BILL ANALYSIS
ACA 6
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ASSEMBLY THIRD READING
ACA 6 (Charles Calderon)
As Amended April 20, 2009
2/3 vote
REVENUE & TAXATION 6-3 APPROPRIATIONS 12-5
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|Ayes:|Charles Calderon, Beall, |Ayes:|De Leon, Ammiano, |
| |Coto, Ma, Portantino, | |Charles Calderon, Coto, |
| |Saldana | |Davis, Fuentes, Hall, John |
| | | |A. Perez, Skinner, |
| | | |Solorio, Torlakson, Hill |
| | | | |
|-----+--------------------------+-----+---------------------------|
|Nays:|DeVore, Harkey, Hagman |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Audra Strickland |
| | | | |
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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:
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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;
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 "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 : 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
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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."
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.
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
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years from now.
Committee Staff Comments:
1)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 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.
2)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.
3)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.
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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.
4)Why do we need a constitutional amendment?:
a) Some may argue that it is not necessary to adopt a
constitutional amendment because both the Assembly and
Senate Revenue and Taxation Committees already require the
vast majority of tax expenditure measures they pass out to
contain a built-in repeal date. While it is true that
policy committees routinely require sunset dates be added
to tax expenditure measures, there is nothing in existing
law that would require the committees 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.
b) In addition, some may argue that the same end can be
achieved statutorily. It is true that, in the past, the
Legislature 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.]
5)How much do tax expenditures "cost" the state?: According to
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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.
6)Related legislation:
a) 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.
b) 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.
c) 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 the Assembly Committee on
Revenue and Taxation.
d) 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
the Assembly Committee on Revenue and Taxation.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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FN: 0002478