BILL ANALYSIS                                                                                                                                                                                                    




            SENATE REVENUE & TAXATION COMMITTEE

            Senator Lois Wolk, Chair

                                                   AB 2666 - Skinner

                                                  Amended: May 28, 2010

                                                                       

            Hearing: June 23, 2010                          Fiscal: Yes




            SUMMARY:  Requires FTB to Compile Specific Information  
                      Regarding Tax Expenditures Claimed by Publicly  
                      Traded Firms; The State Chief Information Officer  
                      to Disclose Information on a Searchable Database.


                      

                 EXISTING LAW generally prohibits unlawful disclosure  
            or inspection of any income tax return information except  
            as specified in law.  Criminal sanctions, including  
            imprisonment, apply to FTB personnel convicted of unlawful  
            disclosure or inspection of tax records.   The Franchise  
            Tax Board (FTB) must notify a taxpayer if criminal charges  
            have been filed for willful unauthorized inspection or  
            disclosure of their tax data.  However, FTB may publish  
            statistical data related to taxpayer information so long as  
            nothing specific to a single taxpayer is disclosed.   
            Notwithstanding these provisions, the Legislature directed  
            FTB to publish a list of the top 250 tax delinquencies over  
            $100,000 (AB 1418, Horton, 2006).  

                 EXISTING LAW provides various tax credits designed to  
            provide incentives for taxpayers that incur certain  
            expenses, such as child adoption, or to influence behavior,  
            including business practices and decisions, such as  
            research and development credits and Geographically  
            Targeted Economic Development Area credits.  The  
            Legislature typically enacts such tax incentives to  








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            encourage taxpayers to do something but for the tax credit,  
            they would otherwise not do. 

                  EXISTING LAW directs the Department of Finance to  
            annually publish a report detailing tax expenditures, and  
            relevant costs.

                 THIS BILL requires FTB to compile information on any  
            tax expenditure authorized under the Personal Income Tax  
            Law or Corporation Tax Law that is claimed and reported by  
            a taxpayer that is a publicly-traded company, defined as a  
            company with securities that are:

                             Either listed or admitted to trading on a  
                      national or foreign exchange, or is the subject  
                      of two way quotations, such as bid and asked  
                      prices, and
                             Regularly published by one or more  
                      broker-dealers in the National Daily Quotation  
                      Service or similar service.

                 THIS BILL requires FTB to submit the information  
            detailed above to the State Chief Information Officer for  
            publication on the Reporting Transparency in Government  
            Internet Web site beginning March 30, 2012, and by March  
            30th of every year thereafter.  The State Chief Information  
            Officer shall develop on the Reporting Transparency in  
            Government Internet Web site a searchable database by  
            company name and the amount of tax expenditures claimed, to  
            increase public awareness of the amount and scope of tax  
            expenditures for business in this state. 


            FISCAL EFFECT: 

                 According to the FTB, AB 2666 does not affect state  
            revenues.




            COMMENTS:








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            A.   Purpose of the Bill

                 The author provides the following statement:

                 "AB 2666 would create a database of  publicly traded   
            corporations that receive tax subsidies.  This bill will  
            provide transparency and accountability to corporate tax  
            expenditures in order to make them more effective at  
            creating much needed 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.

                 Yet there is no oversight or accountability of that  
            money to assess its effectives at creating or retaining  
            jobs.

                 Transparency in government spending is key to  
            increasing effectiveness of public dollars.

                 If we require beneficiaries of state programs, such as  
            CalWORKS, to provide fingerprints, report their income  
            every three months, be checked continuously for fraud, and  
            prove that they found work for thirty-two hours a week to  
            keep their grants and assistance, we should require  
            corporations to report to the stat what they are doing with  
            the  billions  of dollars they receive each year.

                 AB 2666 will help to ensure that state spending on  
            corporate tax subsidies is transparent and accountable.



            B.   Tradeoffs

                 AB 2666 poses a clear tradeoff in tax policy: are  
            taxpayer privacy protections more important than making  
            public information necessary to determine which  
            corporations receive how big of a slice of California's  
            corporate tax credit pie?  While taxpayer privacy is the  








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            cornerstone of a self-assessed income tax system, how can  
            the Legislature evaluate whether tax expenditures work when  
            it doesn't know who gets tax breaks, and how much each  
            taxpayer gets?  Financial information is highly sensitive  
            to both individuals and businesses, allowing friends and  
            neighbors to know your financial investments or personal  
            spending, or to disclose vital data in a tax return to a  
            competitor is a violation of privacy and can lead to very  
            bad things.   For these reasons, state law allows felony  
            prosecution for unlawful inspection and disclosure to  
            enforce these safeguards, and FTB must notify any taxpayers  
            if criminal charges are filed.  



            C.   Going Public

                 The Securities and Exchange Act of 1934 requires  
            companies with more than $10 million in assets whose  
            securities are held by more than 500 owners to file annual  
            and other periodic reports for the benefit of its  
            shareholders and the investing public. These reports are  
            available to the public through the SEC's EDGAR database.    
            Shareholders and potential investors should have some idea  
            of a firm's profits and losses, and assets and liabilities.  
             This data famously lead to the largest national tax policy  
            change since the enactment of the federal income tax:  
            Robert McIntyre, working at Citizens for Tax Justice combed  
            through the financial reports of the nation's largest  
            companies and found that 128 of the 250 largest U.S firms  
            paid no federal corporate income tax in at least one year  
            between 1981 and 1983 (17 paid no tax in all three).  The  
            resulting furor pushed Congress to enact the Tax Reform Act  
            of 1986.  

                 AB 2666 requires FTB to compile and have subsequently  
            published tax information for only for publicly traded  
            firms.  As introduced, the measure applied to all firms,  
            similar to SBx6 19 (Florez), which the Committee will also  
            hear at its June 23rd hearing.  The companies are used to  
            filing reports with the Securities and Exchange Commission,  
            which ostensibly enforce the Securities and Exchange Act,  








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            privately-held firms do not, as they have made the tradeoff  
            not to forgo public equity investment in exchange for  
            keeping private sensitive information to itself.  However,  
            neither SEC filings, nor FIN 48, a regulation recently  
            enacted by the Financial Accounting Standards Board for  
            firms to advise potential shareholders and the public of  
            uncertain tax positions, contain information specific to  
            each state about the firm's tax expenditures claimed



            D.   Change You Can Conceive Of?

                 The Legislature previously waived individual taxpayer  
            confidentiality when it directed the tax agencies to  
            disclose the top delinquents in the hopes that scarlet  
            letters enforce compliance.  AB 2666 goes much further:  
            instead of the current reports that FTB compiles on the  
            aggregate use of each credit, the measure directs state  
            authorities to publish the names of firms that claim tax  
            credits, and the amounts it claims.  

                 An important question embedded in AB 2666 is whether  
            more information will result in substantive policy changes  
            that produce a better return on investment from  
            California's tax expenditure.  FTB and the Department of  
            Finance already publish tax expenditure reports detailing  
            each tax preference and related information, including its  
            costs, yet the Legislature has added more tax expenditures  
            in recent years than it has limited or repealed.  McIntyre  
            did his calculations using information that existed in  
            1983, without the benefit of a searchable database.  The  
            Committee may wish to consider whether substantive change  
            will result disclosing previously confidential information,  
            especially given the likely workload tradeoffs for FTB and  
            the taxpayer privacy compromises necessary to obtain it. 



            E.   Diff'rent Strokes

                 California's key business tax credits, the Research  








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            and Development Tax Credit and the Geographically Targeted  
            Economic Development Area Hiring Credit and Sales and Use  
            Tax Credit, are neither capped to a specified amount of  
            foregone revenue nor specifically allocated by a state  
            agency.  If firms legitimately satisfy the conditions  
            necessary to claim the credit, such as increasing research  
            and development year-over-year or hiring a qualified worker  
            (with proper documentation), the firm claims the credit on  
            its return, thereby reducing its tax in the current tax  
            year, or carrying the credit over to be used against tax  
            due in a future year.  Once granted, the state cannot  
            cancel the credit and make the firm repay the amount, a  
            procedure known as a claw back, if the firm followed the  
            law.  In that way, California's key business tax  
            expenditures function similarly to entitlement programs,  
            but unlike spending programs, cannot be limited or  
            eliminated without 2/3 vote required by Section 3 of  
            Article XIIA of the State Constitution.

                 Other states operate economic development programs by  
            application, and claw back incentives when companies leave  
            the state or decrease employment.  Many firms must apply  
            for tax incentives, which the state awards up to an amount  
            specified in each state's budget, or sign memorandums of  
            understanding with the state.  Next, the state requires  
            reports from firms to ensure that it meets specified  
            employment totals, wage amounts, and investment thresholds.  
             If the firm does not meet the targets, it must pay back  
            the entire value of the tax credit in some cases, sometime  
            with a penalty.  A Chart from the organization "Good Jobs  
            First" details these provisions for 20 states."  

                  According to the Assembly Revenue and Taxation  
            Committee, "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  








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            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  
            mandate disclosure of economic development tax incentives  
            claimed by companies.  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." 


            F.   Related Legislation

                 The Committee will also hear SBx6 19 (Florez) at its  
            June 23rd, 2010 hearing, which directs FTB to collect  
            information regarding credits against the corporate tax  
            received by all corporations.  The measure also requires  
            the information to be disclosed on the Reporting  
            Transparency in Government Internet Web site in a  
            searchable database.



            G.   Amendments Necessary

                 FTB and Committee Staff suggest the following  
            amendments to limit reporting to publicly traded  
            corporations and provide a definition for tax expenditures.  
             According to FTB, neither amendment prevents them from  
            collecting and disclosing information for firms filing as  
            LLCs, except those that choose to be taxed as partnerships.

                   On Page 2, Lines 3 and 4, strike out "Part 10  








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                 (commencing with section 17001) or"
                   On Page 3, Line 14, insert: "tax expenditure" means  
                 any credit against the tax imposed under Part 11  
                 (commencing with Section 23001).




            Support and Opposition

                 Support:California Labor Federation (sponsor);  
            American Federation of State and County and Municipal  
            Employees, AFL-CIO; California Nurses Association; Sierra  
            Club CA; Asian Health Services; California Professional  
            Firefighters; State Building and Construction Trades  
            Council of CA



                 Oppose:California Chamber of Commerce; California  
            Taxpayers' Association; California Business Properties  
            Association; California Retailers Association; California  
            Bankers Association; California Manufacturing and  
            Technology Association; California Aerospace Technology  
            Association; TechAmerica



            ---------------------------------

            Consultant: Colin Grinnell



















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