Individual Taxpayers Hit Hard By California Budget Increases

After months of negotiations, the California legislature has passed a budget deal that includes a number of tax increases for just about everyone in the state.  Looks like the increases will wipe out the benefit of the Federal stimulus plan and California taxpayers will end up with a wash!

Temporary – 2 Years

These additional taxes are temporary increases and will be in effect for a two-year period only, unless extended by a future budget deficit.

• Personal Income Tax – There is a 0.25% surcharge on the personal income tax, which will raise $3.658 billion.  If Federal stimulus funding is adequate, this increase could be reduced by up to one-half or 0.125%.  This increase will be for two years - 2009 and 2010 – and will impact higher-income taxpayers the most. 

• Vehicle License Fee - The fee would go up from the current level of 0.65% to 1% of the value of the vehicle.  An additional, ongoing, 0.15% will be tacked on - for a total of 1.15% - dedicated to local law enforcement programs.  The 0.15% for law enforcement is not temporary; thus, for two years, the license fee will be increased to 1.15% (1.00 .15).  After two years, the fee drops to 0.80% (0.65 .15), raising $1.476 billion (and $601.9 million for law enforcement).  Since the license fee will be based on the value of the car, this increase will apparently impact higher-income taxpayers, who presumably purchase costlier vehicles, the most.  Effective for registrations beginning May 19, 2009.

• Sales Tax – The state sales tax will increase by 1%, effective April 1, 2009.  This raises $5.969 billion.

Observation – Car Sales
This seems to undercut the Federal government’s efforts to rescue the auto industry by adding cost to purchase and own a new vehicle.  This should only prolong the trend to buy used cars instead of new ones.  However, the good news, under the recently enacted federal stimulus legislation, is that most taxpayers will be able to deduct the sales tax paid to purchase a new vehicle in 2009 as an above-the-line deduction on their federal returns; California did not adopt this provision.

• Dependent Credit – The dependent exemption credit is reduced to match the personal exemption credit.  This saves the state government $1.44 billion.  The personal credit amount for 2009 will not be released by the state until the fall, so its impact on 2009 cannot be determined until that time.  However, for 2008, the personal exemption credit was $99, and the credit for a dependent was $309.  That will be a credit reduction of $210 per dependent.  The impact on low- and very high-income taxpayers will be minimal, since the credit is nonrefundable and phased out for higher-income taxpayers.  Lower-income taxpayers generally don’t use all the credit anyway and higher-income ones don’t receive any part of the credit when their AGI exceeds the top of the phase-out range.  Thus, this increase will impact the middle-income taxpayer the most.

Some Increases Could Be Substantially Longer

Although each of these revenue adjustments are for two years only, the passage of the budget stabilization account reform would lengthen the:
o Sales tax by one year;
o The surtax by two years; and
o The vehicle license fee by three years.

The table below illustrates how the increases will impact a family of four (two children) based on the 2008 amounts:



(1) Since the taxpayer’s tax is only $420 (357 63), they were not getting the full benefit of the larger dependent tax credit. Their credit based on 2008 rates will be $396 (4 x 99).  Since their tax liability after subtracting the $396 credit from the $420 tax is only $24, they actually only lose $24 of that tax benefit.   

(2) The exemption credits are reduced $6 per exemption for every $2,500 of income over $326,379.  Thus, the $420 dependent tax credit would have been already phased out for taxpayers of this income so they don’t really lose any benefit.  

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