BILL ANALYSIS
AB 2666
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2666 (Skinner) - As Amended: April 8, 2010
Majority vote. Fiscal committee.
SUBJECT : Administration of income taxes: business tax credits:
transparency.
SUMMARY : Requires a taxpayer doing business in California to
submit to the Franchise Tax Board (FTB), under penalty of
perjury, specified information relating to the amount of tax
credits claimed by the taxpayer. Requires the State Chief
Information Officer (CIO) to publish this information on the
Reporting Transparency in Government Internet Website.
Specifically, this bill :
1)Requires a taxpayer that is doing business in this state and
claims any business tax credits to submit, under penalty of
perjury, an annual certification to the FTB when filing the
annual tax return reporting all of the following information:
a) The number of full-time, part-time, and temporary
employees employed by the taxpayer in California;
b) The amount of tax credits claimed by the taxpayer on the
return for each tax credit authorized under Revenue and
Taxation Code (R&TC) Part 10 (commencing with Section
17001) or Part 11 (commencing with Section 23001);
c) The number of full-time jobs, part-time jobs, and
temporary jobs created by the tax credit;
d) A list of occupations, job classifications, and expected
average wages for the full-time jobs, part-time jobs and
temporary jobs created by the tax credit; and,
e) The taxpayer's office mailing address and office
telephone number.
2)Defines the term "business credit" as any credit against "net
tax," as defined in R&TC Section 17039, or any credit against
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the "tax," as defined in R&TC Section 23036, allowed under
R&TC Part 10 or Part 11.
3)Excludes from the definition of a "business credit" all of the
following credits relating to:
a) Household and dependant care;
b) Employer's child care assistance;
c) Employer's credit to contribution to care plan;
d) Qualified dependent care plan;
e) Adoption costs;
f) Renters' tax credit;
g) Donations to conservation land;
h) Disabled access expenditures;
i) Personal, dependent, blind, and senior exemptions;
j) Joint custody head of household;
aa) Senior head of household;
bb) Non-resident pro ration of exemption credits; and,
cc) Refunds pursuant to the Unemployment Insurance Code.
4)Requires FTB, notwithstanding Government Code Section 6254.21
or any other law, to compile this information annually,
commencing with information based on the 2010 taxable year.
5)Requires FTB, beginning on March 30, 2012, and each March 30th
thereafter, to submit this compiled information to the State
CIO for publication on the Reporting Transparency in
Government Internet Website (RGT Website).
6)Requires the RGT Website to include a database searchable by
company name, amount of tax expenditure, or any other criteria
necessary to increase public awareness of the amount and scope
of tax expenditures for businesses in this state.
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7)Imposes a penalty of 1% of the credit claimed by the taxpayer
for each failure to file the required information under R&TC
Section 19571(a), unless it is shown that the failure is due
to reasonable cause and not due to willful neglect.
8)Imposes a state-mandated local program and provides that no
reimbursement to local agencies and school districts is
required for a specified reason.
EXISTING STATE LAW:
1)Provides various tax credits and other tax benefits designed
to provide tax relief for taxpayers who incur certain expenses
(e.g., child adoption) or to influence behavior, including
business practices and decisions [e.g., research and
development (R&D) credit or economic development area hiring
credits]. These benefits, generally, are designed to provide
incentives for taxpayers to perform various actions or
activities that they may not otherwise undertake.
2)Does not require tax credit provisions to include specific
goals, purposes, and objectives, performance measures, or a
sunset date.
3)Requires tax agencies to keep taxpayer information
confidential. Consistent with federal law, it is a
misdemeanor for FTB to disclose or make known in any manner
information as to the amount of income or any other
particulars of taxpayer information, unless expressly
provided. Similarly, the State Board of Equalization (BOE) is
not allowed to divulge taxpayer information.
4)Requires FTB to make available as public record a list of the
250 largest tax delinquencies in excess of $100,000 for each
calendar year.
EXISTING FEDERAL LAW requires all publicly held corporations to
file annual reports with the Securities and Exchange Commission
(SEC), disclosing the amount of corporate profits, amounts of
federal taxes paid, and, in some instances, information on
specific tax expenditures claimed by each corporation.
FISCAL EFFECT : Unknown.
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COMMENTS :
1)Author's Statement . The author states that, "In this era of
perennial budget deficits, lawmakers need accountability for
any tax revenue that is dispersed to corporations to determine
if they are using the money to create or retain jobs. In
2009, nearly $14.5 billion in tax expenditures went to
corporations as an incentive for them to do business and
create jobs in the state. There is no oversight or
accountability of that money to assess its effectiveness at
creating or retaining jobs."
2)The Purpose of this Bill . According to the author, this bill
is intended to bring needed transparency and accountability to
corporate tax expenditures. While the federal lawmakers have
access, albeit limited, through the SEC filings, to some
information on corporate profits, federal corporate taxes
paid, and sometimes tax credits claimed, almost no public
information is available to state legislators in evaluating
the "state" of the state corporate income taxes. Thus, when
a state enacts a business tax incentive for the purpose of
creating jobs or encouraging investment in the state, unless
the incentive itself is expressly contingent upon a
determinable number of jobs created, it is difficult, if not
impossible, to ascertain the effectiveness of such policies
without the information provided by company-specific tax
disclosure. AB 2666 is part of a package of bills that will
ensure that corporations that receive tax credits use taxpayer
dollars to create or retain jobs.
3)Arguments in Support . The proponents of this bill argue that
a publicly accessible database that displays all the
recipients of economic development subsidies "will provide
policymakers as well as the public with the transparency
needed to hold the recipients of tax expenditures accountable
to taxpayer goals." The proponents also note that, as
billions of dollars flow out to corporations without
oversight, "the Governor proposes an elimination of social
safety net programs like CalWORKS, while demanding little from
corporations in terms of sharing the pain of California's
broken economy." Finally, the proponents assert that, since
beneficiaries of state programs are required to provide
fingerprints, "report their income every three months, be
checked continuously for fraud, and prove that they found work
for thirty-two hours per week to keep their grants and
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assistance, we should require corporations to report to the
state what they are doing with the billions they receive each
year." This bill, the proponents state, will cast a little
sunshine on which corporations to see which corporations are
properly using state taxpayer dollars and which are not.
4)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 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). A recent report by the Legislative
Analyst Office (LAO) shows that tax expenditure programs cost
the state nearly $50 billion in fiscal year 2008-09. The LAO
report noted that resources are allocated to a new tax
expenditure program automatically each year, with limited, if
any, legislative review, and there is no limit or control over
the amount of money forgone since the Legislature does not
appropriate funds for tax expenditure programs. The LAO
report also stated that the tax expenditure programs offer
many opportunities for tax evasion, given the relatively low
level of audits.
5)How is a Tax Expenditure Different from a Direct Expenditure?
As the Department of Finance notes in its annual Tax
Expenditure Report, 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, which effectively results
in a "one-way ratchet" whereby tax expenditures can be
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conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority vote.
6)Disclosure of Tax Information in California . The State of
California, as well as other states, readily publishes
information on unpaid taxes and delinquent taxpayers with
respect to property taxes. An unpaid property tax becomes a
lien against the real property and dissemination of
information on such liabilities is important for protecting
potential buyers, lenders, etc. In the area of income tax
liabilities, however, the state law generally prohibits
disclosure or inspection of any income tax return information,
except as specified in law. In fact, the FTB is required to
notify taxpayers if criminal charges have been filed for
willful unauthorized inspection or disclosure of their tax
data. However, FTB may release tax return information to
certain other agencies, including legislative committees, the
Attorney General, the California Parent Locator Service, the
Commissioner of the Internal Revenue Service, and others, for
certain statutorily enumerated purposes. BOE is similarly
restricted from divulging taxpayer information. Furthermore,
since 2007, both FTB and BOE are required to make as a matter
of public record a list of the largest 250 tax delinquencies
over $100,000.
7)Corporate Tax Disclosure in Other States . Several states have
some sort of public disclosure of state income tax
information. The State of Wisconsin was the first to provide
for public disclosure of income tax returns in 1923,
authorizing a release of state income tax, franchise tax, or
gift tax information reported by an individual or corporation
if the person requesting information is a Wisconsin resident.
In the early 1990s, Massachusetts, West Virginia, and Arkansas
enacted public disclosure rules as well. The Massachusetts
law, which was enacted in 1993, is broad and requires a bank,
an insurance company, and a publicly traded company doing
business in Massachusetts to file annual reports stating its
name, address, the amount of state taxable income, total
excise tax due, gross receipts or sales, either gross profit
or credit carryovers to future years, income subject to
apportionment, and the amount of each credit taken against the
excise tax due. [Massachusetts General Law, Chapter 62C,
Section 83(n)]. These reports are available for public
inspection but only after the names and addresses on the
companies have been expunged. Currently, some 12 states
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mandate disclosure of economic development tax incentives
claimed by companies. (Company-Specific Subsidy Disclosure in
the States, www.goodjobsfirst.org ). Seven of these 12 states
- Connecticut, Illinois, Maine, Minnesota, North Carolina,
North Dakota, and West Virginia - require disclosure of state
corporate income tax incentives received by companies,
including the value of those incentives.
8)What Kind of Disclosure Does This Bill Require ? This bill
requires every taxpayer that claims a business tax credit to
reveal certain information to FTB and, ultimately, to the
public, once it is posted on the RTG Website. The required
tax-related information would include the number of taxpayer's
employees (full-time, part-time, and temporary), the amount of
tax credit claimed by the taxpayer on the return for each
authorized tax credit, the number of jobs created by the tax
credit, and a list of occupations, job classifications, and
expected average wages for the jobs created by this credit.
Some may argue that the disclosure of the number of employees
and the amount of tax credits claimed would reveal valuable
proprietary business information. While full disclosure of
corporate tax returns could result in a loss of some
proprietary business information, it does not appear that the
companies would be disadvantaged under this bill.
First of all, this bill delays the disclosure of the submitted
information for a particular tax year for at least two
calendar years following the end of the tax year. The delay
would reduce the potential utility of the information to
out-of-state competitors not subject to the disclosure
requirement. Secondly, the type of information required to be
revealed under this bill is unlikely to be strategically
useful to competitors. As pointed out by the Center for
Budget and Policy Priorities in its 2007 report on corporate
tax disclosure, even if, for example, it were possible for a
competitor to calculate how much R&D spending a corporation
had done in a particular year, there is very little real
practical benefit, if any, in knowing the amount without
knowing what the money was spent on. (See, e.g., State
Corporate Disclosure Report, Center for Budget and Policy
Priorities, p. 22). Thus, it seems unlikely that a taxpayer
"would be compelled to increase its R&D spending merely
because it learned that one of its competitors was spending
more on R&D than the [taxpayer] thought." Id. Finally,
companies operating in California already provide a lot of
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information to the state in order to do business here. A
disclosure of the amount of tax credits in conjunction with
the number of jobs created as a result of these tax credits
will make a valuable contribution to the evaluation of
California's business tax policy.
9)Potential Issues :
a) Should other tax expenditures be included in the
disclosure ? While this bill refers to tax expenditures, it
only requires taxpayers to disclose the amount of business
credits claimed and does not apply to tax exemptions,
exclusions, deferrals, elections, or deductions. For
example, the FTB includes a "water's-edge" election on the
list of tax expenditures that cost the state $700 million
in the 2006 tax year. The "water's-edge" election is an
alternative to the worldwide unitary method of calculating
California income for multinational corporations. It
allows corporations to reduce their tax liability and/or
filing complexity and to avoid providing financial details
of their foreign operations. However, under this bill,
taxpayers are not required to report the amount of tax they
save as a result of electing to file on the "water's-edge"
basis. Furthermore, not every credit is enacted for the
purpose of creating jobs. For example, a low-income
housing tax credit is intended to increase the supply of
affordable rental housing units available to low-income
California households. Similarly, the California R&D
credit was implemented to encourage companies to conduct
research and development in California, rather than in
other states.
Finally, businesses often receive tax exemptions and
exclusions from their sales and use taxes as well as
property taxes, not just income taxes. If this bill's
intent is to require disclosure of only those tax
incentives that are expressly created by the Legislature
for the principal purpose of encouraging economic
development, then Committee staff suggests that those
incentives be identified in this bill.
b) What is the methodology for determining the number of
jobs created? This bill requires taxpayers to report the
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number of jobs and the expected amount of average wages
created by the tax credits claimed by the taxpayers. It is
unclear what kind of methodology the taxpayer is expected
to use in calculating the number of jobs created since this
bill is silent on this issue.
c) How many taxpayers are going to be subject to the
disclosure requirement ? The FTB currently receives over 17
million income tax returns a year. While the majority of
those returns contain no claims of business tax credits,
many of them do. The proposed disclosure requirements will
be burdensome not only for many small taxpayers but also
for the FTB since it will have to process millions of
additional disclosure statements. The utility of the
information received from small taxpayers may not outweigh
the burdens of compliance. The Committee may wish to
consider limiting the application of this disclosure
requirement only to businesses with a certain amount of
gross receipts or sales attributable to California.
10)Suggested Technical Amendments .
a) The terms "full-time", "part-time", and "temporary"
employees should be defined in order to avoid disputes
between taxpayers and FTB.
b) On page 2, line 7, an erroneous reference to Section
18410 should be replaced with "Section 18401."
c) This bill does not specify which agency, FTB or the
State CIO, must develop a searchable database.
d) A penalty imposed for failure to file the required
information equals to 1% of the credit claimed. Committee
staff suggests that this language be clarified to provide
that the amount of penalty equals to 1% of the aggregate
amount of credits claimed by the taxpayer for the taxable
year for which the information was not provided.
11)Related Legislation.
AB 2230 (Charles Calderon), introduced in the current
legislative session, requires FTB to post on its website, by
March 31, 2011, and annually thereafter, a list of the 100
largest publicly traded corporations disclosing certain
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tax-related information reported by those corporations, as
specified. AB 2230 is scheduled to be heard by this Committee
on April 19, 2010.
SB 1272 (Wolk), introduced in the current legislative session,
requires any bill that creates a new tax credit to include
specific goals, purposes, and objectives of the credit,
performance measures for the credit within the language of the
bill, and repeal dates that are five years after the enactment
date of the bill. SB 1272 is currently pending in the Senate
Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Employees International Union (SEIU) Local 1000
The American Federation of State, County and Municipal
Employees, AFL-CIO
California Labor Federation (sponsor)
California Nurses Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098