BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 508
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          Date of Hearing:  June 13, 2011

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair

                    SB 508 (Wolk) - As Amended:  February 17, 2011
           
           Majority vote.  Fiscal committee.

           SENATE VOTE:   23-17
           
          SUBJECT  :  Income and corporation taxes:  credits:  information 
          and operative limitations.

           SUMMARY  :  Provides that a new tax credit, enacted by a bill 
          introduced on or after January 1, 2012, shall be operative for a 
          period of seven years and shall include specified goals, 
          objectives, and purposes, as well as other detailed information 
          relating to the credit's effectiveness.  Specifically,  this 
          bill  :  

          1)Requires any bill that would authorize a new credit under 
            either the Personal Income Tax (PIT) Law or the Corporation 
            Tax (CT) Law to state all of the following:

             a)   Specific goals, purposes, and objectives that the tax 
               credit will achieve.

             b)   Detailed performance indicators for the Legislature to 
               use when measuring whether the tax credit meets the goals, 
               purposes, and objectives stated in the bill.

             c)   Data collection requirements to enable the Legislature 
               to determine whether the tax credit is meeting, failing to 
               meet, or exceeding those specific goals, purposes, and 
               objectives.

             d)   A requirement that the tax credit shall cease to be 
               operative seven years after its enactment date.

          1)Makes legislative findings and declarations regarding the need 
            for review of tax preference programs, including tax credits.

          2)Applies to bills introduced on or after January 1, 2012. 









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           EXISTING LAW  :

          1)Provides various tax credits, deductions, exclusions, and 
            exemptions.  Some of these tax expenditures are designed to 
            provide relief to taxpayers who incur specified expenses, such 
            as, for example, costs incurred in adopting a child.  Other 
            tax expenditures are designed to encourage socially or 
            economically beneficial behavior. 

          2)Requires, under Government Code (GC) Section 13305, the 
            Department of Finance (DOF) to provide an annual report to the 
            Legislature on tax expenditures by no later than September 15 
            of each year.  The report must contain each of the following:

             a)   A list of all tax expenditures exceeding $5 million in 
               annual cost;

             b)   The statutory authority for each tax expenditure;

             c)   A description of any legislative intent articulated for 
               each tax expenditure;

             d)   The sunset date of each tax expenditure, if applicable;

             e)   Identification of the beneficiaries of each tax 
               expenditure;

             f)   An estimate or range of estimates for the state and 
               local revenue loss for the current fiscal year (FY) and the 
               two subsequent FYs; 

             g)   For PIT expenditures, the number of affected taxpayers;

             h)   For CT and sales and use tax (SUT) expenditures, the 
               number of returns filed or businesses affected;

             i)   Identification of any comparable federal tax 
               expenditure; and,

             j)   A description of any tax expenditure evaluation 
               completed by any stage agency since the last report made.

          1)Defines a tax expenditure as "a credit, deduction, exclusion, 
            exemption, or any other tax benefit as provided for by the 
            state."








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           FISCAL EFFECT  :  The Franchise Tax Board (FTB) staff estimates 
          that this bill would not impact General Fund revenue.

           COMMENTS  : 

           1)Author's Statement  .  The author states, "Today's public 
            finance system in California requires major reform.  While I 
            have pushed 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)Arguments in Support  .  According to the proponents of this 
            bill, California spends about $41 billion annually in tax 
            expenditures and despite this large amount, the necessary 
            evaluation requirements used to assess the effectiveness of 
            tax expenditures are nonexistent.  The proponents assert that 
            "tax expenditures have limited legislative review, no cap on 
            the amount of money spent and a vote requirement of a simple 
            majority."  Once created, "tax expenditures could go on in 
            perpetuity, giving away billions of dollars without any way 
            for the public to know if that spending has any public 
            benefits whatsoever."  The proponents argue that SB 508 brings 
            much needed performance review and oversight to tax 
            expenditure programs in order to make those programs more 
            transparent and effective.  
                 
            3)Arguments in Opposition  .  The opponents, in contrast, argue 
            that this bill would create uncertainty regarding long-term 
            tax planning.  The opponents state that, "When businesses 
            choose to locate in a state, factors such as the availability 
            of a skilled workforce, infrastructure, regulatory 
            environment, and tax structure all play a significant role, 
            and businesses evaluate whether they can rely on these factors 
            to remain relatively stable and consistent in the long term."  
            The opponents contend that the imposition of a mandated 
            seven-year sunset on all future tax credits will have an 
            adverse effect on businesses because it would create 








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            uncertainty with respect to the future of the state's tax 
            structure.   For example, in the life science industry, 5- and 
            10-year business plans are the norm and more effective, so 
            enacting a seven-year sunset will be disruptive to this 
            industry.  The opponents assert that SB 508 "would eliminate 
            vital tax credits just as a product comes to market after 
            years of development and millions of dollars spent."  While 
            many of the opponents recognize that the state needs to 
            analyze the effectiveness of tax policies and make sure that 
            they are sensible for the future of California's economy, they 
            stand firm in believing that this bill will negate that 
            purpose.   The opponents suggest amending SB 508 to eliminate 
            the seven-year sunset.
           
          4)What is a "Tax Expenditure  "?  Existing law provides various 
            credits, deductions, exclusions, and exemptions for particular 
            taxpayer groups.  According to legislative analyses prepared 
            for prior related measures, United State Treasury officials 
            and some Congressional tax staff began arguing in the late 
            1960s that these features of the tax law should be referred to 
            as "expenditures," since they are generally enacted to 
            accomplish some governmental purpose and there is a 
            determinable cost associated with each (in the form of 
            foregone revenues).  A recent report by the Legislative 
            Analyst's office (LAO) shows that tax expenditure programs 
            cost the state nearly $50 billion in FY 2008-09.  The LAO 
            report noted that resources are allocated to a new tax 
            expenditure program automatically each year, with limited, if 
            any, legislative review, and there is no limit or control over 
            the amount of money forgone since the Legislature does not 
            appropriate funds for tax expenditure programs.  The LAO 
            report also stated that the tax expenditure programs offer 
            many opportunities for tax evasion, given the relatively low 
            level of audits.  
                 
            5)Current Review of Tax Expenditures  .  Although there is no 
            requirement for the Legislature itself to review existing tax 
            expenditures, several state agencies are required to issue 
            annual tax expenditures reports.  In 1985, the Legislature 
            passed ACR 17 (Bates), which called upon the LAO to prepare a 
            biennial "tax expenditure" report.  Additionally, the DOF 
            currently publishes an annual report on tax expenditures, 
            pursuant to GC Section 13305, and provides it to the 
            Legislature by no later than September 15 of each year.  The 
            DOF report includes a list of tax expenditures exceeding $5 








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            million in annual cost.  Finally, since 2007, the FTB is 
            required to prepare an annual report, "California Income Tax 
            Expenditures," describing tax expenditures found in the PIT 
            and the CT Laws.  
                 
            6)How is a Tax Expenditure Different from a Direct Expenditure  ?  
            As the DOF notes in its annual Tax Expenditure Report, there 
            are several key differences between tax expenditures and 
            direct expenditures.  First, tax expenditures are reviewed 
            less frequently then direct expenditures once they are put in 
            place.  While infrequent legislative review offers taxpayers 
            greater certainty, it also results in tax expenditures 
            remaining a part of the tax code in perpetuity without 
            demonstrating any public benefit.  Secondly, there is 
            generally no control over the amount of revenue losses 
            associated with any given tax expenditure.  Finally, the vote 
            requirements for direct expenditures and tax expenditures are 
            different.  While it takes a two-thirds vote to make a 
            budgetary appropriation, a tax expenditure measure can be 
            enacted by a simple majority vote.  It should also be noted 
            that, once enacted, it generally takes a two-thirds vote to 
            rescind an existing tax expenditure.  This effectively results 
            in a "one-way ratchet" whereby tax expenditures can be 
            conferred by majority vote, but cannot be rescinded, 
            irrespective of the efficacy, without a supermajority vote.  
                 
            7)How Much Do Tax Expenditures "Cost" the State  ?  According to 
            the DOF, the vast majority of tax expenditures are included in 
            the PIT Law.  To this end, the DOF estimates that tax 
            expenditures reduced PIT revenues by roughly $31 billion in FY 
            2010-11.  The SUT Law, in turn, contains identifiable state 
            tax expenditures worth about $11 billion annually.  For FY 
            2010-11, corporate tax expenditures amounted to roughly $5 
            billion.  
                 
            8)What Does This Bill Do ?  SB 508 is intended to create a 
            mechanism for the legislative review of certain tax 
            expenditures for the purpose of evaluating their effectiveness 
            and compatibility with present day state policy objectives.  
            Specifically, it requires each bill enacting a new tax credit 
            to describe the goals, purposes, and objectives for 
            authorizing such a credit, to specify detailed performance 
            indicators intended to measure the effectiveness of the 
            credit, and to mandate an automatic seven-year sunset for the 
            operation of the credit.  This bill is narrowly tailored to 








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            apply only to tax credits, as opposed to all tax expenditures. 
             Furthermore, it would only apply to new tax credits, i.e. tax 
            credits that are enacted by bills introduced on or after 
            January 1, 2012.  
                 
            9)The Seven-Year Sunset  .  This bill limits the operation of 
            every new tax credit to a seven-year period, as long as it is 
            enacted by a bill introduced on or after January 1, 2012. 
            Business representatives often argue that companies need 
            predictability, and that a short-term business tax credit 
            would not be of any particular benefit to a taxpayer whose 
            business projections span over decades.  However, this sunset 
            date may be easily extended by a subsequent statute enacting 
            or re-enacting a tax expenditure.  
                 
            10) How Effective is This Bill  ?  Both this Committee and its 
            Senate counterpart already require the vast majority of tax 
            expenditure measures they pass out to contain a built-in 
            repeal date. However, while the Committee routinely requires 
            sunset dates to be added to tax expenditure measures, there is 
            nothing in existing law that would require them to do so in 
            the future. Moreover, in the past few years, some of the most 
            dramatic changes to our tax code have been enacted as part of 
            the budgetary process beyond the review of this Committee. 
            However, even if a general sunset requirement were included in 
            statute, there would be nothing to prevent a future 
            Legislature from enacting an open-ended tax expenditure 
            "notwithstanding" the statutory prohibition.  Indeed, there is 
            considerable question as to whether such a prohibition would 
            have any binding effect.  ÝSee e.g., United Milk Producers of 
            California v. Cecil (1941) 47 Cal.App.2d 758, 764-65, noting 
            that the Legislature cannot declare in advance the intent of a 
            future Legislature].  Courts have long held that one 
            legislative body may not limit or restrict its own power or 
            that of subsequent legislatures, and the act of one 
            Legislature may not bind its successors ÝCounty of Los Angeles 
            v. State of California (1984) 153 Cal.App.3d 568, 573].  In 
            practical terms, it means that subsequent Legislatures are 
            under no legal obligation to comply with the provisions of 
            this bill. Furthermore, since this bill is a statutory, and 
            not a constitutional, measure, any subsequent Legislature 
            could easily dispense with this requirement by simply 
            including a provision in a statute that would override Revenue 
            and Taxation Code Section 40.
           








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          11)Suggested Technical Amendment  .  Committee staff suggests the 
            following technical amendment:

          On page 2, line 8, delete "$41 billion" and insert "$47 billion" 

          12)Related Legislation:  

             a)   SB 1272 (Wolk), introduced in the 2009-10 legislative 
               session, was identical to this bill.  Governor 
               Schwarzenegger vetoed SB 1272 stating that "While the 
               sponsors seem intent on eliminating measures that will 
               generate jobs and stimulate the 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."

             b)   AB 2171 (Charles Calderon), introduced in the 2009-10 
               legislative session, would have conditioned the allowance 
               of a tax benefit on the passage of a separate statute.  AB 
               2171 was held under submission by the Assembly Committee on 
               Appropriations.

             c)   AB 2641 (Arambula), introduced in the 2009-10 
               legislative session, would have required the Legislature to 
               review, before January 1, 2014, and every fifth year 
               thereafter, each tax expenditure, as specified, and 
               provided that every new tax expenditure that is enacted 
               after the effective date of AB 2461 shall be repealed 
               automatically on January 1, 2015, and on January 1 of every 
               fifth year thereafter, unless otherwise provided.  AB 2641 
               was held under submission by the Assembly Committee on 
               Appropriations.

             d)   ACA 6 (Charles Calderon), introduced in the 2009-10 
               legislative session, would have amended the State's 
               Constitution to, among other things, limit the operative 
               period to seven years from the date of the enactment of a 
               new or amended tax credit.  ACA 6 died on the Assembly 
               Floor.

             e)   AB 831 (Parra), introduced in the 2007-08 legislative 
               session, would have required any legislation creating a new 
               tax expenditure, or extending the operation of an existing 
               tax expenditure, to include a sunset provision.  AB 831 








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               failed to pass out of the Senate Committee on Revenue and 
               Taxation.

             f)   AB 1933 (Coto), introduced in the 2005-06 legislative 
               session, would have required any legislative measure 
               creating a new tax expenditure, or extending the operation 
               of an existing tax expenditure, to include legislative 
               findings regarding the purpose of the tax expenditure, an 
               estimate of the attributable revenue losses, a specific 
               methodology for measuring the anticipated benefits, and a 
               sunset date no later than five years in the future. AB 1933 
               failed to pass out of the Senate Committee on Revenue and 
               Taxation.  

             g)   AB 2199 (Brown), introduced in the 1995-96 legislative 
               session, would have required all tax expenditures to be 
               authorized via an appropriation in the annual Budget Act.  
               AB 2199 failed to pass out of this Committee.

             h)   AB 2884 (Villaraigosa), introduced in the 1995-96 
               legislative session, would have required the LAO, together 
               with the DOF, FTB, and the Board of Equalization, to 
               conduct an evaluation of all tax expenditures, as defined.  
               AB 2884 failed to pass out of this Committee.

             i)   SB 1233 (Hayden), introduced in the 1993-94 legislative 
               session, would have required the LAO to review each tax 
               expenditure program, as directed by this Committee and its 
               Senate counterpart, to determine if its objectives are 
               being realized, whether its benefits exceeded its revenue 
               costs, and whether there is a less costly way of providing 
               the same benefits.  Governor Wilson vetoed SB 1233.

           REGISTERED SUPPORT / OPPOSITION  :    

           Support 
           
          California Labor Federation 

           Opposition 
           
          BIOCOM
          California Aerospace Technology Association
          California Bankers Association
          California Manufacturers and Technology Association








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          California Taxpayers' Association
          Tech America
           
          Analysis Prepared by  :  Jeremy Ghassemi & Oksana Jaffe / REV. & 
          TAX. / (916) 319-2098, ext. 3978