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									              MMC Policy Update
              AB 1221 (amended 3/25/03) by Campbell & Steinberg

               M M C            CALIFORNIA
                                                                                  April 18, 2003


This communication is to inform you that much-anticipated public hearings on AB 1221 (Assembly Members
Steinberg and Campbell), California Balanced Communities Act of 2003, will take place before the Assembly
Local Government Committee on Wednesday, April 23, and the Assembly Revenue and Taxation
Committee on Monday, April 28 (tentative). Refer to for committee analyses. AB 1221 (as
amended 3/25/03), which swaps a half-cent of local government’s sales tax revenues with an equal amount of
property tax revenues, will be a major topic in this year’s discussions about local government finance reform. In
anticipation of the hearings, MMC is providing the following summary and an attached city evaluation calculator to
help evaluate the impact of AB 1221 (as amended 3/25/03) in your city.

•   AB 1221 (AS AMENDED 3/25/03) BACKGROUND

The attached “AB 1221 City Evaluation Tool” will determine city-specific impact. Because a “macro” security
must be set in MS Excel to use the tool, please refer to the “AB 1221 Installation Instructions” file to get started.
Please contact your MMC Client Services Representative or Fran Mancia, Director of Government Relations, at
559-271-6800 (ext. 5013) with any questions or comments. For technical support, please contact Doug Kitchen at
(800) 800-8181 (5512).

The implementation of AB 1221 (as amended 3/25/03) would:

    •   Reduce local governments’ share of the state-local Bradley-Burns sales tax by half (from 1 cent of each
        sales dollar to a half-cent).
    •   Require an identical amount of property tax revenues from schools to local governments.
    •   Require the state to backfill the money to schools from its increased share of the sales tax.
    •   Refer to for committee analyses and legislation.


Assembly Members Steinberg and Campbell’s stated purpose in introducing AB 1221 is twofold:

    1. Obtain statutory language that would provide cities with revenue protection, along with an incentive that
       would discourage cities from “negotiating” with retailers to locate in particular jurisdictions.
    2. Provide a financing mechanism that would eliminate the disincentives associated with building homes.

The authors report that AB 1221 attempts to address current fiscal incentives in local land use decisions that often
prevent local governments from making responsible land-use planning decisions. Some lawmakers, including the
authors, claim that it is a reality that “California is a state full of unbalanced communities.” The authors ultimately
want to make cities less reliant on sales taxes. To some extent, the same rationale was behind Assembly Member
Steinberg’s AB 680 from the 2001-02 Legislative Session.

The following excerpts are taken from an author’s fact sheet on AB 1221 (as amended March 25):

    •   AB 1221 diversifies and stabilizes local government revenue. By receiving less of the highly volatile
        sales tax revenue and more of the stable property tax revenue, local governments would be cushioned
        against the ups and downs of the economy.

    •   Property tax is a much more stable and robust revenue source. As depicted below, property tax has
        been, and continues to be, a much more stable and consistent source of revenue than sales tax. Currently,
        sales tax revenues are stagnant while property tax revenue continues to grow at a steady rate of 8 to 9%.

    •   AB 1221 does not create winners and losers. The base year under AB 1221 would be 2004. Since sales
        tax is simply swapped for property tax in the base year, the process is entirely revenue neutral and will not
        impact any current revenue generated by past development decisions. Future years’ revenue, however,
        would be based upon development decisions made by local governments. If a community builds a balance
        of retail, jobs, & housing within their community plan, they will obtain the maximum revenue under AB

    •   AB 1221 provides protection against future legislatures taking more property tax. Understanding
        that the state-local relationship is rocky at best, AB 1221 provides a reversal mechanism so that if a future
        legislature reduces the property tax allocated to local governments in this bill, the sales tax rate would be
        reinstated to compensate.

    •   AB 1221 would remove disincentives to approve housing and corporate job centers. Under current
        law, there is very little fiscal incentive to approve housing and other non-sales tax generating developments.
          Housing is often referred to as a "black hole" in community development. By increasing the percentage of
          property tax retained by property tax generating land uses, housing developments will begin to pencil out.


Constitutional protection for local government

     •    As reported in the March 21st edition of Priority Focus, the League of California Cities, in initial discussions
          with the author, indicated that its member cities were concerned with granting state control of local sales
          taxes. The league reported that “for the bill to be taken seriously by the League membership, it [has] to be
          coupled with constitutional protection for local government revenue sources.” Further, “without this
          stability and predictability in local government revenues, why would city officials be willing to give up local
          control over the Bradley-Burns sales tax to the state?”
     •    MMC understands that League representatives met with Senate Republican Leader Jim Brulte, who
          indicated that he would favor constitutional protection for local governments. This would likely be part of
          the final state budget package.

“AB 1221: Fiscal and Policy Implications for Cities” March 17, 2003 memorandum analysis from Michael Coleman to the League
of California Cities

     •    This analysis recommends a “trade of city and county sales and use tax for greater property tax, property
          tax return to cities, counties, and special districts, and constitutional protection of local revenues.”
     •    The memorandum is thorough in describing 1) how the sales and use tax / property tax swap in AB 1221
          would work, and 2) the estimated individual city impacts and how the bill would affect the finances of
          individual cities.
     •    At the League’s Revenue and Taxation Committee, a primary point of concern raised by Committee
          members included speculation as to what will happen after the first year of the bill’s implementation.
          Because the first year is proposed to be revenue neutral (an equal swap of property tax for sales tax) there
          is no clear answer as to what is expected in year two and beyond. At the meeting, Mr. Coleman warned
          that careful fiscal analysis is essential, as each city will be affected differently.
     •    In the analysis, Coleman reported that “to reasonably estimate the budgetary impacts of AB 1221 on any
          particular (jurisdiction) one must consider: 1) local long-term economic trends in the context of statewide
          trends; 2) future land use and economic plans for the city; 3) the existence and plan for completion of
          redevelopment project areas; and 4) a range of possibilities.”


As reported in the “Authors Rationale” section, AB 1221 attempts to provide cities with revenue protection, to
discourage cities from “negotiating” with retailers to locate in particular jurisdictions, and to provide a financing
mechanism that would eliminate the disincentives associated with building homes. The following are
considerations in accomplishing the intended goals:

Goal: Provide cities with revenue protection along with an incentive that would discourage cities from “negotiating” with retailers to
locate in their respective jurisdictions.

• As reported in the Sacramento Bee the swapping of revenue streams at the local level will only work if it is part of
a bigger, long-term reform of state and local finances. The larger reform would also need to be completely
divorced from the current State budget crisis.
• Local governments need to be full partners in any overhaul, as this is the wrong time to make a switch of sales
taxes for property taxes due to a probable real estate bubble: although property tax rates have recently increased,
the rates are varying overall and may quickly flatten or drop.
• Using past actual statewide local revenues be shifted and net assessed values as a guide to possible future
results, the following depicts the combined impact on local governments if AB 1221 had been implemented in
previous years.

         • The left column represents the implementation year and the top row represents the resulting years.
         Therefore, if AB 1221 had been implemented in 1993, in the year 2000 the local government would receive
         an amount of traded property tax equal to 72% of what it actually received in traded sales tax or a 28%
         reduction in revenue for its ½% sales use tax.
         • While property tax has increased at a higher rate than sales tax over the last 25 years, there have been
         periods such as the early 90’s that would, if the transition had taken place at that time, would have resulted
         in a decade long revenue shortage for local governments.
         • The economic conditions that result in negative local government revenues require property net
         assessed value to be at a point of flattening or negative growth with concurrent sales and use tax growth.
         • This situation occurred in the early 90’s and many people believe that it is likely to be the case in 2004-
         05, the proposed AB 1221 implementation period.













  1990     100%    102%    129%    131%    126%    123%    116%    108%    105%    103%    94%     107%    118%    114%
  1991             100%    126%    129%    124%    121%    114%    106%    102%    100%    92%     105%    115%    112%
  1992                     100%    102%    98%     96%     90%     84%     81%     80%     73%     83%     91%     89%
  1993                             100%    96%     94%     89%     82%     80%     78%     72%     82%     90%     87%
  1994                                     100%    98%     92%     86%     83%     81%     75%     85%     93%     91%
  1995                                             100%    94%     88%     85%     83%     76%     87%     95%     93%
  1996                                                     100%    93%     90%     88%     81%     92%     101%    98%
  1997                                                             100%    97%     95%     87%     99%     109%    106%
  1998                                                                     100%    98%     90%     103%    113%    109%
  1999                                                                             100%    92%     105%    115%    111%
  2000                                                                                     100%    114%    125%    121%
  2001                                                                                             100%    110%    107%
  2002                                                                                                     100%    97%
  2003                                                                                                             100%

• In addition to the economic timing of the implementation of AB 1221 there are two other timing factors that
would impact local governments future revenues. This would include the timing of the implementation of 1)
commercial property split roll, and 2) the potential of taxation on services. In the event that SB 17 (Senator
Escutia) is implemented prior to AB 1221, there would be a negative impact on the future of local government
revenues because the bill attempts to redefine transfer of property ownership. In the event that a proposal for
taxation on services (SB 400 by Senator Florez) is implemented after AB 1221, there would also be a negative effect
on future local government revenues. Keeping in mind the following is based on the current versions of proposed
legislation, the following matrix depicts the goals and effects for the scenarios described above. Also included is an
analysis of how the authors’ intended AB 1221 goals would be impacted should AB 1690 (Leno) providing for a
local income would be implemented.

See Exhibit A Page 1 & 2

Goal: Provide a financing mechanism that would eliminate the disincentives associated with building homes.

• An increased amount of housing costs cities more than increased retail in terms of the services provided; thus,
local governments will need subsidies to cover the costs of increased housing.
• Due to current state and local budget crises the State of California and local governments cannot afford to
provide housing subsidies, nor has the federal government demonstrated a willingness to help.
MMC utilized financial data from 48 of its client cities to calculate the resulting economic revenue results from AB
1221, demonstrating that direct general fund revenues from residential properties will increase by 24% if AB 1221
is implemented.
                                                        Current Tax           Current Adjustment             of Current Tax
                                                            Revenue                 with AB 1221                   Revenue
Business to business                                      345,937,538                 308,837,205                       89%
Commercial/industrial property                            163,679,178                 256,167,954                     157%
Financial institutions                                      6,343,954                   7,665,949                     121%
Governmental                                               34,295,284                  33,271,344                       97%
Hospitality                                               336,004,770                 294,415,737                       88%
Miscellaneous                                              42,729,849                  45,514,585                     107%
Residential property                                    1,285,342,174               1,595,424,181                     124%
Retail businesses                                         814,399,787                 478,905,353                       59%
Service industry                                          158,261,839                 157,010,431                       99%
Vacant land                                                 8,520,176                  14,440,725                     169%
Unable to classify                                         18,885,815                  22,746,901                     120%

Total                                                   3,214,400,364                 3,214,400,364                   100%

                                                         TRA Factor                           169%

• Generally MMC has observed that cities spend approximately 70% of the general fund budget providing
services to residential properties. Using the above calculated residential revenue amount, the residential economic
sector is still seriously under funded.

                                    Revenue                                                Net
                                                          Amount           Percent
Residential                           1,595,424,181        2,250,080,255        70%      (654,656,074)
Non-Residential                       1,618,976,183          964,320,109        30%       654,656,074

Total                                 3,214,400,364        3,214,400,364       100%

Refer to the attached “AB 1221 City Evaluation Tool” to determine city-specific impact.

Because a “macro” security must be set in MS Excel to use the tool, please refer to the “AB 1221 Installation
Instructions” file to get started. For technical support, please contact your MMC representative or Doug Kitchen
at (800) 800-8181 (5512).


The following resources were used in preparing this update:

Coleman Advisory Services
League of California Cities
Office of Assembly Member Steinberg
Sacramento Bee
Speaker’s Commission of State and Local Governments Finance
                                                       Exhibit A Page 1

                                                                                                                         Goals & Effects

                                                                                                                                                             0% Short Term
                                Prevents Sales                                         Promote Low / Moderate              Promotes Local Gov't
                                                        Promote Housing                                                                                    Revenue Impact On             RDA Impact        Local Gov’t Control
                                Tax Negotiation                                           Income Housing                     Revenue Stability
                                                                                                                                                              Local Gov't
          Requirement that
                                                                                                                                                                                                              Restricts local
             cities are not                                                                                                         Yes,                           Yes,
                                    Yes,                                                                                                                                                                    government from
          allowed to rebate                                                                                                Tax revenue cannot be          Tax revenue cannot be
                            Prohibits rebates to                N/A                                N/A                                                                                        N/A         attracting businesses
           any sales / use                                                                                                 diverted to the private        diverted to the private
                               private sector                                                                                                                                                             with rebates of sales /
            tax directly or                                                                                                        sector                         sector
                                                                                                                                                                                                          use tax either directly
                                                                                                                                                                                                                or indirectly
                           Retail businesses                                             Very Little,                                                 Variable,             Negative,
                            would still be an                                   Low / moderate housing is                                          The first year of        This would
                                                Only in a few cities will the                                            Some,
                                attractive                                    generally rental housing with a                                implementation would be       increase the            Some,
          Trade of sales &                    housing revenues exceed the                                       Over the long term (10 to
                               acquisition                                     relatively low "market value.”                               revenue neutral, while the general fund cost to Broadens the potential
             use tax for                         cost to provide services.                                      20 years) property tax is a
                               opportunity                                      The market value for rental                                    following years could    local government land uses that provide
            property tax                        These Cities would likely                                        more stable & consistent
                             because they                                        property is based on the                                      result in a positive or with an operational positive net revenue
             revenues.                        have currently high TRA rates                                         revenue source as
                             provide more                                       property's profitability; low /                              negative revenue impact RDA by decreasing           scenarios.
                                               and/or a residentially based                                       compared to sales tax.
                           revenue than cost                                    moderate rental properties                                       depending on the      the State’s revenue
                                              UUT with a high rate and cap.
                               to the local                                    generate small net revenues.                                         indexing year.         contribution.
AB 1221

                                                                                                                                                             The implementation
                                                                                                                         The implementation under
               Requires                                                                                                                                   under current economic                                     No,
                                                                                                                              current economic
          implementation &                                                                                                                               conditions, with sales tax                            The long term
                                                                                                                          conditions, with sales tax
          indexing of sales                                                                                                                                revenues at a low and                              reduction of net
                                     N/A                        N/A                                N/A                     revenues at a low and                                              N/A
            tax to property                                                                                                                                 peaking property tax                           revenue will reduce
                                                                                                                            peaking property tax
           tax in fiscal year                                                                                                                               values, will result in a                        local governments'
                                                                                                                         values, will result in a long
                2004-05.                                                                                                                                 severe short term (2 to 9                         future fiscal options.
                                                                                                                           term negative revenue
                                                                                                                                                         years) negative revenue
                                                                  No,                                                                 No,
                                                           Because housing                                                   Currently the state
                                                                                     Because housing development
                                                    development is a long term                                           legislature can unilaterally                                           No,
                                                                                     is a long term process and the
                                                       process and the current                                           revert back to the existing                                      Unless the RDA              No,
           Protects local                                                            current legislation provides for
                                                      legislation provides for a                                           tax structure. However,                                        increment was      Unless the proposed
            government                                                                a reversal of this tax structure
                                                    reversal of this tax structure                                            there is a current                                        included as one of       constitutional
           revenues from             N/A                                                  at the discretion of the                                                  N/A
                                                        at the discretion of the                                         consideration of promoting                                        the protected    amendment protecting
          State Legislature                                                            legislature, the above stated
                                                   legislature, the above stated                                               a constitutional                                        revenue sources in      local government
           modifications.                                                                advantages will not exist
                                                      advantages will not exist                                           amendment, which would                                         the constitutional  revenues is passed.
                                                                                          without a constitutional
                                                       without a constitutional                                          stabilize local government                                         amendment.
                                                                                     amendment guaranteeing local
                                                     amendment guaranteeing                                                revenues by preventing
                                                                                             revenue stability.
                                                        local revenue stability.                                          future state intervention.
                                        Exhibit A Page 2

                                                                                                         Goals & Effects
                                                                                                                       0% Short Term
                           Prevents Sales                                Promote Low / Moderate Promotes Local Gov't                                                              Local Gov’t
                                               Promote Housing                                                       Revenue Impact On                           RDA Impact
                           Tax Negotiation                                  Income Housing        Revenue Stability                                                                 Control
                                                                                                                        Local Gov't

           Commercial                                                                                                                                             Positive,
          property to be                                                                                                                                     This will produce
          reassessed at                                  No,                            No,                                                                    a more rapid         Some,
          current market
                                                                                                                     Some,                     No,
                                             The higher non-residential The higher non-residential                                                            increase and a This would provide a
SB 91

                                                                                                          This would provide a more This will increase local
           value, while         N/A            rate would increase the      rate would increase the                                                          larger amount of more diverse revenue
                                                                                                           diverse revenue base for  taxes and increase
            residential                           desirability of non-    desirability of non-residential                                                       increment,       base for local
                                                                                                               local government.     municipal revenues
             property                        residential over residential       over residential                                                               resulting in a     government.
          remains under                                                                                                                                        shorter life of
             Prop 13.                                                                                                                                          RDA projects.

          Local income
            taxation of
          with primary
                                                       Yes,                                                                                     No,                                   Yes,
             residence                                                                No,                          Some,
AB 1690

                                             Particularly with move-up                                                              This will increase local                  Locally imposed and
               within                                                        This group pays an                    If implemented,
                                N/A          housing and higher quality                                                            taxes on individuals and         N/A        monitored revenue
           jurisdiction.                                                insignificant portion of State there is always a threat of
                                               single family detached                                                                 increase municipal                        sources allow for
          Tax could be                                                          Income Taxes             a referendum repeal.
                                                       homes.                                                                              revenues                            fiscal self-reliance.
          up to 10% of
          state income

                                No,                     No,                           No,                                                                                             Yes,
                         This could                 The additional non-         The additional non-                                             No,                            Includes some or all
AB 400

      Sales & use tax                                                                                            Includes some or all
                        increase the         residential revenue would residential revenue would                                      This will increase local                of the service industry
         on some                                                                                            of the service industry                                 N/A
                      number of firms        increase the desirability of increase the desirability of                                 taxes and increase                     segments (broadening
         services.                                                                                         segments (broadening /
                      that cities could         non-residential over         non-residential over                                      municipal revenues                      / diversifying the tax
                                                                                                          diversifying the tax base).
                            solicit                  residential                  residential                                                                                          base).

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