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Ronald Reagan Presidential Library
Digital Library Collections
This is a PDF of a folder from our textual collections.
Collection: Reagan, Ronald: Gubernatorial Papers,
1966-74: Press Unit
Folder Title: Issues - Tax Reform
(2 of 5)
Box: P32
To see more digitized collections visit:
https://reaganlibrary.gov/archives/digital-library
To see all Ronald Reagan Presidential Library inventories visit:
https://reaganlibrary.gov/document-collection
Contact a reference archivist at: [email protected]
Citation Guidelines: https://reaganlibrary.gov/citing
National Archives Catalogue: https://catalog.archives.gov/
Explanation of
TAX REFORM PROGRAM
(AB 1000 & AB 1001)
Assembly Committee on Revenue & Taxation
April 1970
INDEX (AB 1000 and AB 1001)
by subject matter
SUBJECT
BILL & SECTIONS
PAGES
Outgo -- Property Tax Relief
1. Homeowner's exemption
AB 1001, Sec. 30
13-14
33
15
2. Renter Relief
AB 1000, Sec. 48
28
3. Inventory tax relief
AB 1001, Sec. 13
5-6
31
14
4. Welfare Medi-Cal property
tax relief
AB 1001, Sec. 19
10
100-101
61-2
104-7
63-64
5. Open space program
AB 1001, Sec. 18
9
22-24
11-12
26-29
12-13
109
65
Income
1. Sales tax increase
AB 1000, Sec. 39-42
22-23
43-44
24
2. Bank & Corporation tax
increase
AB 1001, Sec. 37-40
17-19
42
21
72
39
3. Limit oil depletion
AB 1000, Sec. 86
69
AB 1001, Sec. 95
58
4. Capital gains
AB 1000, Sec. 110-111
86-88
113
89
5. Income tax changes:
a. Withholding and estimated
tax provisions
AB 1000, Sec. 45
24
135-7
108-10
139-41
110-13
143
113-14
146
115-16
151
117
153
118
155
119
162
121-22
166-70
123-9
172-4
129-30
192-3
137-8
SUBJECT
BILL & SECTIONS
PAGES
b. Forgiveness
AB 1000, Sec. 51
31-32
C. 11% & 12% rates
AB 1000, Sec. 46
24
d. October prepayment
AB 1000, Sec. 134
107-8
6. Federal Conformity Items
a. Accumulation trusts
AB 1000, Sec. 92-96
74-77
98-99
78-80
101-104
81-84
b. Bond premium: corporate
treatment on repurchase
AB 1001, Sec. 87
53-4
C. Charitable contributions:
unlimited deduction
changed
AB 1000, Sec. 62
46-7
89
71-3
d. Fines, penalties, 2/3
of treble damages
AB 1000, Sec. 55
37
AB 1001, Sec. 81
44-5
e. Foster children tax
credit
AB 1000, Sec. 49
28-9
f. Income averaging
AB 1000, Sec. 125-9
101-6
g. Installment method
AB 1000, Sec. 72
61-2
AB 1001, Sec. 94
58
h. Interest deduction
limitations:
1. on investment
interest
AB 1000, Sec. 56
38-40
2. on debt incurred
to finance corporate
acquisitions
AB 1001, Sec. 86
49-53
i. Lump sum distributions
from qualified pension
plans
AB 1000, Sec. 53
34-5
j. Mineral production
payments
AB 1000, Sec. 87
69-70
AB 1001, Sec. 96
59
- 2 -
SUBJECT
BILL & SECTIONS
PAGES
k. Minimum income tax
AB 1000, Sec. 50
29-30
AB 1001, Sec. 36
16-17
41, 43
19-21
1. Moving expenses
AB 1000, Sec. 54
36
63
47-8
m. Original issue bond
discounts
AB 1000, Sec. 114-5
89-90
n. Real estate depreciation
rules, recapture rules,
rehabilitation
expenditures
AB 1000, Sec. 60-61
43-6
122-4
97-101
AB 1001, Sec. 82-84
45-8
O. Stock redemption by
corporation with
appreciated-value
property
AB 1001, Sec. 91
54-7
(88-90, 92)
p. Tax exempt organizations:
1. Clay Brown: debt-
financing of corporate
acquisitions
AB 1001, Sec. 67
31
2. Feeder organizations AB 1001, Sec. 48
22
3. Investment income of
social clubs
AB 1001, Sec. 53
24
4. Non-exempt member-
ship organizations:
limitations on
deductions
AB 1001, Sec. 85
49
5. Unrelated business
income tax:
a. Expansion of
AB 1001, Sec. 49
23
b. Income from
advertising
AB 1001, Sec. 66
30
6. Voluntary employees:
Beneficiary organi-
zations
AB 1001, Sec. 44
21
- 3 -
SUBJECT
BILL & SECTIONS
PAGES
q. Treatment of interests
as stock VS. indebted-
ness
AB 1000, Sec. 66
53
AB 1001, Sec. 93
57-8
7. Other Provisions
a. Educational equali-
zation tax for schools
AB 1000, Sec. 1-2
3-5
5-12
6-12
21-23
13
25
14
27
14-15
30
16
34
20
b. Expenditure limit
AB 1000, Sec. 33
16-19
C. Information on tax
bill
AB 1000, Sec. 36
20-1
d. Operative dates
AB 1000, Sec. 207
140
AB 1001, Sec. 110
65
e. Appropriation
AB 1001, Sec. 4
3
- 4 -
HOMEOWNERS' EXEMPTION (AB 1001, Sec. 30)
A. Proposal: (1) Increase the homeowners' exemption for owner-
occupied, single-family homes on two acres or
less to $1,000 assessed value plus 20% of the
remaining assessed value.
(2) Increase the homeowners' exemption for owner-
occupied, single-family homes on two acres or
more, condominiums, and duplexes to $1,500 of
assessed value.
(3) Provide for the first time a $1,500 homeowners'
exemption to:
(a) owner-occupied, multiple dwelling units
(b) cooperatives owned by corporations in which
tenants own a share, which gives them exclusive
use of a dwelling unit (Roosmoor-type coopera-
tives).
B. Fiscal Implications:
General fund cost
1970-71
$388 million
1971-72
422
11
C. Present Law:
Under present law, a $750 exemption of assessed value
is available for all owner-occupied, single-family homes
condominiums, and duplexes.
D. Rationale:
(1) Increasing the homeowners' exemption reduces the
regressivity of the property tax.
(2) Since the homeowners' exemption decreases taxes
on 35% rather than on 100% of taxable property,
greater tax reductions, for homeowners, can be
achieved through this exemption than through
general property tax reduction programs.
(3) The exemption of 20% of the assessed value, after
$1,000 exemption, mitigates the assessors' ability
to reduce the significance of the homeowners'
exemption.
(4) Increasing the homeowners' exemption is a form of
property tax reduction visable to taxpayers.
RENTER RELIEF PROGRAM (AB 1000, Sec. 48)
A. Proposal: This program would allow a qualified renter a tax
credit against his personal income tax liability in
the amount of $50 or the tax liability, whichever
is smaller. The credit is $50 in the case of a single
individual, head of household, or married couple
filing jointly. Married couples filing separately
may divide the credit or the credit may be claimed
by one spouse.
A qualified renter is an individual who was a resident
of this State and rented premises as his principal
place of residence as of March 1 of the taxable year,
unless such premises were exempt from property taxes.
B. Present law:
Contains no provisions for property tax relief
for renters.
C. Fiscal Implications:
Costs are estimated by the Franchise Tax Board to be
$85 million in the first year.
Coverage is estimated at about 2 million households.
D. Rationale: Although only few studies have been made on the
subject, most authorities would agree that renters do
indeed pay some portion of the owner's property tax
liability in their rental payments.
Since persons who rent property can be expected to
cover all costs of doing business as other entrepreneurs
do, this would be the logical assumption.
Most studies have shown that property taxes constitute
generally 13% to 25% of the renter's annual payments.
However, the studies are not consistent in their
results, and the evidence is even more contradictory
in terms of the amount of property tax increases that
are reflected in increased rental charges.
In its provision of a flat dollar amount of relief
rather than a given percent of rental payments, this
proposal recognizes that renters do pay property
taxes but that the average percent is uncertain and
unknown.
The $50 tax credit is roughly equivalent to the
amount of property tax relief received by homeowners.
BUSINESS INVENTORIES (AB 1001, Sec. 13, 31)
A. Proposal: Beginning on the 1971 lien date, increase the
exemption for business inventories from property
tax to 50%.
Inventories are defined by present law to include:
1. Goods intended for sale or resale in the
ordinary course in business.
2. Raw material and work in process with respect
to such goods.
3. Animal and crops held for sale or resale.
4. Animals used for the production of food or
fiber and feed for such animals.
B. Fiscal Implications:
First full years costs should fall between $130-140
million, depending on certain unknowns of economic
growth.
C. Present Law:
Present law provides for an exemption of 30% of inven-
tories for 1970 and 1971 and a 15% exemption for each
year thereafter.
D. Rationale:
1. Business inventory taxation has long been viewed
as undesirable. Studies by the Assembly Committee
on Revenue and Taxation, National Tax Association
and recently by the Advisory Commission on Inter-
governmental Relations have all condemned this tax.
2. Inventory taxes place California at a definite
disadvantage in competing with other states for
new industries and jobs. California needs both.
Arizona, Nevada, Oregon, and Hawaii all give tax
advantages to inventories. California is isolated
by her neighbors.
3. Inventory taxes cause an annual slow-down in
business activity prior to March 1 that causes a
loss in warehouse occupancy in California, fewer
goods available to consumers, loss in business
income and jobs, and loss in tax revenue to state
and local government.
4.
Inventory taxes are inequitable. They produce
serious tax inequities between businesses requiring
inventories and those that do not, and even a
disparity of tax burdens between businesses
requiring inventories due to differences in turn-
over, seasonal fluctuations, etc.
5. Inventory taxes hinder the efficient operation
of free markets and reduce income from other tax
sources.
6. Inventory taxes are regressive. They are passed
on to the consumer and are imposed on such items
as food, medicine, clothing, etc.
WELFARE - MEDI-CAL TAX RELIEF (AB 1001, Sec. 100, 101, 104-7)
A. Proposal: 1. Welfare:
a) Provides for uniform 75% state/25% local
sharing ratio for categorical aids program.
b) Requires counties to pay their full 25%
share up to a tax rate of 25¢ per $100 per-
cent of assessed value.
c) Reduces counties share of remaining costs to
7½ of the state-local costs of categorical
aids.
2. Medi-Cal:
a) Counties would no longer be required to
participate financially in the Medi-Cal
(Title XIX) program.
b) The State of California would no longer
constitute to any county medical indigent
program through the "county option".
B. Fiscal Implications:
The Legislative Analyst's office estimates costs in
millions at:
1970-1
71-2
72-3
73-4
$143
$167
$194
$225
C. Present Law:
The five categorical aid welfare programs now have
five different sharing ratios. The counties fully
fund their share from locally levied revenues.
D. Rationale:
1.
Provides tax relief to all property taxpayers in
all counties.
2. Equalizes the welfare burden among the counties
and removes the heavy load from counties with high
welfare costs.
3. Restores full local control to counties in the
design and management of their medically indigent
program.
4. Provides administrative simplification and sub-
stantial cost savings in Health Care Services.
OPEN SPACE PROGRAM
A. Proposal: 1. Mandates all counties to make available the
provisions of the Land Conservation Act to all
eligible properties.
2.
vides for payments to local government for land
under open-space restrictions as follows:
Prime
Non-Prime
Counties
$1.50
$ .50
Schools:
Elem. district
.75
.25
High school district
.60
.20
Junior college district
.15
.05
Unified
1.35
.45
Cities
1.50
.50
B. Fiscal Implications:
Depending on how much additional land will be placed
under agreement as a result of the provisions of this
measure, it is estimated that the cost to the state
will be $8 million in 1970-71 and $13 million in 1971-72.
C.
Present Law:
The Land Conservation Act is optional with counties
and there are no state funds provided to local
government for open-space lands under restriction.
D.
Rationale:
The need to save prime agricultural lands and other
open-space lands is one of statewide concern. The
program cannot be effective if a number of important
counties refuse to implement the program.
This proposal would help preserve the rapidly-
disappearing open spaces in California.
A flat rate payment was selected for payment to
counties to help cushion the revenue impact in local
areas. It is impossible to administer a program and
protect the state's treasury if the state were to
attempt actual reimbursements - as the assessor only
makes one assessment -- that based on open-space use.
SALES TAX (AB 1000, Sec. 40-42)
A. Proposal: 1. Rate increase: increase the State sales and
use tax rate from 4% to 5%, making the total
6% on all sales taxable transactions.
2.
Administrative charge to local governments:
at the present time, the local governments pay
1/5 of the State Board of Equalization's adminis-
trative costs because they get 1/5 of the
revenue distributed to local governments, and,
therefore, this measure provides that beginning
July 1, 1970, they will pay costs on the basis
of 1.02% of the revenue they receive.
3.
Contractor's exemption: exempts from the increase
in sales and use tax the taxable purchases made
by contractors if the items are used in perform-
ing work contracted for because the increase in
tax was enacted.
B. Present Law:
1.
Rate: the present rate of the sales and use tax
is 5%, constituting 4% for the state and 1% for
cities and counties.
2.
Administrative charge: local governments presently
pay for 1/5 of the State Board of Equalization's
administrative costs attendant to collecting and
distributing the sales and use tax.
3.
Contractor's exemption: there is no effective
provision in present law that exempts purchases
made by contractors. However, a similar special
provision was enacted in 1967 when the sales tax
was increased lc.
C. Fiscal Implications:
Estimated revenue increase in millions:
70-1
71-2
72-3
Rate Increase
$422
$492
$525
Contractor's exemption
-12
- 2
- 0
Net Increase
$410
$490
$525
D.
Rationale:
1.
Rate increase: although many object to the rise
of the sales tax on the grounds that it is a
regressive tax, the sales tax in California
exempts food, housing and prescription drugs
from taxation and by doing so, becomes a nearly
proportional tax. Recent studies indicate that
the California sales tax has an index falling
somewhere between .81 and .98 (1.00 indicates a
proportional tax and less than 1.00 a regressive
tax.)
In terms of this tax package, the sales tax
increase partially offsets the business property
tax relief as businesses pay a significant portion
of the sales tax.
The sales tax is the most productive tax source
at any given tax rate.
2. Administrative charge: the effect of the change
in method of determining the costs to be paid by
local governments will continue to pay what they
now do.
3. Contractor's exemption: an exemption for contrac-
tor's purchases necessary to complete existing
contractual arrangements is generally provided
when sales and use tax increases are proposed.
BANK & CORPORATION TAX RATE INCREASE OF 1/2/c (AB 1001, Sec. 37-42,
72)
A. Proposal: Effective 1/1/72, this measure would increase the
State's bank and corporation franchise rate to 71/2%
B. Present Law:
Present bank and corporation franchise tax rate
is 7%.
C. Fiscal Implications:
When fully effective, this measure would provide
approximately $50 million per year in revenue.
D. Rationale:
1. The business community will receive general
property tax relief in the welfare provisions of
this package as well as more specific relief in
the form of business inventory tax relief. The
timing of this increase corresponds to the increase
in the cost of the inventory tax exemption for
1972-3.
2. The impact of the state corporate tax is greatly
reduced because it's deductible from the federal
income tax. Studies indicate the effective rate
is less than half of the nominal rate.
LIMIT ON OIL DEPLETION ALLOWANCE (AB 1000, Sec. 86; AB 1001, Sec. 95)
A. Proposal: Limit depletion allowance for oil and gas wells to
five times the adjusted cost of the taxpayer's interest
in such property. The taxpayer would continue to
deduct 27½ of gross income, up to 50% of net income
until the point that the depletion allowances taken
amounted to five times cost.
B. Fiscal implications:
The Franchise Tax Board estimates that for income
year 1970, this proposal will produce $14.8 million
in additional revenue.
C. Present law:
Under present law, California allows, for oil and gas,
a depletion allowance which allows a deduction from
taxable income of 27½ of gross income, not to exceed
50% of net income. There is no limit as to the
extent that the depletion allowance may exceed the
adjusted cost of property.
For federal income taxes, the depletion allowance was
reduced by the Tax Reform Act of 1969 from 27½ to
22%. The Franchise Tax Board estimates that conformity,
just on the oil and gas depletion figure of the new
federal law, would produce $4.1 million in additional
revenue.
D. Rationale:
1. There should be some limit on how much depletion
is allows on any given property.
2. The Franchise Tax Board's most recent study of
the depletion allowance for income years
1967 and 1968 reveals that on the average
percentage, depletion results in a deduction
equal to 15.6 times cost.
3. Certain natural resources producers, such as oil
and gas, enjoy a tax deduction not enjoyed by
other businesses. Many other businesses have
assets which are losing value (depleted) due to
obsolescence on other reasons and operate in a
high risk field of endeavor. The motion picture
industry would be a good example.
CAPITAL GAINS (AB 1000, Sec. 110,111,113)
A.
Proposal: The provisions relating to capital gains contains
the following changes:
(1) Holding Period
Amount Taxes
0-1 years
100%
1-2
II
80%
2-5
=
65%
5-10
=
50%
over 10
=
40%
(2)
Capital losses: the existing $1,000 capital
loss limitation is changed to conform to the
new federal treatment in regard to married persons
filing separate returns. Under the new provisions,
each spouse is allowed a deduction of $500 for a
capital loss if separate returns are filed.
(3) Cattle and horses: under these provisions, the
classification of cattle and horses as property
used in a trade or business is conformed to
the new federal law. Gain from the sale of
cattle and horses held by the taxpayers for draft,
breeding, dairy, or sporting purposes are accorded
capital gain treatment only if held for 24 months
or more.
(4) Miscellaneous: the bill contains several other
provisions that appear to change the present
treatment but actually preserve current treatment
under the new provisions. For example:
(a) non-business bad debts are treated as a
loss arising from a capital asset held for
less than a year in order to preserve its
current 100% deductibility status.
(b) a holding period of 5-10 years (50%) is
attributed to a lump-sum distribution from
a pension plan or employee annuity trust
plan in order to preserve current treatment
of 50% taxable.
(c) the holding periods attributed to capital
loss carryovers are changed to preserve the
same percentage treatment as they receive
under current law.
B.
Present Law:
(1)
Holding period: under existing law, gain on
assets held 6 months or less is treated as
ordinary income and taxed at 100%; for assets
held longer than 6 months only 50% of the gain
is taxed.
(2) Capital losses: under present law, if married
persons file separate returns, each spouse is
allowed to deduct $1,000 for a capital loss.
(3)
Cattle and horses: present law requires that
cattle and horses as well as other livestock
be held 12 months or more before eligible for
capital gains treatment.
-2-
C. Fiscal Implications:
Revenue gains are estimated in millions for these
income years by the FTB as follows:
1970
1971
1972
1973
Change in Holding
Period
18.6
21.6
23.3
26.8
Change in $500
Loss Limit
.7
.8
.8
.9
D.
Rationale:
(1)
Change in holding period:
economists
and
most
tax experts argue that the preferential treatment
of capital gains income discriminating against
some enterprises as well as individuals that do
not have capital gains income and are not able to
take their income in this form.
In addition, taxpayers' attempts to convert
ordinary income into capital gains and the
government's efforts to prevent this are often
said to be responsible for many complexities in
current provisions.
Many economists also argue that it is impossible
to draw a clear distinction between capital gains
and other income from property that doesn't qualify.
On the other hand, compelling arguments have been
made for a different treatment of capital gains
because they often accrue over many years, are
subject to the effects of inflation, and are
realized at irregular intervals.
There is general agreement, however, that present
provision go far beyond those required to avoid
discrimination against capital gains and adverse
effects upon investment.
In addition, present capital gains treatment
violates the principle of tax neutrality by giving
a tax premium to companies which conduct their
financial affairs in a certain way.
(2)
Capital losses: the new treatment of capital loss
limitation for married taxpayers is aimed at pre-
venting married couples from filing separately merely
to take advantage of the $1,000 capital loss deduc-
tion for each spouse.
(3)
Cattle and horses: in the case of these animals,
it is generally felt that the taxpayer cannot
determine within the existing 12-month period which
animals he will keep for the specified purposes of
draft, breeding, dairy, or sport.
WITHHOLDING (AB 1000, See Index)
A. Proposal: This measure provides:
1. Begin withholding of state personal income taxes
beginning January 1, 1971, and require quarterly
estimates if a person has $1,000 or more in income
subject to tax from other than wages and salaries.
2. Repeal of the present October prepayment of one-
half of the previous year's income tax paid.
3. Provides a tax credit of 40% for 1970 income taxes --
which represents 100% forgiveness of non-reoccuring
revenues.
4. Establishes a 5% penalty for failure to pay
income taxes on time plus a penalty of 1/2% per
month for each month the tax remains unpaid (up
to 36 months).
Withholding is a procedure for collecting State income
tax when income is earned, by withholding the tax
from wages and by quarterly estimates, similar to
federal law.
Beginning on January 1, 1971, most wage earners will
be subject to withholding in their regular payroll
period.
If the amount withheld by an employer is more than
$50 per month, the employer will remit to the State,
on a monthly basis; if less than $50, the remittance
will be required on a quarterly basis.
For persons with $1,000 in income, subject to tax,
from other than wages and salaries, a quarterly
estimate payment will be required beginning on April
15, 1970.
The second payment is due June 15 and the others
on September 15 and January 15 of the following year.
No estimate need be made if the tax for the prior year
is $100 or less, for joint returns.
B.
Present Law:
In California, withholding of income taxes is only
done for out-of-state residents.
C. Fiscal Implications:
Estimated Fiscal Impact (In Millions)
1970-71
1971-72
1972-73
1973-74
$105
$220
$175
$180
D.
Rationale:
1.
Withholding produces substantial amounts of
revenue every year which can be used to provide
additional property tax relief.
2.
Withholding is an effective mechanism for collecting
from substantial numbers of persons who are evading
State income taxes.
3. Withholding is the only means of correcting a very
serious cash flow situation which now faces the
State of California and which will get worse each
year as the percent of general fund revenue from
the personal income tax increases (the income
tax is more elastic and grows faster than the
other general fund revenue sources).
4.
The Legislative Analyst's Analysis of the Budget
Bill demonstrates the condition of the General
Fund Cash Flow (page 919) in millions:
Current
Deficiency
Month
Receipts
Disbursements
or Excess
1970-71
July
329
398
- 69
August
343
470
-127 -
September
234
377
- -143
October
372
383
- 11
November
595
400
195
December
234
385
-151 -
1971-72
January
265
391
-126 -
February
389
450
- 61
March
410
594
- -184
3,171
3,848
I
-677
5.
Virtually all states but California and North
Dakota that have a personal income tax also have
withholding:
WITHHOLDING IN THE UNITED STATES
Year of
Degree of
State
Adoption
Forgiveness
Oregon
1948
None
Alaska
1949
N.A.
Delaware
1949
None
- 2 -
Vermont
1951
None
Arizona
1954
None
Colorado
1954
None
Kentucky
1954
None
Idaho
1955
None
Maryland
1955
None
Montana
1955
None
Alabama
1956
None
District of Columbia
1956
50%
Indiana
1956
None
Hawaii
1957
N.A.
Massachusetts
1959
None
New York
1959
Most*
Utah
1959
None
North Carolina
1960
None
South Carolina
1960
None
Georgia
1960
None
Louisiana
1961
None
West Virginia
1961
N.A.
Missouri
1961
None
Oklahoma
1961
None
New Mexico
1961
None
Minnesota
1961
75%
Wisconsin
1962
65%
Virginia
1963
None
Arkansas
1966
None
Iowa
1966
None
Kansas
1966
None
Nebraska
1967
N.A.
Michigan
1967
N.A.
Mississippi
1968
None
Maine
1969
N.A.
Illinois
1969
N.A.
Note: The states where forgiveness was not
applicable is where withholding was
introduced simultaneously with intro-
duction of income tax.
*In New York, 1968's tax liabilities, except those
on trusts, estates and capital gains, were forgiven.
At the same time, however, the New York income tax
was substantially increased to provide the revenue
required by forgiveness.
- 3 -
PERSONAL INCOME TAX - Add 11% and 12% Rates (AB 1000, Sec. 46)
A. Proposal: This measure adds an 11% bracket to the personal income
tax for taxable incomes over $32,000, beginning
January 1, 1972, and a 12% bracket for incomes over
$36,000 beginning January 1, 1973.
B. Present Law:
Presently, 10% is the highest income tax rates on
personal taxable income, applying to taxable incomes
over $28,000.
C. Fiscal Implications:
Revenue increases are estimated as follows: (in millions)
1971-2
1972-3
1973-4
$15
$60
$96
C. Rationale:
1. Increasing the tax rates for higher income
taxpayers compensates for the higher property tax
relief that they receive in the form of the 20%
feature. This flat percentage reduction of
assessed value will give more relief to taxpayers
with higher valued homes.
2. The recent publication by the Advisory Commission
on Intergovernmen ta Relations entitled "State
and Local Finances", 1967 to 1970, demonstrates
that in 1968, 20 areas had higher effective rates
of personal incomes taxes for a married couple
with two dependents and adjusted gross income of
$25,000 (Table 39). These were: Alaska, Colorado,
Delaware, District of Columbia, Georgia, Hawaii,
Idaho, Kentucky, Maryland, Minnesota, Montana,
New York, North Carolina, North Dakota, Oregon,
South Carolina, Utah, Vermont, Virginia, Wisconsin.
In many of these states, the burden was substan-
tially higher than Californias, up to 90% higher
in one state (Wisconsin).
CONFORMITY WITH FEDERAL TAX REFORMS
I. MINIMUM INCOME TAX (AB 1000, Sec. 50; AB 1001, Sec. 41, 43)
A. Proposal: Impose a 1.5% tax on certain income exempt from
income taxes. The tax is computed on the gross
amount of exempt income, less
(1) $30,000
(2) Income taxes paid for the taxable year
(3) Net losses
Exempt income subject to the minimum tax includes:
(1) Excess of net investment interest over
investment income
(2) Excludable capital gains
(3) Stock options: difference between option
price and fair market value
(4) Accelerated depreciation on real property
(5) Accelerated depreciation of personal property
subject to net lease
(6) Depletion: amount of allowable depletion less
adjusted basis
(7) Bad debt deductions of financial institutions:
amount of deduction allowed less amount which
would be required, based on institutions
actual loss experience
B. Fiscal Implication:
For 1970-71, the proposed tax would produce
approximately $10.12 million based on federal
fiscal effect.
C. Present Law:
The types of income subject to the proposed
minimum income tax are now exempt from personal
or corporate income taxation.
D. Rationale:
The present tax treatment which permits individuals
and corporations to escape tax on certain portions
of their economic income results in an unfair
distribution of the tax burden. In recent years,
there has been a significant number of cases where
taxpayers with economic incomes of $1 million or
more paid little or no income tax. United States
Treasury studies also show people who paid little
or no tax in one year are very likely to pay
little or no tax in succeeding years.
Existence of this basic unfairness in the tax
system undermines public confidence in the income
tax and in government itself.
CONFORMITY WITH FEDERAL TAX REFORMS
II. REAL ESTATE DEPRECIATION (AB 1000, Sec. 60, 61, 122-124;
AB 1001, Sec. 82-84)
A. Proposal: Enact new depreciation rules as follows:
(1) 200% declining-balance method of depreciation
allowed for rental residential property only
(2) 150% declining-balance method allowed for
new real estate bought or constructed after
July 24, 1969 only
(3) 125% declining-balance method allowed for
used residential rental property only with
a useful life of 20 years or more
(4) For all other property, only straight line
depreciation will be allowed
(5) A five-year rapid write-off for capital
expenditures made between July 24, 1969 and
before 1975 for rehabilitation of substandard
and slum housing rented to persons of low
and moderate income. Such expenditure must
not exceed $15,000 per unit
(6) The excess of post 1969 realty depreciation
over straight line depreciation will be
100% recapture
B. Fiscal Implication:
The estimated state revenue gain from conformity
to the new depreciation guidelines is:
1970 - Minor
1971 - $ 1.0 million
1972 - $ 1.8 million
1973 - $ 5.4 million
1974 - $ 7.9 million
1979 - $18.6 million
C. Present Law:
In general, taxpayers are now allowed the 200%
declining-balance method for all new realty and
the 150% declining-balance method for all used
realty
D. Rationale:
Accelerated depreciation will frequently allow
deductions in excess of the amount required to
service the mortgage during the early life of
the property, thus producing in many cases, a
tax loss deductible against other income even
though there is a positive cash flow.
In addition, accelerated depreciation usually
produces a deduction far in excess of the actual
decline of the usefulness of the property.
As a result of the fast depreciation and the
ability to deduct amounts in excess of the tax-
payer's equity, economically profitable real
estate operations normally produce substantial
tax losses, sheltering from the income tax the
economic profit of the operation and permitting
avoidance of income tax on the owner's other
ordinary income -- such as salary and dividends.
Later, the property can be sold and the excess
of the sale price over the remaining basis is
treated as a capital gain.
- 2 -
CONFORMITY WITH FEDERAL TAX REFORMS
III. INCOME AVERAGING (AB 1000, Sec. 125-9)
A. Proposal: Extend income averaging to types of income
now excluded from averaging --- capital gains,
gambling income and gifts.
B. Fiscal Implication:
State revenue loss:
1970-71, $3 million
1971-72, $4
II
C. Present Law:
Taxpayers may now average income if current
years income is 133-1/3% above his averageable
income for the past four years. Excluded from
the averaging provisions are capital gains,
gambling, winnings, and gifts. Current year's
income must be at least $3,000 in excess of
average income.
D. Rationale:
Allowing additional types of income to be
averaged will materially simplify the averaging
computation. The present complexity of the
procedure deters some eligible taxpayers from
making use of income averaging.
In addition, there does not appear to be a
valid reason for denying the averaging feature
to types of income formerly excluded.
CONFORMITY WITH FEDERAL TAX REFORMS
IV. MOVING EXPENSES (AB 1000, Sec. 54, 63)
A. Proposal: To expand the present moving expense deduction
to include:
(1) Expenses for house hunting trips
(2) Temporary living expenses at new job location
while waiting to move into permanent
quarters (limit of 30 consecutive days)
(3) "Qualified" expenses incident to a sale,
purchase or lease of a residence. The
above deductions are limited to $2,500.
Self-employed are allowed to claim moving expense
deduction.
The entire deduction is restricted to moves where
the new principal place of work is 50 miles
further distant from his old home than his old
place of work.
Income received for moving expenses must be
included in gross income.
B. Fiscal Implication:
State revenue loss of $ .7 million for 1970-71
C. Present Law:
Current California law allows a deduction for:
(1) The cost of transporting the taxpayer and
his family from the old house to the new one
(2) The cost of transporting belongings, and
(3) The cost of meals and lodging in route.
To obtain this deduction, the taxpayer's new place
of work must be 20 miles further from his old
home than his old place of work. In addition,
the taxpayer must be employed full time during
at least 39 weeks of the 52 weeks immediately
following his arrival at the new place of work.
Both the old and new residence must be in California.
D. Rationale:
The mobility of labor is an important and necessary
part of a dynamic full employment economy. Sub-
stantial moving expenses are incurred by taxpayers
in connection with employment related moves and
these expenses are widely viewed as a cost of
earning income.
CONFORMITY WITH FEDERAL TAX REFORMS
V. FOSTER CHILDREN (AB 1000, Sec. 49)
A. Proposal: Allow foster children to qualify as a dependent
B. Fiscal Implication:
Minor revenue loss
C. Present Law:
State law now provides that a foster child does
not qualify as a dependent
D. Rationale:
Foster children are treated in every way as
part of a family unit and a credit for such
children should be allowed to recognize costs
of care of such children.
CONFORMITY WITH FEDERAL TAX REFORMS
VI. DEDUCTIBILITY OF TREBLE DAMAGES, FINES, PENALTIES (AB 1000,
Sec. 55; AB 1001, Sec. 81)
A.
Proposal: (1) Provide fines and penalties are not
deductible business expenses
(2) Prohibit deduction of moneys paid for
bribes of public officials and "kickbacks"
(3) Prohibit deduction as a business expense
2/3 of treble damage payments under the
anti-trust laws.
B. Fiscal Implication:
Revenue gain; unknown amount
C. Present Law:
Present law is unclear whether fines and
penalties are deductible; however, treble
damages are now fully deductible as business
expenses
D. Rationale:
By allowing a deduction for treble damages,
the State allows a business to mitigate the
penalty provisions of the anti-trust laws and
is in the curious position of, in effect,
paying a portion of the anti-trust judgment
through foregone tax revenue.
CONFORMITY WITH FEDERAL TAX REFORMS
VII. ACCUMULATION AND MULTIPLE TRUSTS (AB 1000, Sec. 92-104)
PRESENT LAW:
Single Accumulation Trust:
Presently, the law treats the trust as a
separate entity which is taxed in the same
manner as an individual. The important
difference is that trusts are allowed to
deduct from taxable income any distributions
of ordinary income made to beneficiaries.
The beneficiaries then include these distri-
butions in their income for tax purposes.
Therefore, in the case of income distributed
currently, the trust merely acts as a conduit
through which the income passes to beneficiaries,
and the income retains the same character in the
hands of the beneficiaries as it does in the
hands of the trust. However, a trustee may be
required or able to accumulate the income for the
benefit of the beneficiaries and to this extent
the income is taxed at individual rates to the
trust.
When the trust distributes accumulated income to
the beneficiaries, they are sometimes taxed
under the throwback rule. This rule treats the
income for tax purposes as if it had been received
by the beneficiary in the year in which it was
received by the trust (i.e., the beneficiary must
compute the current tax as if the income had been
received by him in the year the income was earned
by the trust). However, the beneficiary is taxed
under this rule only on the portion of the distri-
bution that was earned by the trust in the five
years immediately prior to the distribution. In
addition to this limitation, the throwback rule
does not apply to several types of distributions.
If the accumulation distribution falls within
one of these exceptions, the throwback rule does
not apply and the trust rather than the bene-
ficiary is taxed on this income.
Multiple Accumulation Trusts:
Present law permits, in some cases, the creation
of multiple trusts by the same taxpayer for the
same beneficiary. The effect of multiple
accumulation trusts is to split income among
several taxable entities, thereby achieving taxation
at lower rates to each trust.
Capital Gains Income Treatment:
Also, if the trust has capital gains income,
these gains are generally taxed to the trust in
the year earned and there are no further tax
consequences upon the distribution of these gains
in later years.
Trusts, Special Circumstances:
In the case of a trust established by the taxpayer
for the benefit of someone else, present law
provides that the taxpayer creating the trust is
to be treated as the owner of the trust generally
if the trust income can be distributed to the
taxpayer himself or can be used to his benefit
now or in the future. In such cases, the trust
income is taxable to the taxpayer as earned and
not to the trust or the named beneficiaries.
PROPOSAL:
Single and Multiple Accumulation Trusts:
This proposal conforms California law to the
changes made in the Federal Tax Reform Act in
connection with single or multiple trusts and
trusts of the benefit of a spouse.
This measure substantially reduces the tax
savings that result from shifting income to one
or more trusts and not making distributions to
beneficiaries. This is accomplished by taxing
beneficiaries as income is earned by the trust.
The proposed measure achieves this effect by
eliminating the five-year limitation and all the
exceptions to the throwback rule, and providing
instead an unlimited throwback rule with respect
to the accumulation distributions, whether from
one or more trusts.
The tax on the amounts SO determined to be
includible in the taxpayer's income may generally
be computed in either of two ways, with credits
allowed for the taxes paid by the trust (s) in
prior years. A first-in, first-out rule is
applied to determine which years the income was
accumulated by the trust for purposes of "throwing
back" the accumulation under the new unlimited
throwback rule. The beneficiary's tax liability
can be computed either by the exact method, which
is substantially the same as the current method,
or by the "shortcut" method which allows the
taxpayer to use a three-year averaging method of
computing the additional liability.
Capital Gains Income Treatment:
The proposal substantially changes the treatment
of capital gains treatment. The accumulation trust
distributions would retain the same income
character to the beneficiary as they had in the
hands of the trust (s). In essence, this means
that a distribution of capital gains income would
be treated as such to the beneficiary: the
beneficiary would be taxed separately on such
amount as if the capital gains were his own. An
unlimited throwback rule also applies to capital
gains and a distribution is determined to be one
of capital gains to the extent that the distri-
bution is greater than all of the accumulated
ordinary income. (NOTE: If a distribution is
greater than both the accumulated ordinary
income and capital gains income, to that extent
it is considered to be a distribution of corpus
and no additional tax will be imposed.)
Trusts, Special Circumstances:
In the case of a trust as described under this
subheading, "Present Law", the new law provides
that the income of a trust is taxable to the
creator of the trust if the trust income can be
distributed to this taxpayer or his spouse or
if the income can be used to benefit him or his
spouse now or in the future. This provision does
not apply if the beneficiary spouse is required
to include the trust income in his or her own
gross income. This provision is usually referred
to as the treatment of "trust income for the
benefit of spouse".
FISCAL IMPACT:
The estimated revenue gains are as follows:
Income year
Millions $
1970
.2
1971
.6
1972
.8
1973
1.0
1974
1.3
1979
2.7
Note: Initial revenue gains are small due to
provisions of the act that delay the effective
date for trusts making distributions from
income accumulated in prior years. Only after
December 31, 1973, will the new rules apply to
all trusts and even then only to accumulations
made after December 31, 1973. This delayed
impact is desirable as it allows the taxpayer to
maintain the necessary records for future tax
years.
RATIONALE:
General:
When a trustee has the discretionary power of
distributing trust income now or in the future,
he can elect to make such distribution at a time
when the beneficiary is in a low income tax
bracket. The progressive rate structure is thus
avoided by deferring the distribution from the
trust to the beneficiary. This means that the
income in question is taxed to the trust at the
starting tax rate instead of to the beneficiary
at his marginal tax rate. The throwback rule
theoretically prevents this result, but the
five-year limitation and the numerous exceptions
seriously erode effective taxation of the trust
income at the beneficiary's marginal rate. This
avoidance device is compounded by the use of
multiple trusts (the creation of more than one
accumulation trust by the same grantor for the
same beneficiary). Multiple trusts may be used
to split the income among several trusts, thus
reducing the applicable tax rate substantially.
For these reasons, the new tax provisions
eliminate the five-year limitation and the
numerous exceptions to the throwback rule with
respect to an accumulation distribution. For
future accumulations, all deferred income distri-
butions would be taxed to the beneficiary upon
distribution to him and the amounts would be
treated as if they had been distributed to the
beneficiary in the years in which the income was
accumulated by the trust.
Capital Gains Income Treatment:
The purpose of the new provisions in regard to
capital gains income treatment is to close a
significant loophole in the present law that
allows the trust to be taxed currently on capital
gains and further permits such gains to be
distributed in later years with no additional
tax to the beneficiary. The new measure will
reduce the extent to which capital gains income
is taxed to the trust at low rates, instead of
to a beneficiary at high rates.
Trusts, special circumstances:
The purpose of the new treatment for trusts deemed
created for the benefit of spouse is to treat
husband and wife as a single economic unit.
CONFORMITY WITH FEDERAL TAX REFORMS
VIII. UNRELATED BUSINESS INCOME OF TAX EXEMPT ORGANIZATIONS
(AB 1001, Sec. 44-49, 64, 66, 67, 85)
A. Proposal: Extend corporation income tax to unrelated
business income of all exempt organizations
B. Fiscal Implication:
Revenue gain; unknown amount
C. Present Law:
The present state law imposes the unrelated
business income tax on a number of tax exempt
organizations -- such as churches, labor,
agricultural and horticultural organizations,
schools, charitable organizations, business
leagues, etc.
Such organizations still exempt are social
clubs, fraternal beneficiary societies,
civic leagues, organizations of employees.
D. Rationale:
The issue here is tax neutrality and tax
equity. When an organization engages in
a business as a profit-making activity
unrelated to the exempt organization - it
has a competitive advantage over like busi-
nesses which are subject to income taxes.
The tax structure should be neutral with
respect to business organizations and
competition. In addition, it is hardly
equitable to tax, for example, total income
of a hospital or church and exempt the same
for a civic league.
CONFORMITY WITH FEDERAL 1 AA RETORMS
IX. INVESTMENT INCOME OF CERTAIN TAX EXEMPT ORGANIZATIONS
(AB 1001, Sec. 53)
A. Proposal: Extend the unrelated business income tax to
investment income of social, fraternal and
similar organizations
B. Fiscal Implication:
Revenue gain; unknown amount
C. Present Law:
Investment income of social, fraternal and
similar organizations are tax exempt
D. Rationale:
Since the tax exemption for social clubs and
other groups is designed to allow individuals
to join together to provide recreational or
social facilities or other benefits on a mutual
basis, without tax consequences, the tax
exemption operates properly only when the
sources of income of the organization are
limited to receipts from the membership.
Under such circumstances, the individual is in
substantially the same position as if he had
spent his income on pleasure or recreation
without the intervening organization.
However, when the organization receives income
from sources outside the membership, such as
income from investments, upon which no tax is
paid, the membership receives a benefit not
contemplated by the exemption in that untaxed
dollars can be used by the organization to
provide pleasure or recreation to the membership.
CONFORMITY WITH FEDERAL TAX REFORMS
X. MINERAL PRODUCTION PAYMENTS (AB 1000, Sec. 87; AB 1001, Sec. 96)
A. Proposal: (1) Treat a carved-out mineral production payment
as a mortgage loan on the mineral property
rather than an economic interest in the
property.
(2) Treat a production payment on the retained
sale of a mineral property as a purchase
money mortgage rather than an economic
interest in the mineral property.
B. Fiscal Implications:
State revenue gain:
1970 - $2.3 million
1971 - $2.6 million
C. Present Law:
A carved-out production payment is created when
the owner of a mineral property sells - or
carves out - a portion of his future production.
A carved-out production payment is usually sold
for cash and, quite often, to a financial insti-
tution. Under present law, the amount received
by the seller of the carved-out production
payment generally is considered ordinary income
subject to depletion in the year in which
received. The purchaser of the production payment
treats the payments received as income subject
to the allowance for depletion (almost always
cost depletion) and thus generally pays no tax
on those amounts (except for that portion of the
payments which is in the nature of interest).
The amounts utilized to pay the production
payment are excluded from income by the owner
of the property during the payout period, but
the expenses attributable to producing the
income are deducted by him in the year they are
incurred.
A retained production payment is created when
the owner of a mineral interest sells the working
interest, but reserves a production payment for
himself. Under present law the owner of the
retained production payment receives income for
which percentage depletion may be taken during
the payout period, or period during which he
receives a part of the production (or a payment
based on production). The purchaser of the
working interest excludes the amounts used to
satisfy the production payment during the payout
period, but (until recently) deducted the cost
of producing the minerals subject to the production
payment.
D. Rationale:
Mineral production payments are transactions which,
in fact, are very similar to loans. In a carve-
out, the analogy to the loan is the borrowing
of money. In the retained production payment,
the analogy is to the sale of a property subject
to a mortgage. While the factual similarities
are readily apparent, the tax treatments are
quite different -- the mineral production
payment system substantially reduces tax liabilities
by the avoidance of limits on depletion deductions
and mismatching of income and expenses which
creates artificial tax losses.
There is no reason why a person who, in effect,
is the borrower in a production payment trans-
action should be allowed to pay off the loan
with tax free dollars while a borrower of funds
in any other industry must satisfy the loan out
of taxed dollars.
The factual similarity between the creation of
a production payment and a loan transaction and
the disparate tax treatment of production payments
and loans can be illustrated by examining two
hypothetical A-B-C transactions, one involving
an oil payment, and the other the sale of an
apartment.
Assume that A sells an operating business to B -
the business may be an oil well, or may be an
apartment building. However, assume that A
retains the right to a production payment - a
payment equivalent to the current price of a
specified number of barrels of oil - or in the
case of the apartment building, a mortgage, which
is not much different from the production payment.
Then suppose that A sells the production payment
or mortgage to C.
From A's standpoint, the two transactions are
treated the same - they both result in a capital
gain - or loss - to A depending upon his cost
or other basis whether it is the apartment building
or oil well which is being sold.
However, the similarity between the oil well and
the apartment building ends here. In the case of
the apartment building, all of the rental income
after ordinary expenses and depreciation is
taxable income to B and he must pay off the
mortgage out of "after tax" dollars.
- 2 -
In the case of the oil well, however, B is not
considered as receiving the production payment
at all - which, in the typical case, may well
amount to as much as 90 percent of the income
from the well. Thus, in this case B is, in
effect, paying the production payment out of
"before tax-dollars". This privilege of paying
off capital interests out of tax free dollars
is not a privilege accorded ordinary taxpayers.
- 3 -
CONFORMITY WITH FEDERAL TAX REFORMS
XI. UNLIMITED CHARITABLE CONTRIBUTION
A. Proposal: This measure would reduce by 1975 the presently
unlimited charitable deduction to 50% of a
taxpayer's taxable income. The reduction is
accomplished gradually in the years 1970-1974.
For the first taxable year affected, the unlimited
deduction can't reduce the taxpayer's taxable
income to less than 20% of his adjusted gross
income.
At the same time, the measure reduces the percent
of income necessary to qualify for the unlimited
deduction from 90% in 1970 to 50% in 1975. The
bill also conforms California to federal law in
requiring the taxpayer to meet this percentage
test in only eight out of ten preceding years
in addition to the taxable year, rather than the
current ten out of ten preceding years currently
required.
B. Present Law:
Present law generally allows taxpayers to deduct
charitable contributions up to 20% of the
taxpayer's taxable income.
However, the law also provides that if a tax-
payer's charitable contribution and income taxes
exceed 90% of his income for the taxable year
and in each of the 10 preceding taxable years,
the 20% limit does not apply.
C. Fiscal Implication:
Minor revenue gain
D. Rationale: The current provisions allow a very few high
income taxpayers to minimize or avoid tax
liability by means of the charitable contri-
bution deduction. The reduction of the limitation
to 50% would require the taxpayer to include
at least 50% of his gross income in his tax base.
CONFORMITY WITH FEDERAL TAX REFORMS
XII. LIMITATION ON DEDUCTIBILITY OF INVESTMENT INTEREST
(AB 1000, Sec. 56)
A. Proposal: This measure limits the deductibility of
investment interest by non-corporate taxpayers
in taxable years beginning in 1972 (until then,
excess investment interest is classified as a
tax preference item and subject to the 1.5%
minimum income tax). Investment interest,
defined as interest paid or accrued on indebted-
ness or continued to purchase or carry property
held for investment, can be used only to offset
specified income items. These items are:
(1) $25,000
(2) Net investment income
(3) The excess of net long-term capital gain
over net short-term capital loss
(4) one-half of the excess of investment interest
over the total of the three items above.
Investment interest that is disallowed in one year
may be carried over to the next year. The amount
that can be deducted in the following year is
limited to one-half of the net investment income
for the carryover year plus $25,000 over the
greater of:
(1) investment interest paid in the carryover year
or
(2) $25,000.
If, because of these requirements, part of the
investment interest is disallowed, it may be
carried over to a third year, reduced by the
amount of capital gains not recognized. Special
rules and exceptions are applied in the case of
property under net lease, partnerships, construction
interests, and binding contracts.
B. Fiscal Implication:
Estimated revenue gain of $.5 million in 1972
and following years.
C. Present Law:
Under present law, all interest paid or incurred
can be claimed as an income tax deduction.
D. Rationale:
Although this provision will have only limited
impact due to its restricted application, conformity
is probably desirable in terms of the principle at
issue.
-2-
Some taxpayers deliberately incur large interest
expenses on funds borrowed for investment in order
to offset the costs of carrying the investment
property which currently produces little or no
income. Often, the interest expense also offsets
ordinary income to a large extent.
The expectation is that the eventual sale of the
investment property will result in a long-term
gain while the costs of carrying the asset have
been entirely offset. To discourage this practice,
the measure attempts to limit the deductibility
of interest in these cases by requiring that the
interest expense be offset against specified types
of income.
CONFORMITY WITH FEDERAL TAX REFORMS
XIII. STOCK REDEMPTION BY CORPORATION WITH APPRECIATED PROPERTY
(AB 1001, Sec. 91)
A. Proposal: This provision changes the tax treatment of
appreciated property redemptions made after
November 30, 1969 in conformity with the
Federal changes. If appreciated property is
used to redeem all or part of a stockholder's
stock, the corporation must pay tax on any
appreciation in value of the property, as
measured by fair market value over adjusted
basis, that is used to make the redemption.
This provision applies to all redemptions, even
if classified as a dividend; but does not apply
to a complete or partial liquidation of a
corporation.
B. Fiscal Implications:
Although detailed estimates are not available,
a substantial revenue gain is expected.
C. Present Law:
Presently, a corporation that is holding stock
of another corporation that has appreciated in
value can use this appreciated stock to redeem
a portion of its own stock without paying tax
on the gain in value.
D. Rationale:
Present law allows corporations to redeem
substantial amounts of their own stock with
appreciated property and in this manner allows
these corporations to dispose of appreciated
property in essentially the same manner as if
they had sold it and then redeemed their own
stock. However, dispositions made in this manner
are not now subject to tax on appreciation in
value. The present treatment has, in essence,
created a loophole that corporations may use to
avoid taxes on the appreciated value of property
that would be owed on any other sort of disposition.
This loophole is utilized to a large extent by
corporations which hold large investment portfolios
of stock of other companies acquired some time ago
at much lower than present value.
CONFORMITY WITH FEDERAL TAX REFORMS
XIV. DEBT FINANCED CORPORATE ACQUISITIONS AND RELATED PROBLEMS:
Fiscal Implications: If all five items are adopted, the total
estimated revenue increase is as follows:
Income Year
1970
$ .1 (millions)
1971
.1
1972
.2
1973
.3
1974
.3
1979
.5
Item 1. Interest on Indebtedness Incurred by a Corporation to
Acquire the Stock or Assets or Another Corporation.
(AB 1001, Sec. 86)
A. Proposal: This proposal limits the amount of corporate
interest deduction allowed on "corporate acquisition
indebtedness" incurred after Oct. 9,1969 to acquire
stock or two-thirds of all the operating assets
(excluding cash) of another corporation. The
maximum amount of such interest to be allowed as a
deduction is $5 million, reduced by any interest
incurred on indebtedness issued any time after
1967 used to acquire corporate stock or operating
assets, but which does not qualify as corporate
acquisition indebtedness.
In order to be "corporate acquisition indebtedness",
a bond, debenture, note, certificate, or other
evidence of indebtedness has to be used to pay for,
directly or indirectly, the purchase of stock or
not less than 2/3 of the operating assets of another
corporation. An obligation used to acquire less
than 5% stock interest in a corporation does not
qualify as acquisition indebtedness. In addition
to qualify as acquisition indebtedness, the debt
instrument must come under all of the following
debt-equity tests:
(1) Subordination to other Creditors: the debt
instrument must be subordinated either to the
claims of the issuing corporation's general
creditors or to any substantial amount of the
corporation's unsecured indebtedness (whether
outstanding now or at a later time).
(2) Convertibility Test: the debt instrument must
be convertible, directly or indirectly, into
the stock of the issuing corporation. This
requirement is satisfied if stock purchase
warrants to purchase the issuing corporation's
stock are issued along with the debt instrument.
-2-
(3) Ratio of Debt-to-Equity or Earnings Test:
the debt instrument must come under either
the debt-to-equity or earnings test. The
test date is the last day of the issuing cor-
poration's taxable year in which a debt instru-
ment was used to purchase another corporation's
stock or operating assets.
(a) Debt-to-Equity: the ratio of the acquiring
corporation's debt to its equity is
determined by comparing the corporation's
total indebtedness to the excess of its
money and other assets over that indebted-
ness (i.e., equity). The assets
are accounted for at their adjusted basis
for this purpose. If the ratio exceeds
2 to 1 (i.e., the amount of debt is over
two times the amount of equity), the
test is considered met.
(b) Earnings Test: this test is computed by
comparing, on the test date, the issuing
corporation's average annual earnings for the
previous three years (called projected
earnings) with the corporation's annual
interest costs on its total outstanding
indebtedness. If the annual interest costs
are not covered at least three times over
by the average annual earnings,
the earnings test is considered met.
As a general rule, once the tests described
above are satisfied so as to result in the
disallowance of a deduction for the interest
with respect to the obligation for a taxable
year, the interest deduction will be disallowed
for that year and all subsequent years. The
measure provides that in the instance where the
issuing corporation subsequently obtains control
of another corporation, the projected earnings
and annual interest expense of both corporations
are taken into account for purposes of computing
the equity test. The following exception is
also made to the general disallowance rule: if
a corporation issuing corporate acquisition
indebtedness does not meet the debt-equity and
earnings tests for each of three consecutive
taxable years, the interest deduction limit
imposed on those obligations ceases to apply,
beginning with the first taxable year after the
three-year period.
This proposal also includes special rules for
applying such tests to financial institutions
and for treating all members of affiliated
groups as one entity.
-3-
B. Present Law:
A corporation at this time can deduct interest
paid by it on its debt but is not allowed a
deduction for dividends paid on its stock or
equity. Present rules for distinguishing equity
interests and debt interests are not clear.
C. Rationale:
Because the present regulations are not clear
in distinguishing between debt versus equity
interests this measure provides for specific tests
to make such a determination within a limited
context. Item 5, following, also allows the
Franchise Tax Board to establish regulations to
make this determination in other situations.
Although the problem is a long standing one, it
has become even more significant in recent years
because of the increasing number of corporate
mergers and the increasing use of debt for corporate
acquisition purposes.
There are a number of factors which make the use
of debt for corporate acquisition purposes desirable,
including the fact that a corporation can deduct
dividends on stock. A number of these factors also
tend to make the bond or debenture more like an
equity interest in spite of the fact that it is
labeled as debt. For example, the fact that a bond
is convertible into stock makes it more desirable
as it allows the bondholder to participate in the
growth of the company. The fact that a bond is
subordinated to other creditors makes it more
desirable since it does not impair the corporation's
general credit position.
The conclusions reached by those who have studied
this proposal at the federal level were that even
though a corporate obligation is labeled debt, it
should be treated for tax purposes as an equity
interest if, in fact, the obligation is more like
an equity than a debt interest. The tests required
by this measure attempt to make that determination
and consequently limit the interest deduction if
the tests are met and the interest is, therefore,
concluded to be primarily an equity interest.
-4-
Item 2. Installment Method (AB 1000, Sec. 72; AB 1001, Sec. 94)
A. Proposal: This measure provides that for purposes of the
installment method of reporting gains on sales
of real property and casual sales of personal
property, certain types of indebtedness are to be
treated as payments received in the year of sale
and thus subject to the 30% rule. The types of
indebtedness to be treated in this manner include
bonds or debentures with interest coupons attached,
in registered form, or in any other form designed
to make such securities readily marketable. Such
treatment is also extended to include bonds that
are payable on demand as well as other evidence of
indebtedness issued by a corporation or other
governmental body. Ordinary promissory notes are
not intended to be included.
This provision applies to sales or other dispositions
made after May 27, 1969, but does not apply to those
made under a binding contract entered into on or
before May 27, 1969.
B. Present Law:
Under present law, a taxpayer may elect the
installment method of reporting a gain on sale
of real or personal property if the price is in
excess of $1,000 and if the payments received by
the seller in the year of sale do not exceed 30%
of the sales price. Originally, installment
reporting was allowed to ease a possible hardship
if the taxpayer did not receive sufficient cash in
the year of sale to pay the tax in that year.
C. Rationale:
In essence, the reason for this provision is that
there is no reason for postponing gain where a
seller of property receives something which is
the equivalent of cash. Reporting gain on the
installment method when debentures or other readily
marketable securities are received by the taxpayer
is not consistent with the intent of the installment
provisions.
-5-
Item 3. Bonds and Other Evidences of Indebtedness
(AB 1000, Sec. 114-5)
A. Proposal: This measure provides that the bondholder and the
corporation issuing the bond are to be treated in
a consistent manner with respect to the original
issue discount on the bond. This bill requires
the bondholder to include in his income a ratable
portion of the orignal issue discount over the life
of the bond. As he includes the original issue
discount in income, his basis for the bond would
be correspondingly increased. If a bondholder sells
the bond prior to maturity, he would be treated as
receiving capital gain based on his adjusted basis
for the bond unless there was an intention to call
the bond before its maturity when it was originally
issued, in which case the gain on sale would be
treated as ordinary income to the extent of the full
amount of original issue discount.
This ratable inclusion is not required of persons who
purchased a bond at a premium. Also, these rules
are not to apply to bonds or other evidences of
indebtedness issued by any government or political
subdivision.
Effective on discounts after May 27, 1969.
B. Present Law:
Original issue discount is the difference between
the issue price and the face amount of the bond,
when the price is less than the face amount, if the
bond is a capital asset in the hands of the person
acquiring it. Under present law the owner of the
bond is not taxes on the original issue discount
until the bond is redeemed, sold or otherwise
disposed of. On the other hand, the issuing
corporation amortizes the amount of the original
issue discount over the life of the bond (i.e.,
is allowed as current deduction).
C. Rationale:
The present treatment results in a nonparallel
treatment of the corporation issuing the bond and
the person acquiring the bond. Reportedly, tax-
payers often neglect to include the original issue
discount as a gain when they dispose of the bond
and also neglect the fact that this portion of the
gain is as taxable as ordinary income, not capital
gains. The present laws may provide the effect of
the original issue discount never being taxed to
the bond owner. Many also maintain that this treat-
ment of original issue discount is another reason
why corporations use bonds to acquire another
corporation.
-6-
Item 4. Limitation on Deduction of Bond Premium on Repurchase
(AB 1001, Sec. 87)
A. Proposal: This provision clarifies a controversy on whether
the premium that a corporation must pay to repurchase
its own convertible indebtedness is fully deductible
by stating that it is not. A deduction will be
allowed only for the amount of a normal call premium
for nonconvertible indebtedness. The measure further
provides that a larger deduction will be allowed if
the corporation can demonstrate to the FTB that the
amount of the premium in excess of that otherwise
allowed as a deduction is related to the cost of
borrowing and not to the conversion feature of the
indebtedness.
Applies to repurchases after April 22, 1969.
B. Present Law:
At this time, there is a question as to whether a
corporation which repurchases its own convertible
indebtedness at a premium may deduct the entire
difference between the stated redemption price at
maturity and the actual repurchase price. Several
IRS rulings have been contradicated by the courts.
C. Rationale:
In clarifying this controversy, the federal
government declared that the amount of the premium
which is in excess of the cost of borrowing is
not similar to an interest expense or deductible
business expense, but rather is similar to an
amount paid in a capital transaction. In essence,
the corporation is repurchasing the right to
convert the bonds into its common stock, much as
it might purchase its stock.
-7-
Item 5. Treatment of Certain Corporate Interests as Stock
or Indebtedness
(AB 1000, Sec. 66; AB 1001, Sec. 93)
A. Proposal: The bill authorizes the FTB to prescribe the
necessary factors to be considered in distinguish-
ing debt and stock interests (i. e., whether the
relationship is one of debtor-creditor or corporation-
shareholder).
B. Present Law:
The present rules defining such relationships are
somewhat unclear in spite of the significant tax
consequences that can result.
CONFORMITY WITH FEDERAL TAX REFORMS
XV. DEBT FINANCING OF ACQUISITIONS BY TAX EXEMPT ORGANIZATIONS:
THE CLAY BROWN RULE (AB 1001, Sec. 67)
A. Proposal: Extend unrelated business income tax to
"unrelated debt-financed income" received
by a tax-exempt organization -- in proportion
to the debt existing on the income producing
property. In other words, if a property is
worth $100,000 and $50,000 in debt was used
to acquire the property, 50% of the income
from the property will be treated as unrelated
business income.
Excluded from these provisions are:
(1) any property if substantially all
the use is substantially related to the
organization's exempt function.
(2) any property to the extent that its
income is subject to tax as income from
the conduct of any unrelated trade or
business.
(3) any property to the extent that its income
is derived from research activities and is
excluded from gross income of an unrelated
trade or business.
(4) any property to the extent it is used in
a business where
(a) substantially all of the work is
performed without compensation
(b) the organization carrying on the
business does so primarily for the
convenience of members, students,
patients, etc.
(c) the business consists of selling
merchandise substantially all of
which has been received as contri-
butions.
(5) real property located in the neighborhood
of other property owned and used for
exempt purposes which will be used for an
exempt purpose within ten years.
B. Fiscal Implications:
Minor revenue gain
C. Present Law:
The present unrelated business income tax does
not apply to income from the leasing by a tax
exempt organization of the assets constituting
a going business.
-2-
D. Rationale:
Present tax law permits a "bootstrap" sales
and leaseback transaction which allows owners
of businesses to convert ordinary income into
capital gains and allows tax exempt organizations
to acquire businesses entirely from the earnings
of the business.
For example: The sole stockholders of a closely-
held corporation sell their stock to an exempt
organization for $1,300,000. The exempt organi-
zation makes a "bootstrap" purchase - no down
payment and a promissory note executed for the
balance of the purchase price to be paid only
from the earnings of the company's assets. At
the same time, the exempt organization liquidates
the corporation and leases its assets for a
period of five years to a new company formed by
the stockholders' attorneys. Under terms of the
lease, the new company is to pay the exempt
organization 80% of its operating profit as rent.
The exempt organization, in turn, pays 90% of
the rents received to selling stockholders to be
applied on the promissory note.
(Clay Brown, 380 U.S. 563)
Thus, through the use of the tax exempt devise,
stockholders increased after tax income and the
tax income and the tax exempt organization acquired
a $1.3 million business without investment of its
own funds.
CONFORMITY WITH FEDERAL TAX REFORMS
XVI. NON-EXEMPT MEMBERSHIP ORGANIZATIONS: LIMIT ON DEDUCTIONS
(AB 1001, Sec. 85)
A. Proposal: Limit deduction for the cost of furnishing
services, goods, insurance, etc. to members
of non-exempt social clubs to the extent of
income (dues) from members.
B. Fiscal Implications:
Minor revenue gain
C. Present Law:
Taxable membership organizations are permitted
to apply income from non-members and from
commercial activities against cost of services
furnished members.
D. Rationale:
In some cases, membership organizations which
also have business or investment income, serve
their members at less than cost and offset this
book loss against their business investment
income and as a result, pay no income tax. The
recipients of such services also pay no income
tax on such services and, in effect, have received
something of value that others have to purchase
with after-tax dollars.
CONFORMITY WITH FEDERAL TAX REFORMS
XVII. TAX-EXEMPT ORGANIZATIONS: INCOME FROM ADVERTISING
(AB 1001, Sec. 66)
A. Proposal: Include in the definition of "trade or business"
any activity carried on for the production of
income from the sale of goods or the performance
of services. An activity does not lose identity
as a trade or business merely because it is
carried on within a larger aggregate of similar
activities.
Under this provision, the Congress anticipates
that advertising income from any publication of
an exempt organization will be unrelated business
income to the extent that it exceeds expences and
editorial losses.
Organizations with multiple publications may
consolidate gains and losses for the purposes
of this provision.
B. Fiscal Implications:
Minor revenue gain
C. Present Law:
There is some dispute as to whether the
acceptance of paid advertising in an exempt
publication is an unrelated business.
D. Rationale:
The statutory language on which the present
interpretations that net income from advertising
is to be included as unrelated business income
is sufficently unclear as to invite substantial
litigation. The proposal seeks to eliminate
an unfair competitive advantage that publications
of tax exempt organizations have over other
publishers.
CONFORMITY WITH FEDERAL TAX REFORMS
XVIII. VOLUNTARY EMPLOYEE BENEFICIARY ASSOCIATIONS
(AB 1001, Sec. 44)
A. Proposal: Eliminate the present requirement that 85% of
the income of a voluntary employee beneficiary
association consist of amounts collected by
members and amounts contributed by members'
employers for the sale purpose of making
payments of life, sickness, accidents, and
other benefits.
B. Fiscal Implications:
None
C. Present Law:
Voluntary employees' beneficiary associations
providing life, sickness, accident, or other
benefits must derive 85% of its income from
its members.
D. Rationale:
With the imposition of the tax on unrelated
business income on organizations in this
category, the 85% income test is no longer
necessary. As a result, the requirements are
substantially the same as the qualification
standards for employee associations of Federal
employees.
CONFORMITY WITH FEDERAL TAX REFORMS
XIX. FEEDER ORGANIZATIONS (AB 1001, Sec. 48)
A. Proposal: Extends to "feeder organizations" the beneficial
exceptions of the unrelated business tax. The
unrelated business income tax does not apply to
a feeder organization in which substantially
all the work in carrying on the business is
performed by the organization without compen-
sation or to the operation by a feeder organi-
zation of a business of selling merchandise -
most of which is received as gifts and contri-
butions.
B. Fiscal implication:
Very minor revenue loss
C. Present law:
Under present law, feeder organizations
(organizations which feed all profits to tax
exempt organizations) operated primarily to
carry on a trade or business for profit are
not exempt from taxation.
D. Rationale:
A business operated by an exempt organization
through a separate entity should not be subject
to tax if the business would be exempt from tax
if operated directly by the exempt organization.
CONFORMITY WITH FEDERAL TAX REFORMS
XX.
LUMP-SUM DISTRIBUTIONS FROM EMPLOYEES' PLANS
(AB 1000, Sec. 53)
A. Proposal: In regard to a lump-sum distribution to an
employee of the total amount due him from
a qualified pension, profit-sharing, or
stock bonus plan, this measure would provide
capital gains treatment only for the difference
between the taxable portion of the distribution
and the employer's contributions. In essence
then, the employer's contributions are taxed as
ordinary income subject to a revised ceiling.
This measure also revises the ceiling placed
on the tax due from the portion of the distribu-
tion that is treated as ordinary income. The
ceiling is the greater of:
(1) 7 (rather than the current 5) times the
increase in tax resulting from including
14 2/7% (rather than the current 20%) of
the ordinary income portion of the dis-
tribution in the employee's gross income,
or
(2) 7 times the increase in tax which would
result if taxable income equalled 14 2/7%
of the ordinary income portion of the
distribution less personal exemptions.
B. Present Law:
The entire taxable portion of such a lump-sum
distribution is eligible for capital gains
treatment if the distribution is received in
one taxable year of the employer. But, if the
benefits are received as an annuity, the
employee is taxed on the portion that exceeds
his own contributions (i.e., the employer's portion)
as ordinary income.
C. Fiscal Implications:
Minor revenue gains
D. Rationale:
Present law treats distributions differently if
they are received in total in one year in order
to avoid the "bunched" income problem. However,
by allowing capital gains treatment for the entire
taxable portion the loss is providing preferential
treatment for amounts that really consist of
deferred compensation, (i.e., the amounts that
the employer contributes).
Also, it appears that the most significant benefits
accrue to taxpayers with adjusted gross income of
over $50,000. Highly paid employees would often
prefer to convert current income into deferred
compensation in an attempt to avoid high marginal
rates.
-2-
Reform in this area is primarily an attempt
to treat taxpayers similarly when they are
situated in a similar manner - in this
instance, to treat them similarly whether they
receive distributions in one year or in several.
The ceiling on the tax for the portion taxed as
ordinary income is an attempt to avoid undue
hardship because of this revised treatment.
EDUCATIONAL EQUALIZATION TAX (AB 1000, See Index)
A.
Proposal: 1. Levy a $2.05 statewide property tax on all taxable
property to replace the first $2.05 levied locally
by school districts.
2. Require the State Board of Equalization to adjust
this tax rate to compensate for variations in
county assessment levels.
3. Allocate all the funds produced by such a tax
back to school districts.
B. Fiscal Implications:
1. The $2.05 statewide property tax will produce
new revenue of $60 million, from basic aid school
districts, and provide for an additional $12
million per ADA increase in state support.
C.
Present law:
The only statewide property tax now levied by the
state is one on private railroad cars. This is
levied by the State Board of Equalization on the
assessed value of such cars using last year's average
statewide property tax rate. The proceeds from this
tax go to the general fund.
D.
Rationale:
1.
The State of California has an obligation to see
that all children have an equal opportunity to
have an adequate education.
2.
Among the districts of the state, there is a wide
variation in the local ability to support an
educational program.
Assessed Value per ADA
1968-69
Elementary
High School
Low
$
125
$
10,350
Average
14,723
35,247
High
1,156,872
339,362
3. The present system of support does not provide
reasonable uniformity of tax effort by taxpayers
4.
The $2.05 statewide property tax reduces the
program ratio from 3.4 times to 2.2 times.
Equalization to be accomplished
Present Law
Ratio
Baldwin Park
$ 533
1
Beverly Hills
1794
3.4
Statewide Tax at 2.05
Baldwin Park $ 545
1
Beverly Hills
1200
2.2
5. It is best to institute a statewide property tax
in connection with a major tax reform program.
In AB 1000 and 1001, the property tax rate in
most "adversely effected" school districts is
still lower than present rates due to the rate
reductions which stem from the state assuming
much of the county's welfare financing.
In addition, in all school districts, every
homeowner will see a reduction in property
taxes due to the increase in the homeowners'
exemption.
EXPENDITURE LIMITS (AB 1000, Sec. 33)
A.
Proposal:
(1)
Schools
(a) Expenditures for current expenses per
ADA for each school district are limited
to the amount authorized to be spent in
the prior year per ADA plus a factor for
growth (the factor is the percentage
increase in the services index of the
consumer price index). The limits can
be exceeded by 1% for unexpected emergencies
if approved by the county board of education.
The limit may be increased by a vote of the
people.
(b) For other than current expense (food services,
community services, capital outlay), a tax
rate limit is established at the level which
is the same proportion of present non-current
expense to total tax rate. The limits are:
Elementary
.13
High School
.08
Unified
.21
Junior College
.06
(c) Districts are allowed to levy a tax rate to
retire bonds and repay state building loans.
(d) Existing tax rate limits and authorized
permissive overrides are repealed.
(2)
Counties
(a) Current expenses (excluding public assistance)
per capita by each county are limited to the
prior year's current expenditures per capita
plus a factor for growth (the factor is the
percentage increase in the services index of
the consumer price index) The limit may be
exceeded by 1% for unexpected emergencies by
a unanimous vote of the supervisors. The
limit may be increased by a vote of the people.
(b) Expenditures by counties for public assistance
are limited to the prior year's expenditures
plus a factor for growth (the factor is the
average percentage increase in public assistance
expenditures for the prior three years). This
limit may be exceeded by 1% for unexpected
emergencies by a unanimous vote of the super-
visors. If the supervisors believe that this
limit will endanger the peace, health, or
safety of the county's residents or prohibits
expenditures required by law, they may request
the State Director of Social Welfare for an
increase in the limit.
(c) By a unanimous vote, the supervisors may
levy any tax rate to pay for fixed asset.
(d) Counties are authorized to levy a tax rate
necessary to retire bonds.
(3) Cities
(a) Before cities can expend money from any new
permissive tax override authorized by the
legislature, they must provide local residents
the right to subject such override to a refer-
endum upon signatures of 20% of the registered
voters.
B. Fiscal Implications:
These provisions effectively limit the extent to which
counties and school districts may levy property tax
rates.
C. Present Law:
At the present time, counties are not subject to
expenditure or tax rate limits. Schools are not subject
to crude tax rate limits, with a number of exceptions.
D. Rationale:
(1) Expenditure limits guarantee that property tax
reductions provided by this program will not be
consumed by higher local spending. The limits,
however, allow flexibility for local government
to meet legitimate growth demands.
(2) Tax rate limits are no good. They have been
ineffective in controlling property tax increases.
They are inequitable because the same limits
produce vastly more in dollars per pupil in one
school district than another. They allow the
spending of any large 'windfall" increase in assessed
value due to changes in assessment levels, while
prohibiting local government from meeting its
responsibilities for existing programs where
assessed values remain static.
(3) Data developed indicates expenditure limits, while
being more rational limits, will also be more
effective. Studies show that property tax levels
for schools would not have accelerated so rapidly
had an expenditure limit, rather than a tax rate
limit, been in effect.
(4) Mechanically, expenditure limits are effective
devices to insure that property tax rates are
reduced when additional state funds are provided by
local government. If expenditures are fixed, when
the state share is increased, the local share must
decrease. This automatically precludes the use of
property tax relief money for additional spending.
ESTIMATED IMPACT OF GOVERNOR'S TAX PROGRAM
ON SINGLE INDIVIDUALS
HOMEOWNER
Personal Income Tax
Property Tax
11% & 12%
Interaction
Total
Additional
Additional
Reduced
Total
Tax
Capital
of other
Income
Sales
Homeowners
Welfare
Net
Income
Rates
Gains
changes
Tax
Tax
Exemption
Tax
Change
Without Capital Gains
$3,500
-
---
$15
-$61
-$5
-$51
5,000
---
20
-66
-6
-52
7,500
$3
$3
28
-84
-8
-61
10,000
4
4
35
-98
-10
-69
12,500
5
5
42
-102
-10
-65
15,000
9
9
47
-143
-15
-102
17,500
12
12
50
-158
-17
-113
20,000
$4
16
20
55
-177
-19
-121
25,000
84
22
106
61
-222
-25
-80
50,000
488
40
528
78
-370
-43
193
75,000
899
49
948
111
-466
-55
538
100,000
1,300
70
1,370
184
-682
-83
789
With Capital Gains
$10,000
$8
$4
$12
$35
-$98
-$10
-$61
15,000
20
9
29
47
-143
-15
-82
20,000
$4
40
16
60
55
-177
-19
-81
25,000
84
63
22
169
61
-222
-25
-17
50,000
488
150
40
678
78
-370
-43
343
75,000
899
216
49
1,164
111
-466
-55
754
100,000
1,300
320
70
1,690
184
-682
-83
1,109
NOTE: Standard deduction used for single returns below $7,500. Average itemized deductions used otherwise.
1/30/70 (70/5)
ESTIMATED IMPACT OF GOVERNOR'S TAX PROGRAM
ON MARRIED COUPLES WITH TWO CHILDREN
HOMEOWNER
Personal Income Tax
Property Tax
11% & 12%
Interaction
Total
Additional
Additional
Reduced
Total
Tax
Capital
of other
Income
Sales
Homeowners
Welfare
Net
Income
Rates
Gains
changes
Tax
Tax
Exemption
Tax
Change
Without Capital Gains
$5,000
-
--------
--------
$22
-$70
-$6
-$54
7,500
-
-
-
31
-82
-8
-59
10,000
-
-
$2
$2
39
-99
-10
-68
12,500
-
-----
3
3
47
-120
-12
-82
15,000
-
-
4
4
54
-134
-14
-90
17,500
-------------------------
-----
6
6
56
-152
-16
-106
20,000
a
-------------------------
8
8
62
-169
-18
-117
25,000
-
-------------------------
11
11
69
-208
-23
-151
50,000
$180
--------
36
216
89
-346
-40
-81
75,000
617
---
43
660
126
-435
-52
299
100,000
1,020
-
61
1,081
209
-638
-77
575
With Capital Gains
$10,000
---
$3
$2
$5
$39
-$99
-$10
-$65
15,000
-------------------------
5
4
9
54
-134
-14
-85
20,000
-
13
8
21
62
-169
-18
-104
25,000
----
20
11
31
69
-208
-23
-131
50,000
$180
36
36
302
89
-346
-40
5
75,000
617
154
43
814
126
-435
-52
453
100,000
1,020
251
61
1,332
209
-638
-77
826
NOTE: Standard deduction used for joint returns below $10,000. Average itemized deductions used otherwise.
1/30/70 (70/5)