. The EDD also oversees the state s unemployment and disability insurance programs. State Controller s Office The state controller is the chief fiscal officer of California and sits on the Franchise Tax Board and the State Board of Equalization. The controller acts as the accountant and bookkeeper for all the state s public funds, and administers the Uniform State Payroll System and unclaimed property laws. The controller also is responsible for auditing state and local government programs, as well as providing information to the public on the fiscal status of the state. State Treasurer s Office The State Treasurer s Office was created in The office s main responsibilities are to manage the state s Pooled Money Investment Account, finance public works projects and act as the state s banker. The treasurer also is responsible for managing the state s debt, and issuing bonds. 60 CALIFORNIA TAX FACTS

69 Department of Finance The Department of Finance, part of the executive branch of state government, serves as the governor s chief fiscal policy advisor, creating and administering the state s annual financial plan, and analyzing budgetary aspects of proposed laws. The director of finance, who heads the department, is appointed by the governor and sits on the Franchise Tax Board. Other Key Agencies Secretary of State s Office. The Secretary of State s Office registers and authenticates business entities and trademarks, processing files and records relating to corporations, limited liability companies, partnerships, and other entities doing business in California. Governor s Office of Business and Economic Development. The Governor s Office of Economic Development (GO-Biz) administers the California Competes Tax Credit, an income tax credit available to businesses that want to locate in California or stay and grow in California. The tax credit is negotiated by GO-Biz and the California Competes Tax Credit Committee, which consists of the state treasurer, director of finance, the director of GO-Biz, and one appointee each from the speaker of the Assembly and the Senate Rules Committee. The credit is applicable for tax years beginning January 1, 2014, and before January 1, California Air Resources Board. The California Air Resources Board, part of the California Environmental Protection Agency, administers various regulations and fees, including the state s cap-and-trade auction. Department of Forestry and Fire Protection. The California Department of Forestry and Fire Protection, often referred to as CalFire, oversees rural fire responsibility for the state and administers the state s fire tax, which is imposed on every habitable structure located in a state responsibility area. Department of Motor Vehicles. The Department of Motor Vehicles registers and records ownership of vehicles in California and issues driver s licenses, identification cards and vehicle licenses. The DMV collects the vehicle registration fee, the vehicle license tax, some automotive sales and use taxes, and other fees. County Assessors. Each of California s 58 counties has a locally elected assessor who administers property taxes within the county, and is responsible for decline-in-value assessments, determining when a change in ownership occurs, and assessing new construction. Chapter Ten: Tax Administration 61

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