BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 508 HEARING: 3/30/11
AUTHOR: Wolk FISCAL: Yes
VERSION: 2/17/11 TAX LEVY: No
CONSULTANT: Grinnell
TAX PREFERENCE ACCOUNTABILITY
Requires bills enacting tax preferences to include
specified information and a seven-year sunset.
Background and Existing Law
California law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate 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 geo-graphically
targeted economic development area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something that but for the tax
credit, they would not do. The Department of Finance is
required to annually publish a list of tax expenditures.
Proposed Law
Senate Bill 508 provides that any bill that enacts a credit
against the Personal Income Tax Law or Corporation Tax Law
for taxable years beginning on or after January 1, 2012,
contain:
Specific goals, purposes, and objectives that the
tax credit will achieve.
Detailed performance indicators for the Legislature
to use when measuring whether the tax credit met its
specific goals, purposes, and objectives.
Data collection requirements to enable the
Legislature to determine whether the tax credit is
meeting, failing to meet, or exceeding its goals,
purposes, and objectives. The requirements shall
include specific data and baseline data to be
collected and remitted in each year the credit is
effective, and the specific taxpayers, state agencies,
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or other entities required to collect and remit data.
A seven-year sunset.
The measure also makes findings regarding tax preferences
generally and their current fiscal impact on federal and
state governments.
State Revenue Impact
According to FTB, an identical bill last year did not
impact state revenues (SB 1272, 2010).
Comments
1. Purpose of the bill . According to the Author, "Today's
public finance system in California requires major reform.
While I have pursued changing our budgeting system to apply
performance measurements for spending programs, I am trying
to do the same with SB 508, which applies a
performance-based methodology to future tax expenditures
enacted by the state. There is no good reason not to
evaluate tax expenditure programs with the same rigor that
we use when judging spending decisions, especially when
California's tax preference portfolio now exceeds $47
billion, equal to half of our total revenue. While we
cannot change existing tax preferences, we can at least
start keeping better track of future ones."
2. Don't Count on It ? Currently, California's two business
tax incentives, the Research and Development Tax Credit and
Geographically Targeted Economic Development Area credits,
do not have sunsets. Firms have certainty that they can
claim these credits so long as they qualify, and make
long-term investment decisions accordingly. Some opponents
to SB 508 state that mandatory sunsets for tax expenditures
are inappropriate and unfair when similar requirements do
not apply to spending programs. Others state that the
seven year standard is arbitrary; while sunset provisions
and performance review are important, a firm's investment
horizon and the tax credits themselves vary from case to
case, and the same, fixed sunset period should not apply to
tax incentives which may require different periods of time
to accomplish its purposes.
3. A Bill About Bills . SB 508 applies to legislative
bills introduced on or after January 1, 2012 that provide
SB 508 -- 02/17/11 -- Page 3
new tax expenditures enacted by applying specified
requirements, including a mandatory seven-year sunset.
Future authors would have to put considerable thought into
a bill adding a tax expenditure prior to introduction, like
find indicators that they expect to change as a result of
the tax expenditure, identify data that they expect to
measure the change in the indicator, and select an entity
to collect data. The Legislature would use this
information when considering whether to reauthorize,
expand, or limit the tax expenditure before the mandatory
sunset.
SB 508 could apply these requirements to existing tax
preferences, but doing so in a way that would restrict the
eligibility of a taxpayer to claim a credit would trigger
the 2/3 vote requirement under Section 3 of Article XIIA of
the California Constitution. Additionally, SB 508 applies
only contingently to forthcoming measures; a future
Legislature could waive the section of law put in place by
SB 508, as this Legislature cannot affirmatively bind
future ones under County of Los Angeles v. State of
California (1984) 153 Cal.App.3d 568, 573. Future authors
could simply add a "notwithstanding clause" to future
measures to nullify the bill's requirement. Similarly,
authors could choose to add a tax expenditure as an
amendment to evade the requirement.
4. A Rose By Any Other Name . The terms "tax expenditures"
and "tax preferences" have caused considerable strife in
debates before the Revenue and Taxation Committee in the
past. One school of thought states that tax revenue
inherently belongs to taxpayers, and laws allowing them to
keep more of it for performing a specific activity cannot
appropriately be called or compared to direct spending as
the money involved never flows to the State's treasury.
Others disagree, indicating that laws allowing taxpayers to
reduce tax by engaging in specific behavior is
indistinguishable from spending except on a balance sheet.
To illustrate the point, the late economist David Bradford
stated that instead of purchasing weapons systems from
defense contractors, Congress could instead provide a
Weapons Supply Tax Credit for defense contractors equal to
the cost of goods sold. Defense spending would then vanish
from the spending side of the federal government's
accounting ledger, and revenues would concomitantly decline
by an equal amount.
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The Congressional Budget Office (CBO) defines tax
expenditures as "revenue losses attributable to provisions
of the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide
a special credit, a preferential rate of tax, or a deferral
of tax liability." CBO states that tax expenditures may be
considered analogous to direct outlay programs, and the two
can be considered as alternative means of accomplishing
similar budget policy objectives. The Department of
Finance defines tax expenditures as "any special provision
in the tax law that results in the collection of fewer tax
revenues than would be collected under the basic tax
structure."
The semantic distinction is politically important. While
tax expenditures are parts of current federal and state
law, and need not be authorized as part of the federal
budget process, both Congress and the Legislature must
authorize spending programs by legislative appropriation or
in the State Budget with the notable exception of spending
mandated by initiative. In Congress, legislation
authorizing tax expenditures and direct spending programs
are treated identically. In California, unless the tax
expenditure is subject to a sunset provision, the
Legislature can only reduce or limit tax expenditure
programs by 2/3 vote of each house of the Legislature, as
they are considered tax increases for the purposes of
Section 3 of Article XIIA of the California Constitution.
Despite cuts in programmatic spending this year, the
Legislature has not yet repealed tax expenditures in recent
years, although Governor Brown proposed ending tax credits
in Geographically Targeted Economic Development Areas such
as enterprise zones. Past tax expenditures such as the
Rice Straw Credit have sunset in recent years, although the
Legislature reauthorized the Child Care Facilities Credit
(AB 1282, Mullin, 2007) and the Community Development
Financial Institutions credit (AB 2831, Ridley-Thomas,
2006) in recent years, although both credits are due to
expire after the 2011 taxable year.
5. Plus Çe Change, Plus C'est La Même Chose. According to
Stanley Surrey and Paul McDaniel's seminal book, "Tax
Expenditures," the United States Department of the Treasury
first published a tax expenditure budget in 1968. The
Congressional Budget Act of 1974 required that all future
SB 508 -- 02/17/11 -- Page 5
budgets detail the tax expenditure concept and providing a
detailed accounting of federal tax expenditures in the
federal budget where it has appeared ever since, although
the amounts are not part of the budget table. In 1976,
Congress reduced tax expenditures as part of the Tax Reform
Act that year. Soon after, President Jimmy Carter urged
Treasury to recommend whether tax expenditures could be
repealed to reduce taxes overall, and Congress considered
sunset reviews and statutory caps on federal spending
during that time. Currently, federal tax expenditures
result in $1.2 trillion in foregone revenue (half of total
revenues), and 8% of U.S. Gross Domestic Product, and
exceed any category of federal spending. This year, the
President's National Commission on Fiscal Responsibility
and Reform stated that eliminating all tax expenditures
allows Congress to cut income tax rates by half without
significant change to overall revenues, and called for
eliminating or limiting many tax expenditures as part of
its plan.
California does not include tax expenditures as part of the
budget, instead choosing to publish two excellent reports
on the subject. First, the Department of Finance's "Tax
Expenditure Report" serves as a listing of all tax
expenditures
( http://www.dof.ca.gov/research/economic-financial/#anchorTa
xExpenditureReports ) and Franchise Tax Board's "California
Income Tax Expenditures: Compendium of Individual
Provisions,"
( http://ftb.ca.gov/aboutftb/plans_reports.shtml ) describes
and discusses each item in addition to providing foregone
revenue totals and number of returns affected. Finance's
report shows that tax expenditures resulted in revenue
foregone in 2002-03 of $24.2 billion, which roughly doubled
to $47 billion in 2010-11 - an amount equal to about half
of total revenues and the same share of total federal
revenues.
6. Back Again . SB 508 is identical to SB 1272 (Wolk,
2010) which Governor Schwarzenegger vetoed, stating:
To the Members of the California State Senate:
I am returning Senate Bill 1272 without my signature.
While the sponsors seem intent on eliminating
measures that will generate jobs and stimulate the
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economy, the average California taxpayer would
probably be better served if the Legislature were
willing to automatically sunset every new spending
entitlement, program expansion and business mandate
after 7 years.
For this reason, I am unable to sign this bill.
Sincerely,
Arnold Schwarzenegger
Support and Opposition (03/24/11)
Support : California Labor Federation
Opposition : California Bankers Association, California
Taxpayers Association, California Aerospace Technology
Association, California Manufacturers Association, and
TechAmerica