Subject: Studies in the News 06-23 (May 30, 2006)


CALIFORNIA RESEARCH BUREAU
CALIFORNIA STATE LIBRARY
Studies in the News:
Revenue, Taxation and Budgeting Supplement


Contents This Week

Introductory Material ECONOMY
   Tax cuts and American families
   State business tax climate
   Taxation of software
   California's limited liability companies
GENERAL GOVERNMENT
   Glossary of terms for federal budget process
   Federal budget impact on California
   Taxing low-income families
   Avoiding state corporate income tax
   Ratio of taxes to income
   Governor's budget revised
   LAO's views on May Revise
   Governor's proposed budget
   Structural budget problems
   State tax and expenditure limits
   State and federal budget deficits
   States in strong financial position
   States decoupling from federal estate tax
   Troubled state tax systems
   Taxing illegal aliens
   State tax revenues
   Federal estate tax on farms and small business
   Tax shelter reporting penalties
   Abusive tax shelters
   Tax incentives to preserve history
   State R&D tax credits
PREVIOUSLY IN STUDIES IN THE NEWS
   Analysis of income trends
   LAO fiscal projections through 2007
   Eliminating state corporate income tax
   Additional revenues improve budget picture
   State budget perspectives and issues
   State assisted tax filing
   Who pays taxes in California
Introduction to Studies in the News

Studies in the News is a very current compilation of items significant to the Legislature and Governor's Office. It is created weekly by the State Library's Research Bureau to supplement the public policy debate in California’s Capitol. To help share the latest information with state policymakers, these reading lists are now being made accessible through the State Library’s website. This week's list of current articles in various public policy areas is presented below.

Service to State Employees:

  • When available, the URL for the full text of each item is provided.

  • California State Employees may contact the State Information & Reference Center (916-654-0206; cslsirc@library.ca.gov) with the SITN issue number and the item number [S#].

  • All other interested individuals should contact their local library - the items may be available there, or may be borrowed by your local library on your behalf.

The following studies are currently on hand:

ECONOMY

TAXATION

Reconciliation Tax Cuts Would Average $42,000 for Households with Income Over $1 Million, But Only $20 for Middle-Income Households. By Joel Friedman, Center on Budget and Policy Priorities. (The Center, Washington, DC) May 4, 2006. 2 p.

Full Text at: www.cbpp.org/5-4-06tax.pdf

["If the tax breaks agreed to by House and Senate leaders pass, how much will end up in the pockets of American families? Most of the benefits would go to households earning more than $100,000. The 20 percent of middle-income households would see $20, while those in the top one percent of the income spectrum would see about $13,800; people whose incomes exceed $1 million would get an average of $42,000 in tax breaks." Connect for Kids (May 8, 2006) 1.]

[Request #S62301]

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State Business Tax Climate Index. By Curtis S. Dubay and Scott A. Hodge, Tax Foundation. (The Foundation, Washington, DC) 2006. 56 p.

Full Text at: www.taxfoundation.org/files/bp51.pdf

["American companies function at a competitive disadvantage in the global economy because they pay one of the highest corporate tax rates of any of the industrialized countries. The index is a tool for lawmakers, the media, and individuals alike to gauge how their states’ tax systems compare."]

[Request #S62302]

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"The Taxation of Canned Software: Should the Delivery Method Matter?" By Jennifer Carr and Cara Griffith. IN: State Tax Notes, vol. 38, no. 14. (December 26, 2005) pp. 1085-1088.

["The taxation of canned computer software is a tricky subject, from the determination of which test a state will employ to the nearly metaphysical issue of what constitutes 'tangible' property."]

[Request #S62303]

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"California LLCs -- An Update on Planning Techniques." By Kathleen K. Wright. IN: State Tax Notes, vol. 37, no. 12. (September 19, 2005) pp. 869-873.

["This article updates the status of limited liability companies in California and how they are being used to achieve those legal and business objectives. Some limited liability companies work, but others get entangled with California's tax law, which may well destroy the benefit of using them."]

[Request #S62304]

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GENERAL GOVERNMENT

FEDERAL BUDGET

A Glossary of Terms Used in the Federal Budget Process. By Government Accountability Office. (The Office, Washington, DC) 2006. 182 p.

Full Text at: www.gao.gov/new.items/d05734sp.pdf

["This glossary is a basic reference document for the Congress, federal agents, and others interested in the federal budget-making process."]

[Request #S62305]

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What Would the President's Proposed Budget Mean for California? By the California Budget Project. (The Project, Sacramento, California) February 2006. 3 p.

Full Text at: www.cbp.org/2006/060222_fedbudget.pdf

["President's Bush released his $2.77 trillion proposed budget for federal fiscal year (FFY) 2007. The proposed budget calls for $183 billion in reductions over five years in 'discretionary' spending.... The proposed federal cuts would affect education programs ... and programs that assist families and children in California."]

[Request #S62306]

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INCOME TAXES

The Impact of State Income Taxes on Low-Income Families in 2005. By Jason A. Levits and Nicholas Johnson, Center on Budget and Policy Priorities. (The Center, Washington, DC) February 22, 2006. 24 p.

Full Text at: www.cbpp.org/2-22-06sfp.pdf

["This report analyzes the impact of state income taxes on poor and near poor families in 2005. Included are: income tax thresholds (starting point at which families' incomes are taxed) for each state and the District of Columbia, state income tax on those at and near the poverty level, historical tables for tax thresholds, and a brief discussion of state income tax legislation/reform."]

[Request #S62307]

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Federal "Business Activity Tax Nexus" Legislation: Half of a Two-Pronged Strategy to Gut State Corporate Income Tax. By Michael Mazerov, Center on Budget and Policy Priorities. (The Center, Washington, DC) 2005. 14 p.

Full Text at: www.cbpp.org/1-26-05sfp.pdf

["Many multistate corporations are engaged in a two-pronged strategy aimed at substantially increasing the share of their nationwide profit that is not taxed by any state... The federal legislation ... would make it much more difficult for states to require many out-of-state corporations to pay any income tax."]

[Request #S62308]

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Income Taxes: Who Pays and How Much? By the Federal Reserve Bank of St. Louis. (The Bank, St. Louis, Missouri) March 2006. 1 p.

Full Text at: research.stlouisfed.org/publications/net/20060301/cover.pdf

["In 2003 the ratio of taxes to income was 11.9 percent. The top 50 percent of taxpayers accounted for 86 percent of Adjusted Gross Income (AGI) and paid more than 96.5 percent of Individual Income Tax (IIT). The bottom 50 percent accounted for 14 percent of AGI and 3.5 percent of IIT. The average tax rate for the top 50 percent was 13.4 percent, while the rate for the bottom 50 percent was 3 percent. Both of these rates for 2003 are at their lowest levels for 1985-2003."]

[Request #S62309]

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STATE BUDGET

May Revision: Governor's Budget 2006-2007. By the Department of Finance. (The Department, Sacramento, California) May 2006. 117 p.

Full Text at: www.ebudget.ca.gov/pdf/Revised/BudgetSummary/FullBudgetSummary.pdf

["Flush with $7.5 billion more than he expected to have over the next two years, his budget would provide big increases in spending for public schools as well as more money for emergency preparedness, children's health care and flood protection. Meanwhile, the governor would set aside $3.2 billion to pay off old debts early and build reserves to levels not seen so soon in the budget process in nearly 30 years. The administration also agreed to spend $2.9 billion over seven years to improve academic performance in poorly performing schools." San Francisco Chronicle (May 13, 2006) A1.]

[Request #S62122]

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Overview of the 2006-07 May Revision. By Brad Williams and others, Legislative Analyst's Office. (The Office, Sacramento, California) May 15, 2006. 20 p.

Full Text at: www.lao.ca.gov/2006/may_revise/may_revise_051506.pdf

["The report recommended that Governor Schwarzenegger cut back on proposed new school spending for programs such as art, physical education and teacher retention by some $416 million and redirect that money to economic impact aid, special education and financially troubled districts. It also recommended that Schwarzenegger rethink his idea to pay down the voter-approved 2004 economic recovery bonds by $1 billion in 2009 and instead use that new revenue to cut into the projected budget shortfalls of 2007-08 and 2008-09." Sacramento Bee (May 16, 2006) A4.]

[Request #S62123]

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Paving the Way: Does the Governor's Proposed 2006-07 Budget Prepare California for the Future? By the California Budget Project. (The Project, Sacramento, California) February 2006. 59 p.

Full Text at: www.cbp.org/2006/2006_chartbook.pdf

["The California Budget Project’s chartbook provides analysis and examines the social and economic context of the Governor’s Proposed 2006-07 Budget."]

[Request #S62310]

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STATE FINANCES

Faulty Foundations: State Structural Budget Problems and How to Fix Them. By Iris J. Lav and others, Center on Budget and Policy Priorities. (The Center, Washington, DC) 2005. 82 p.

Full Text at: www.cbpp.org/5-17-05sfp.pdf

["Many states risk chronic gaps between revenues and necessary expenditures in coming years because of structural weaknesses in their tax systems. These weaknesses are largely independent of the cyclical budget problems caused by economic downturns. Thus, even though states are now enjoying expanded revenues due to the economic recovery, they could face serious budget problems in coming years if their structural issues are not addressed."]

[Request #S62311]

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State Tax and Expenditure Limits -- 2005. By National Conference of State Legislatures. (NCSL, Denver, Colorado) 2005. Various pagings

Full Text at: www.ncsl.org/programs/fiscal/tels2005.htm

["The first years of the twenty-first century have brought renewed interest in the structure and effectiveness of tax and expenditure limitations (TELs). These fiscal mechanisms are designed to provide certain strictures to restrain the growth of governmental budgets either on the tax side or the spending side or on both. This paper reviews the use of TELs by the several states and explores the policy issues associated with fiscal limits."]

[Request #S62312]

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“Budget Deficits, State and Federal” By Michael Bazdarich. IN: Forecast, vol. 2, no. 7. (November 2005) pp. 1-4.

[“This (article) compares the factors and commonalities underlying both the federal and state budgets. It will show that both can in fact be largely attributed to the plunge in the stock market in 2000 and after and the failure of both levels of government to diagnose the temporary nature of revenues and plan accordingly to avoid subsequent budget trauma.”]

[Request #S62313]

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STATE REVENUES

"Tax and Budget Review: 2005." By Nicholas W. Jenny. IN: State Fiscal Brief, no. 74. (January 2006) pp. 1-7.

["Eleven states made significant changes in tax collections affecting fiscal year 2006.... Six states made tax cuts totaling about $2.1 billion, almost three-quarters of which was in the sales tax... Seven states made tax increases totaling about $1.3 billion, 90 percent in tobacco taxes.... This was the first year with net tax cuts since 2000.... States are in a strong position as they consider budgets for fiscal year 2007."]

[Request #S62314]

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STATE TAXES

Many States Are Decoupling From the Federal Estate Tax Cut. By Elizabeth C. McNichol, Center on Budget and Policy Priorities. (The Center, Washington, DC) 2005. 1 p.

Full Text at: www.cbpp.org/5-23-02sfp.pdf

["The 2001 federal tax legislation includes a phaseout of the federal estate tax, culminating in full repeal in 2010. In most states, estate and inheritance taxes are designed in such a way that states face either a full or partial loss of estate tax revenues as this credit is phased out. States can avert this loss of revenue by decoupling. Decoupling means protecting the relevant parts of their tax code from the changes in the federal tax code."]

[Request #S62315]

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State Tax Policy: A Political Perspective. by David Brunori, Urban Institute Press. (The Institute, Washington, DC.) 2005. 158 p.

["State tax systems are in trouble. Revenue collecting methods developed more than a half century ago are facing the strain of dealing with 21st century economies.... David Brunori analyzes these and other critical challenges facing state governments. He identifies the important issues, and examines possible solutions in formulating and implementing state tax policy."]

[Request #S62316]

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"Taxing Illegal Aliens." By David Brunori. IN: State Tax Notes, vol. 39, no. 8. (February 27, 2006) pp. 649-650.

["Several state legislators have taken it upon themselves to join the fight to curb illegal immigration, and they're using the tax system as a weapon. In Arizona the House Appropriations Committee approved an 8 percent tax on all international electronic money transfers out of Arizona..... A proposal in Georgia would require illegal immigrants to pay a 5 percent tax on all wire transfers to another country."]

[Request #S62317]

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TAX REVENUES

"State Tax Revenue Off to a Flying Start for Fiscal 2006." By Nicholas W. Jenny. IN: State Tax Notes, vol. 39, no. 4. (January 30, 2006) pp. 307-317.

["State tax revenue increased 9.2 percent in the July-September quarter of 2005 compared with the same quarter the year before. This is the strongest nominal July-September revenue growth since the Rockefeller Institute of Government began to track state revenues in 1991.]

[Request #S62318]

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TAXES

The Effect of the Federal Estate Tax on Farms and Small Business. By Robert McClelland and others, Congressional Budget Office. (The Office, Washington, DC) July 2005. 28 p.

Full Text at: www.cbo.gov/ftpdocs/65xx/doc6512/07-06-EstateTax.pdf

[“This Congressional Budget Office paper examines the effects of the estate tax on small businesses and family farms, focusing on how it might alter the behavior of farmers and small-business owners during their lives and on the extent to which their estates have enough liquid assets to pay the estate taxes owed. The paper also looks at the impact on those groups of setting the amount of assets exempt from the estate tax at $1.5 million, $2 million, or $3.5 million.”]

[Request #S62319]

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"California Tax Shelters -- This Time It's Federal Conformity." By Kathleen K. Wright. IN: State Tax Notes, vol. 39, no 3. (January 23, 2006) pp. 249-254.

["This article discusses the revised California tax shelter reporting provisions and compares California's penalty regime with the new federal menu of penalties for failure to properly report."]

[Request #S62320]

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"Abusive Tax Shelters in California." By Mark A. Ibele and Jon David Vashe. IN: State Tax Notes, vol. 39, no. 10. (March 13, 2006) pp. 781-789.

["The report contains discussion of abusive tax shelters; discussion of California's general amnesty and voluntary compliance initiatives; amnesty approaches in selected other states and at the federal level; and issues raised by the abusive tax shelter legislation."]

[Request #S62321]

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"Preserving the Past with Tax Incentives." By Mandy Rafool. IN: NCSL Legisbrief, vol. 13, no. 25. (June/July 2005) pp. 1-2.

["The federal government offers tax incentives to encourage the preservation of historic properties.... Only a certified historic structure is eligible for the 20 percent rehabilitation tax credit.... States also promote historic preservation by offering tax incentives for the restoration and rehabilitation of historic buildings."]

[Request #S62322]

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“The Rise and Spread of State R&D Tax Credits.” By Dan Wilson. IN: Economic Research Federal Reserve Bank of San Francisco: FRBSF Economic Letter, no. 2005-26. (October 14, 2005) pp. 1-4.

[“Tax credits for spending on research and development (R&D) were first enacted into federal law in the U.S. in 1981. In the ensuing quarter century, many states have adopted such tax credits, often using the federal tax credit as a model. This Economic Letter reports on recent research that quantifies the development of state tax credits for R&D.”]

[Request #S62323]

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PREVIOUSLY IN STUDIES IN THE NEWS
[This section links to items in Studies in the News since the last Revenue, Taxation and Budgeting Supplement.]

ECONOMY

INCOME DISTRIBUTION

Pulling Apart: A State-by-State Analysis of Income Trends. By Jared Bernstein and others, Center on Budget and Policy Priorities and Economic Policy Institute. (The Center, Washington, DC) January 2006. 66 p.

Full Text at: www.cbpp.org/1-26-06sfp.pdf

["A study ... sounded a familiar refrain: The rich are getting richer, and the poor, if they're not exactly getting poorer, are not getting rich fast enough. The report ranked California's income distribution as the sixth worst in the nation, with the top 20 percent of families earning about $127,500 a year after taxes, while the poorest fifth take home just $16,800. In 2002 ... top earners took in, on average, 7.6 times more than the poorest families that year." Sacramento Bee (January 31, 2006) 1.]

[Request #S61114]

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GENERAL GOVERNMENT

BUDGET PROJECTIONS

California's Fiscal Outlook: LAO Projections, 2001-02 Through 2006-07. By Elizabeth G. Hill, Legislative Analyst's Office. (The Office, Sacramento, California) November 2001. 36 p.

Full Text at: www.lao.ca.gov/2001/fisc_outlook/Fiscal_Outlook_2001.pdf

["California's state government faces its steepest decline in state revenues since World War II, the state's legislative analyst said.... (Legislative Analyst Elizabeth) Hill predicts that revenue shortages, estimated at 15 percent short during the next two budget years, could linger until 2007. But she also predicted the recession could lift next spring. If it lasts until autumn, she said, the state's revenue problem may worsen by up to $4 billion." Sacramento Bee (November 14, 2001) 1.]

[Request #S2815]

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INCOME TAXES

"The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity." By Laura A. Wheeler. IN: State Tax Notes, vol. 39, no. 9. (March 6, 2006) pp. 705-717.

["Economists have struggled with this issue for over 30 years. More than 100 studies have been conducted, each trying to determine what effect, if any, fiscal variables have on firm location and thus on state employment and investment levels. The results have been less than definitive.... This report summarizes some of the better studies, then uses the results of those studies to estimate the effect of eliminating the state's corporate income tax on economic activity within the state."]

[Request #S61917]

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STATE BUDGET

Additional Revenues Improve 2006-07 Budget Picture, State Still Faces Long-Term Problems. By the California Budget Project. (The Project, Sacramento, California) March 2006. 7 p.

Full Text at: www.cbp.org/2006/0603_bwatch.pdf

["Substantially higher than anticipated revenues have significantly improved the state's 2006-07 fiscal picture. The Governor's Proposed Budget uses the additional revenues to increase spending for education and transportation and to pre-pay a portion of the state's outstanding debt. The Governor's proposal also outlines an ambitious public works plan and reduces spending for programs for low-income and other vulnerable Californians."]

[Request #S61621]

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STATE BUDGETS

The 2006-07 Budget: Perspectives and Issues. And Analysis of the 2006-07 Budget Bill. By the Legislative Analyst's Office. Prepared for the Joint Legislative Budget Committee. (The Office, Sacramento, California) 2006. 258 p.

["California has benefited greatly from over $11 billion in unanticipated increases in state revenues. Yet, due to its allocation of these funds, the 2006-07 Governor’s Budget would still leave the state with large structural budget shortfalls and an enormous amount of outstanding financial obligations. In this regard, the budget proposal misses an important opportunity to take advantage of highly favorable revenues to get the state’s fiscal house in order. We thus recommend that the Legislature reduce the amount of ongoing spending increases proposed in this budget, and use the savings to either increase reserves or pre-pay additional budgetary debt."

Perspectives and Issues. 238 p.
http://www.lao.ca.gov/analysis_2006/2006_pandi/pandi_06.pdf

Analysis. Various pagings.
http://www.lao.ca.gov/main.aspx?type=2&PubTypeID=4

[Request #S61145]

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STATE TAXES

ReadyReturn Pilot: Tax Year 2004 Study Results. By the California Franchise Tax Board. (The Board, Sacramento, California) April 2006. 31 p.

Full Text at: www.ftb.ca.gov/readyReturn/TY04RRFinalReport.pdf

["Most of the taxpayers who voluntarily participated in a test run of the state's ReadyReturn program said it alleviated anxiety, saved time and was something government ought to do routinely. More than 96% said they would participate again.... Lawmakers opposed to ReadyReturn say it confuses people, creates privacy concerns and could scare taxpayers away from legitimate deductions.... State tax officials say they heard no such complaints, that the objections they received were philosophical arguments against the government doing people's taxes." Los Angeles Times (May 5, 2006) 1.]

[Request #S62116]

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TAXES

Who Pays Taxes in California? By the California Budget Project. (The Project, Sacramento, California) April 2006. 3 p.

Full Text at: www.cbp.org/2006/0604_pp_whopaystaxes.pdf

["The latest 'Who Pays Taxes' shows that higher-income California families pay a greater share of their income in income taxes. But lower- and middle-income California families pay a greater percentage of their income on property, sales and excise taxes. So, in the end, the higher you move on the income scale, the less share of income you pay in California taxes." Sacramento Bee (April 15, 2006) B6.]

[Request #S61633]

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