BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 228 (Wyland)
Hearing Date: 05/23/2011 Amended: 04/25/2011
Consultant: Mark McKenzie Policy Vote: G&F 9-0
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BILL SUMMARY: SB 228 would authorize the Board of Equalization
(BOE), the State Controller, and the Franchise Tax Board (FTB)
to withdraw, rather than release, a notice of state tax lien if
the underlying debt, including penalties and interest, is paid
in full. A withdrawal would be applied as if the lien had never
been filed. The bill would also require the BOE, SCO, and FTB,
to make reasonable efforts to notify credit reporting agencies
and creditors of the withdrawal of the lien, upon request by the
taxpayer.
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Fiscal Impact (in thousands)
Major Provisions 2011-12 2012-13 2013-14 Fund
FTB administration $145 General
BOE administration unknown, moderate one-time costs,
likelyGeneral
in the range of $100 to $150
SCO administration unknown, likely minor one-time
costsGeneral
Tax revenue impact unknown, significant decreases in tax
General
collections to the extent that the bill
erodes
the effectiveness of liens as a
collection tool,
partially offset by tax revenue gains to
the extent
some taxpayers accelerate tax payments in
an
attempt to clear their credit history of
state tax liens
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SB 228 (Wyland)
Page 1
STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Federal and state tax agencies record tax liens in the amount of
the tax owed, plus applicable penalties, interests, fees and
costs in favor of the federal or state government against the
property of a person who refuses or neglects to pay a tax after
notice and demand. Tax agencies record liens with county
recorders in counties where the taxpayer owns property. Tax
liens are public documents that generally give the government
collections priority over other debts secured by the property.
Potential lenders and credit reporting agencies use them to
assess a taxpayer's credit risk.
A tax lien is not filed until there have been numerous
documented efforts to contact the taxpayer by phone and in
writing. Existing state law authorizes tax agencies to release
a lien when the underlying tax liability, including any
penalties and interest, is paid in full. FTB has the authority
to file a notice of state lien filed in error in specified
circumstances, which serves the same purpose as a withdrawal in
that it removes the lien from the taxpayer's credit record.
Generally, however, a release will show that the tax debt has
been satisfied, but the record of the lien will remain on the
taxpayer's credit report for up to 10 years, similar to a
bankruptcy filing. State tax agencies do not currently have the
authority to withdraw state tax liens. Withdrawal of a lien has
the effect of appearing as if the lien was never filed by
removing it from the public record.
Existing federal law allows for withdrawals of federal tax liens
in the following circumstances: the filing of the lien was
premature or not in accordance with administrative procedures;
the taxpayer has entered into an installment agreement to
satisfy the tax debt; the withdrawal would facilitate the
collection of the tax liability; or the withdrawal of the lien
would be in the interests of the taxpayer, as determined by the
National Taxpayer Advocate. In February of this year, the
Internal Revenue Service expanded the conditions in which a
withdrawal of federal tax lien may be filed as follows:
taxpayers may request withdrawal of a lien once full payment of
taxes is made; taxpayers with unpaid debts of $25,000 or less
who enter into a direct debit installment agreement will have
the lien withdrawn after a probationary period; and taxpayers
SB 228 (Wyland)
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may request the withdrawal of a lien on existing direct debit
installment agreements.
SB 228 would allow the FTB and BOE to issue a notice of
withdrawal of a state tax lien, once full payment of the
underlying debt is satisfied. The taxpayer would be notified of
the withdrawal, and upon request of the taxpayer, the taxing
agency would be required to notify credit reporting agencies,
financial institutions, and specified creditors of the
withdrawal of the lien. This bill is intended to promote
financial recovery for taxpayer's who satisfy their tax debts by
eliminating adverse effects of a record of lien on credit
reports.
The FTB indicates that the bill would impose one-time costs of
approximately $145,000 to create new forms sent to taxpayers,
credit reporting agencies, and county recorders, and to modify
computer systems used to send electronic data to county
recorders. The BOE has not prepared a cost estimate to date,
but staff estimates the bill would also impose one-time costs,
likely in the range of $100,000 to $150,000 to implement the
authority to withdraw liens in the various tax and fee programs
administered by the board. Ongoing costs for FTB and BOE to
administer these provisions would be absorbable. The bill would
also authorize the SCO to withdraw liens related to the Motor
Vehicle Fuel Tax Law. Any costs associated with the SCO would
likely be minor.
The revenue impact of the bill would be dependent upon taxpayer
behavior. BOE releases about 3,000 tax liens annually as a
result of taxpayers satisfying underlying tax liabilities. In
2009-10, the FTB issued approximately 295,000 state liens on
debts totaling $3.3 billion, and issued approximately 84,000
lien releases and 19,000 releases of liens filed in error.
State tax liens are only filed after numerous notices and
attempts to contact a taxpayer to collect unpaid liabilities.
When taxing entities negotiate with delinquent taxpayers, the
possibility of a tax agency recording a lien against the
outstanding debt can be a powerful incentive for a taxpayer to
pay outstanding liabilities before a lien becomes necessary. In
this case, the tax lien is used to accelerate payments that
would otherwise be delayed or go unpaid. While this bill is
intended to improve the credit histories of taxpayers who
satisfy tax debts, the bill may result in the unintended
SB 228 (Wyland)
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consequence of some taxpayers delaying payment because they can
"erase" the record of an unpaid debt at a later date when they
satisfy tax liabilities. FTB indicates that even a small change
in behavior in this regard could have significant negative
revenue impacts. They indicate that the bill could result in
revenue losses of $18 million in 2010-11, $55 million in
2011-12, $70 million in 2012-13, and $60 million in 2013-14.
Both the FTB and BOE indicate that in some cases, taxpayers who
have an outstanding tax lien may accelerate payments to expunge
the record of the lien and improve their credit. This is most
likely to happen if a taxpayer anticipates a need to make a
large purchase, such as a home or car, or a general need to
obtain credit from a financial institution.
The bill could also create perceptions of inequity in the
application of the authority provided in this bill because the
circumstances in which a withdrawal may be filed are undefined.
This could result in some taxpayers obtaining a state withdrawal
at the discretion of BOE or FTB, while others may not be
afforded the same opportunity.