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 AB 2666 - Skinner Page 5 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: AB 2666 - Skinner Page 5 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 AB 2666 - Skinner Page 5 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, AB 2666 - Skinner Page 5 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 AB 2666 - Skinner Page 5 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 AB 2666 - Skinner Page 5 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 AB 2666 - Skinner Page 5 (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 AB 2666 - Skinner Page 5