BILL ANALYSIS AB 1936 Page 1 Date of Hearing: May 19, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 1936 (De Leon) - As Introduced: February 19, 2010 Policy Committee: Revenue and Taxation Vote: 6-3 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill repeals provisions passed with the 2008-09 budget that allow net operating losses (NOLs) incurred by businesses beginning in 2011 to be carried back to offset income during the two prior years under the personal income tax and corporation tax. FISCAL EFFECT The Franchise Tax Board estimates that this bill will result in revenue gains of $25 million in 2010-11, $250 million in 2011-12, $145 million in FY 2012-13, and similar amounts thereafter. COMMENTS 1)Background . For the past two decades, California has partly or fully conformed to federal tax provisions allowing businesses incurring NOLs in one year to carry them forward and deduct them against earnings in subsequent years. However, California has not historically conformed to federal provisions allowing businesses to carry back losses by filing amended returns and deducting the losses against the earnings posted during the two prior years. As part of the budget agreement for 2008-09, the governor signed AB 1452 (Budget Committee), Chapter 763, Statutes of 2008, which, among other things, suspended the NOL deductions for 2008 and 2009, authorized NOL carry-backs for losses incurred in 2011 or later tax years, and expanded the NOL carry-forward period from 10 years to 20 years for losses AB 1936 Page 2 incurred after January 1, 2008. The carry-back provisions are scheduled to phase in, with carrybacks allowed for 50% of NOLs incurred in 2011, 75% of NOLs incurred 2012, and 100% incurred in 2013 and thereafter. 2)Rationale . This bill is intended to repeal a budget agreement that is resulting in significant revenue losses to the state. The author asserts that the Legislature needs to "reassess the corporate tax giveaways that have been enacted over the last few years and repeal those that neither generate economic activity nor assist in the economic recovery of our state." Proponents of repeal also assert that the carry-back provisions, by requiring the state to issue refunds on taxes already collected, add to the volatility of the GF revenues. 3)Opponents state that the NOL carry-back is particularly important for keeping struggling businesses afloat, and that rescinding the NOL carry-back deduction will undermine employers' faith in California's commitment to keeping employers in the state. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081