AB 1209

TAXATION

Income and franchise tax rate modifications

Under current law, the individual income tax contains four tax brackets, each spanning a range of taxable income and with a progressively higher marginal tax rate. The 4th bracket has the highest marginal rate at 7.65 percent. Also under current law, the corporate income and franchise tax and the pass-through entity tax are imposed at the rate of 7.9 percent.

This bill increases the rate for the 4th individual income tax bracket to 8.65 percent for taxable year 2025 and to 8.85 percent for subsequent years. Additionally, the bill creates a 5th individual income tax bracket for taxpayers with taxable income of at least $750,000 for single taxpayers and $1,000,000 for married couples filing jointly ($500,000 if filing separately) and sets the bracket’s rate at 17.30 percent for taxable year 2025 and 17.70 percent for subsequent years.

The bill also creates a new bracket for the corporate income and franchise tax and the pass-through entity tax for income of at least $1,000,000, and sets the bracket's rate at the same rates for the 5th individual income tax bracket.

Determination of revenue raised due to rate modifications

The bill directs the secretary of revenue to determine the amount of tax revenue raised due to the increased rates and to notify the secretary of administration of the amount so that amount can be transferred to the school aid fund created under the bill.

EDUCATION FUNDING

Supplemental school aid

Under the bill, the Department of Public Instruction must annually distribute the total amount transferred to the school aid fund to school districts. The bill provides that this supplemental school aid is distributed to school districts based on the recipient’s proportional share of the total statewide property tax levy for school districts in the 2024-25 school year.

Current law generally limits the total amount of revenue per pupil that a school district may receive from general state aid and property taxes in a school year. The bill provides that supplemental school aid is considered state aid for purposes of school district revenue limits. Current law also provides certain penalties for a school district that exceeds its revenue limit. The bill specifies that these penalties do not apply to the extent that a school district’s state aid, including the supplemental school aid, is greater than its revenue limit.

Counting pupils for purposes of equalization aids and school district revenue limits

The bill changes the weighting of low-income pupils and limited-English proficient pupils in the formulas for calculating general school aid and school district revenue limits. Under the bill, a low-income pupil is counted as 1.2 pupils and a limited-English proficient pupil is counted as 1.2 pupils, rather than 1.0 pupil as under current law, for the purpose of determining a school district's membership in the general school aid calculation and for the purpose of determining the number of pupils enrolled in a school district in the revenue limit calculation. A pupil who is reported both as a low-income pupil and a limited-English proficient pupil is counted as 1.4 pupils for these purposes. For these purposes, a low-income pupil is a pupil who satisfies the criteria for a free or reduced price lunch under federal law, and a limited-English proficient pupil is a pupil whose ability to use the English language is limited because the pupil uses a different language with the pupil’s family or in other nonschool settings and who has difficulty performing ordinary classwork in English as a result of his or her limited proficiency in English.

Reimbursement for special education costs

The bill changes the rate at which the state reimburses school boards, operators of independent charter schools, cooperative educational service agencies (CESAs), and county children with disabilities education boards (CCDEBs) for costs incurred to provide special education and related services to children with disabilities and for school age parents programs (eligible costs). Under current law, the state reimburses the full cost of special education for children in hospitals and convalescent homes for orthopedically disabled children. After those costs are paid, the state reimburses remaining eligible costs from the amount remaining in the appropriation account at a rate that distributes the full amount appropriated. The Legislative Fiscal Bureau estimates that the reimbursement rate will be 42 percent in the 2025-26 school year and 45 percent in the 2026-27 school year.

The bill changes the appropriation to a sum sufficient and provides that, beginning in the 2025-26 school year, after full payment of hospital and convalescent home costs, the remaining costs are reimbursed at 90 percent of eligible costs.