Federal, State Tax Proposals May Add Up to Some Give and Take

The tax cuts President George Bush may give, California Gov. Gray Davis may well take away -- at least in part.

The precise effect of Davis’ plan on individual Californians would vary widely, depending on each taxpayer’s circumstances and spending patterns. The wealthy and those who smoke or spend a substantial amount of their disposable income on taxable purchases or in-state phone calls would be hit the hardest. Smoke-free middle-income families that watch their spending would be hurt less.

State tax hikes are proposed in three primary areas:

* Two new income tax brackets would be added for high-income filers: a 10% rate for single filers earning more than $136,115 and married filers earning more than $272,230; and an 11% bracket for singles earning more than $272,230 and married couples with incomes of more than $544,460. The current top rate is 9.3%.

* Sales taxes would increase by 1 percentage point, or a penny for each dollar spent.

* Cigarette taxes would rise by $1.10 a pack.

Additionally, some fees imposed on college students, registration fees for automobiles and taxes on in-state phone calls also could rise by the time the proposed budget becomes law.

Under Bush’s proposed federal tax changes, a single taxpayer with $20,000 in income would save $50 annually. Meanwhile, the hike in California’s sales tax rate could cost him the same amount.

In addition, if this taxpayer attends a state college -- and Davis’ plan to hike per-course-unit fees becomes law -- this individual would pay an extra $234 in fees to take 18 units. If he were a smoker, the picture gets even worse. Davis’ proposed $1.10-a-pack tax on cigarettes would cost a pack-a-day smoker more than $400 a year.

A married couple with children -- who would get the most from federal tax proposals -- are likely to see only modest hikes in their state tax bills if Davis is successful. That’s because the bulk of the hike is focused on high-income filers and those who consume substantial amounts of taxable goods and services.

Rent and mortgage payments are not taxable, nor are most foods consumed at home. Services, such as child care, also are not taxed. This family’s biggest outlays probably are exempt from Davis’ plan.

If this family spent 20% of its income on taxable items, the California plan probably would cost it an extra $100 a year, while the family would receive $1,133 in federal tax benefits from the Bush plan. If all the tax proposals are passed, this family still would end up better off by $1,033 annually.

For wealthy filers, the question will come down to spending, said Bill Ahern, spokesman for the Tax Foundation in Washington.

If both federal tax cuts and Davis’ proposed tax hikes are approved, a single individual with $600,000 in income would have about half of his or her $10,668 federal tax cut eaten up by state tax hikes, Ahern noted. But it would require a tremendous amount of spending to wipe out the remaining $5,000 in tax savings Bush’s plan would provide to this taxpayer.

One unintended consequence of the state and U.S. tax proposals is that more Californians could fall under the federal alternative minimum tax. This parallel tax system eliminates many popular deductions and credits and affects taxpayers who don’t pay enough taxes relative to their gross income.

Accountants were trying to determine Friday if the proposed tax changes were likely to subject more Californians to the AMT.

In general, lower federal tax rates and higher state tax rates almost always result in more taxpayers falling under the AMT.

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Effects of proposed state tax hike

Gov. Gray Davis’ proposed state tax hikes would impose higher income tax rates on upper income Californians and would raise sales and cigarette taxes. The increases would offset some of the federal tax savings proposed by President Bush this week. Here are some hypothetical examples:

1) Single filer earning $20,000 annually who spends 25% of income on taxable goods and services:

State sales tax hike: -$50

Federal tax savings: +50

Net change: 0

2) Single filer earning $30,000 annually who spends 25% of income on taxable goods and services and smokes one pack of cigarettes daily:

State sales tax hike: -$75

State cigarette tax hike: -$401.50

Federal tax savings: +$50

Net change: -$426.50

3) Married couple earning $50,000 annually with two children under age 17. Family spends 20% of income on taxable goods and services:

State sales tax hike: -$100

Federal tax savings: +$1,133

Net change: +$1,033

4) Single filer earning $190,000 annually, claiming average deductions and credits, who spends 20% of income on taxable goods and services:

State income tax hike: -$97

State sales tax cost: -$380

Federal tax savings: +$2,326

Net change: +$1,849

6) Married couple earning $600,000 annually with two children under age 17, claiming average deductions and credits, who spend 20% of income on taxable goods and services:

State income tax hike: $1,964

State sales tax cost: -$1,200

Federal tax cut: +$11,273

Net change: +$8,109

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Sources: Tax Foundation, Times research