BILL ANALYSIS
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Date of Hearing: June 15, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
ACA 6 (Charles Calderon) - As Amended: April 20, 2009
2/3 vote. Fiscal committee.
SUBJECT : Tax expenditures: operative period
SUMMARY : Proposes an amendment to the Constitution limiting the
operative period of all new and extended tax expenditures.
Specifically, this measure :
1)Provides that a new tax expenditure, or extension of the
operation of an existing tax expenditure, that is enacted by a
legislative measure shall be operative for a period of seven
years or for a shorter period specified in that measure.
2)Defines a "tax expenditure" as a credit, deduction, exclusion,
exemption, or any other tax benefit provided by statute.
EXISTING LAW :
1)Provides various tax credits, deductions, exclusions, and
exemptions. Some of these tax expenditures are designed to
provide relief to taxpayers who incur specified expenses
(e.g., costs incurred in adopting a child). Other tax
expenditures are designed to encourage socially or
economically beneficial behavior.
2)Requires, under Government Code (GC) Section 13305, the
Department of Finance (DOF) to provide an annual report to the
Legislature on tax expenditures by no later than September 15
of each year. The report must contain each of the following:
a) A list of all tax expenditures exceeding $5 million in
annual cost;
b) The statutory authority for each tax expenditure;
c) A description of any legislative intent articulated for
each tax expenditure;
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d) The sunset date of each tax expenditure, if applicable;
e) Identification of the beneficiaries of each tax
expenditure;
f) An estimate or range of estimates for the state and
local revenue loss for the current fiscal year (FY) and the
two subsequent FYs;
g) For personal income tax (PIT) expenditures, the number
of affected taxpayers;
h) For corporation tax and sales and use tax (SUT)
expenditures, the number of returns filed or businesses
affected;
i) Identification of any comparable federal tax
expenditure; and,
j) A description of any tax expenditure evaluation
completed by any state agency since the last report made.
3)Defines a tax expenditure as "a credit, deduction, exclusion,
exemption, or any other tax benefit as provided for by the
state."
FISCAL EFFECT : Unknown. The Franchise Tax Board (FTB) notes,
"The effects of this proposal would be incorporated into the
revenue estimates for future proposals to add tax expenditures,
but cannot be estimated at this time."
COMMENTS :
1)The author states, "Tax expenditures constitute a huge hidden
expense to the State of California. At a time when the state
is grappling with historic budget deficits, its tax code is
riddled with tax expenditures costing billions in foregone
revenues. While tax expenditures can be a useful tool in
stimulating economic growth and achieving important public
policy goals, we cannot continue to allow expenditures to
accumulate without a mechanism for periodic legislative
review. Those tax expenditure programs that can prove their
worth should be continued. But those that have long outlived
their usefulness should be repealed so that scarce revenues
can be used to provide vital services."
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2)State Controller John Chiang is sponsoring this measure. The
Controller states:
This measure seeks to expand the oversight of tax
expenditures by amending the constitution to require that
all new or amended tax expenditures sunset no more than
seven years after enactment. This sunset period will
better enable the Legislature to reevaluate the expenditure
and alter, expand, or eliminate it from state law.
This legislation addresses a major shortcoming of our
budgeting process in that tax expenditures are enacted
without a specific date by which their efficacy will be
evaluated. The annual cost of tax expenditures is
staggering: According to the Department of Finance, there
are now more than $50 billion in state and local tax
expenditures in law. In light of the State's dim long-term
fiscal outlook, it is imperative that tax expenditures that
have [not] met their objective and are no longer justified
be eliminated.
3)Opponents of this measure state:
We are opposed to this constitutional amendment because it
would create uncertainty regarding long-term tax planning.
When businesses choose to locate in a state, apart from
factors such as availability of a skilled workforce,
infrastructure, regulatory environment, and tax structure,
businesses evaluate whether they can rely on these factors
to remain relatively stable and consistent in the long
term. For example, if a state currently has a skilled
workforce, but high school drop-out rates are escalating,
it is unlikely that a skilled workforce will be available
in the future. Similarly, businesses evaluate whether they
can rely on the existence of current tax incentives ten
years from now.
4)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. According to legislative
analyses prepared for prior related measures, United States
(U.S.) Treasury officials and some Congressional tax staff
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began arguing in the late 1960's that these features of the
tax law should be referred to as "expenditures", since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues). Since 1971, state
law has required DOF to provide a tax expenditure report to
the Legislature. In 1984, the law was changed to require
an annual report instead of a biennial report.
b) How is a tax expenditure different from a direct
expenditure? : As DOF notes in its Tax Expenditure Report
for 2008-09, there are several key differences between tax
expenditures and direct expenditures. First, tax
expenditures are reviewed less frequently than direct
expenditures once they are put in place. This can offer
taxpayers greater certainty, but it can also result in tax
expenditures remaining a part of the tax code in perpetuity
without demonstrating any public benefit. Second, there is
generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, the
vote requirements for direct expenditures and tax
expenditures are different. While it takes a two-thirds
vote to make a budgetary appropriation, a tax expenditure
measure can be enacted by a simple majority vote. It
should also be noted that, once enacted, it generally takes
a two-thirds vote to rescind an existing tax expenditure.
This effectively results in a "one-way ratchet" whereby tax
expenditures can be conferred by majority vote, but cannot
be rescinded, irrespective of their efficacy, without a
supermajority vote.
c) How should the term be defined? : The term "tax
expenditure" can be defined in a number of different ways.
As noted above, GC Section 13305 defines the term as "a
credit, deduction, exclusion, exemption, or any other tax
benefit as provide for by the state." ACA 6 proposes to
use a similar definition. Although broad, DOF opines that
this definition does not include several provisions of the
tax code. For example, DOF notes that exemptions or
exclusions required by the U.S. Constitution, the
California Constitution, or federal law do not fall within
this definition. In addition, DOF states that California's
progressive rate structures do not constitute tax
expenditures, because they are fundamental to our system of
taxation.
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d) Why do we need a constitutional amendment ?:
i) Some may argue that it is not necessary to adopt a
constitutional amendment because both this Committee and
its Senate counterpart already require the vast majority
of tax expenditure measures they pass out to contain a
built-in repeal date. While it is true that this
Committee routinely requires sunset dates be added to tax
expenditure measures, there is nothing in existing law
that would require the Committee to do so in the future.
Moreover, in the past few years, some of the most
dramatic changes to our tax code have been enacted as
part of the budgetary process beyond the review of this
Committee.
ii) In addition, some may argue that the same end can be
achieved statutorily. It is true that, in the past, this
Committee has reviewed bills seeking to achieve a similar
result through the addition of statutory language. For
example, AB 831 (Parra), introduced in the 2007-08
Legislative Session, would have required any legislation
creating a new tax expenditure, or extending the
operation of an existing tax expenditure, to include a
sunset provision. There are a couple of problems with
taking such a statutory approach, however. If a general
sunset requirement were included in statute, there would
be nothing to prevent a future Legislature from enacting
an open-ended tax expenditure "notwithstanding" the
statutory prohibition. Indeed, there is considerable
question as to whether such a prohibition would have any
binding effect. [See e.g., United Milk Producers of
California v. Cecil (1941) 47 Cal.App.2d 758, 764-65,
noting that the Legislature cannot declare in advance the
intent of a future Legislature.]
e) How much do tax expenditures "cost" the state? :
According to DOF, the vast majority of tax expenditures are
included in the PIT Law. To this end, DOF estimates that
tax expenditures reduced PIT revenues by roughly $36
billion in FY 2008-09. The SUT Law, in turn, contains
identifiable state tax expenditures worth about $9 billion
annually. For FY 2008-09, corporate tax expenditures
amounted to roughly $4 billion.
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f) Related legislation :
i) AB 831 (Parra), introduced in the 2007-08
Legislative Session, would have required any legislation
creating a new tax expenditure, or extending the
operation of an existing tax expenditure, to include a
sunset provision. AB 831 failed to pass out of the
Senate Committee on Revenue and Taxation.
ii) AB 1933 (Coto), introduced in the 2005-06
Legislative Session, would have required any legislative
measure creating a new tax expenditure, or extending the
operation of an existing tax expenditure, to include
legislative findings regarding the purpose of the tax
expenditure, an estimate of the attributable revenue
losses, a specific methodology for measuring the
anticipated benefits, and a sunset date no later than
five years in the future. AB 1933 failed to pass out of
the Senate Committee on Revenue and Taxation.
iii) AB 2199 (Brown), introduced in the 1995-96
Legislative Session, would have required all tax
expenditures to be authorized via an appropriation in the
annual Budget Act. AB 2199 failed to pass out of this
Committee.
iv) AB 2884 (Villaraigosa), introduced in the 1995-96
Legislative Session, would have required the Legislative
Analyst, together with DOF, FTB, and the Board of
Equalization, to conduct an evaluation of all tax
expenditures, as defined. AB 2884 failed to pass out of
this Committee.
v) SB 1233 (Hayden), introduced in the 1993-94
Legislative Session, would have required the Legislative
Analyst to review each tax expenditure program, as
directed by this Committee and its Senate counterpart, to
determine if its objectives are being realized, whether
its benefits exceed its revenue costs, and weather there
is a less costly way of providing the same benefits.
Governor Wilson vetoed the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
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California State Controller John Chiang (sponsor)
Opposition
California Chamber of Commerce
California Taxpayers' Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098