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