The Legislature raised California's income taxes in February. Now, the phenomenon known as price deflation will nudge them yet a little higher.
Because of deflation, which occurs when consumer prices fall, California's six tax brackets now kick in at slightly lower income levels, according to new rates posted Thursday by the Franchise Tax Board.
It's the first time that's happened since 1983, according to the tax agency.
The change will translate into more money for the treasury when Californians pay their taxes next spring.
Perry Ghilarducci, a Sacramento accountant, called that "a horrible result" for taxpayers. But Brenda Voet, a spokeswoman for the Franchise Tax Board, called it a fair outcome at a time when consumer buying power is actually rising.
"Your dollar is worth more now," she said.
In any event, experts said the bracket math won't be particularly costly to most Californians, and likely will have less impact than the higher taxes imposed by the Legislature in February as part of its effort to eliminate the budget deficit.
The income tax brackets, under the terms of a 1982 voter initiative, are indexed to the California Consumer Price Index. The idea is to prevent residents from paying higher taxes merely because they received cost-of-living raises. When prices go up, as they almost always do, the brackets go up as well, keeping a lid on taxes.
But the system works in reverse, too. The California CPI fell 1.5 percent in the 12 months ending in June, the period used by the Franchise Tax Board to calculate the brackets. That means the brackets have fallen 1.5 percent.
Californians who have seen their incomes reduced by pay cuts, furloughs and layoffs probably won't see a big tax increase because of the bracket changes, however. Their taxes are likely going down, not up.
"Their tax bill is going to go down a little bit less than they might have anticipated," said economist Jeff Michael of the University of the Pacific.
Of far greater consequence, Michael said, are the higher taxes enacted by the Legislature in February. Everyone's rates are going up 0.25 percentage points for two years. The Legislature also slashed the dependent credit from $309 to $98 in February. That will mean considerably higher taxes for those with lots of dependents, Michael said.
The tax news for consumers isn't all bad, however. Deflation in home values means that millions of Californians may pay lower property taxes next year.
The state Board of Equalization is weighing a ruling that potentially could mean mild property tax relief for most property owners in California next year if consumer prices remain low. Although property taxes are collected by counties, the board sets the guidelines.
Already, an estimated 25 percent of California's property owners – mainly those who bought during the real estate boom and have seen their home values plunge below their purchase price – are getting some tax relief, said Dan Goodwin, president of the California Assessors' Association.
The Board of Equalization ruling would affect all the rest. Generally, these are property owners who bought before the real estate boom. Their properties have fallen but are still worth more than their assessed values, which have been held down by Proposition 13, said board spokeswoman Anita Gore.
She said the decrease would take effect with property tax bills that go out in the fall of 2010.
The decrease in assessments likely would be very small, said Ken Stieger, Sacramento County assessor. The final tally will depend on changes in the state Consumer Price Index over a 12-month period ending in October.
So far the index is down 0.7 percent, according to the state Department of Finance.
The ongoing rise in gasoline prices might mean assessments won't fall at all.
"In all likelihood it will come out to zero, slightly above or slightly below," Stieger said.
Californians pay a total of about $45 billion a year in property taxes, said Goodwin, who is Ventura County's assessor. Even with property values declining, property tax assessments are still about twice what they were in 2000, he said.
"It's still the most stable source of revenues for government," he said.
Source Sac Bee
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