BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair SB 1185 (Price) - Centralized Intelligence Partnership Act Amended: April 9, 2012 Policy Vote: G&F 9-0, GO 13-0 Urgency: No Mandate: No Hearing Date: May 24, 2012 Consultant: Mark McKenzie SUSPENSE FILE. AS PROPOSED TO BE AMENDED. Bill Summary: SB 1185 would establish the Centralized Intelligence Partnership consisting of the Board of Equalization (BOE), the Franchise Tax Board (FTB), and the Employment Development Department (EDD) with a central processing center to collect and analyze data, share information, and identify collaborative opportunities to investigate and prosecute activities related to illegal underground activities. Fiscal Impact: Unknown increased staffing costs to each of the participating state entities, likely in the range of $500,000 to $1 million in total for BOE, FTB, and EDD to provide staff and resources to the Partnership (General Fund). Additional staffing costs, likely in the range of $200,000 to $500,000 beginning in 2013-14, to hire an administrator and staff to the Partnership. Cost pressures in the range of $300,000 annually (General Fund and various Special Funds) to authorize participation of six additional state entities in the Partnership in an advisory role (up to 1/2 PY each). Significant cost pressures to hire additional administrative, investigative, and enforcement staff among the participating entities upon full implementation of the Partnership (General and various Special Funds). These costs would likely be mitigated by future revenue gains resulting from increased enforcement activities. Estimated costs in the range of $750,000 to establish and house the Partnership's processing center (General Fund). Unknown future revenue gains, likely tens of millions of SB 1185 (Price) Page 1 dollars annually beginning in 2014-15 (General Fund), related to enforcement actions and increased tax collections. A portion of the revenue gains could be offset by revenue losses to the extent Partnership activities supplant existing revenue-generating enforcement efforts among the participating entities. Unknown costs or savings related to the impact on existing enforcement staffing levels within each of the participating entities (General and various Special Funds). Background: Although undefined in the bill, the Employment Development Department indicates that the term "underground economy" refers to individuals and businesses that deal in cash or use other schemes to conceal their activities and true tax liability from government licensing, regulatory, and taxing agencies. Underground economy activities include tax evasion, tax fraud, cash pay, tax gap, under the table payments, and other "off-the-books" activities. The ultimate impact of the underground economy is erosion of the economic stability and working conditions in California. In 1994, Governor Pete Wilson signed executive order W-66-93, creating the Joint Economic Strike Force (JESF) to address the problem of the underground economy. The JESF is led by the Employment Development Department (EDD) and housed within its Underground Economy Operations, and also consists of the Labor Commissioner's Office, the Department of Consumer Affairs (DCA), the Office of Criminal Justice Planning, the Franchise Tax Board (FTB), the Board of Equalization (BOE), and the Department of Justice (DOJ). The Task Force was codified by the Legislature with the enactment of SB 1490 (Johnston) Chap 1117/1994. The JESF publishes an annual report documenting its efforts. In 2005, Governor Arnold Schwarzenegger's 2005-06 Budget established the Economic and Employment Enforcement Coalition (EEEC), housed in the Department of Industrial Relations (DIR), and comprised of investigators and auditors from DIR's Division of Labor Standards Enforcement and Occupational Safety and Health, and partnering with EDD, DCA, and the Contractors' State License Board. The United States Department of Labor also participates in the coalition, which states that it is "collaborating for vigorous and targeted enforcement against unscrupulous businesses. EEEC aids in leveling the playing SB 1185 (Price) Page 2 field while restoring competitive advantage to law abiding businesses and their employees." Governor Brown renamed the EEEC the DIR Labor Enforcement Task Force (LETF), effective January 1, 2012. DIR launched a new collaborative effort between state agencies to combat illegal business practices and improve California's business environment. LETF's primary partners are EDD, the Contractors' State License Board, BOE, and the Bureau of Automotive Repair, with collaboration by the Department of Insurance (DOI), DOJ, and local district attorneys. According to a recent report, enforcement activities have identified nearly 50,000 violations of labor, licensing, and tax laws since the inception of the EEEC, valued at $62.8 million in penalty assessments. EEEC activities also resulted in the referral of 3,446 cases to district attorney's offices, with 1,696 criminal convictions. EDD operates several additional efforts designed to battle activities related to the underground economy: the Questionable Employment Tax Practices Program, initiated in 2007, which is a collaborative effort between EDD and the Internal Revenue Service (IRS) that provides for information exchange; .and the Unemployment Insurance Rate Equity Group, which focuses efforts on detecting employers that engage in Unemployment Insurance rate manipulation in an attempt to lower payroll taxes. Proposed Law: SB 1185 would establish the Centralized Intelligence Partnership that includes participation by all of the following state entities: The California Health and Human Services Agency (HHS), the Department of Consumer Affairs (DCA), the Department of Industrial Relations (DIR), the Department of Insurance (DOI), the Department of Justice (DOJ), the Department of Motor Vehicles (DMV), the Employment Development Department (EDD), the Franchise Tax Board (FTB), and the State Board of Equalization (BOE). The Partnership would do all of the following: Provide a central intake process and organizational structure to document, review, and evaluate data and complaints. Establish a processing center to receive and analyze data, share complaints, and research leads from the input of each impacted agency. Provide participating and nonparticipating agencies with value-added investigative leads where collaboration opportunities exist for felony-level criminal and civil SB 1185 (Price) Page 3 investigations. Provide that each participating and nonparticipating agency retain jurisdictional authority over whether to pursue partnership strategies or collaborative investigative leads. Document and provide data analysis, analytic data findings, referrals, collaborative opportunities, outcomes, emerging evasion trends, lessons learned, as well as additional enforcement, administrative, and legislative opportunities. The scope of activities and projects undertaken by the Partnership would be consistent with the amount of funds appropriated by the Legislature. SB 1185 would establish an advisory committee comprised of one representative from each of the participating entities, and require the committee to meet at least quarterly. The committee would determine which agency would house the Partnership's processing center. Members of the Partnership would be authorized to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating illegal, underground operations, and prohibit specified persons from divulging any information in a manner not allowed by law. Information would retain its confidential status and remain subject to specified confidentiality statutes. SB 1185 would also require the Partnership to provide annual reports to the Legislature on its activities and accomplishments, beginning July 1, 2014, and to provide a more comprehensive report by January 1, 2018 on the number of leads or complaints received, the number of cases investigated and prosecuted through criminal or civil action, and recommendations for modifying, eliminating, or continuing the operation of the Partnership. Finally, the bill would sunset the Partnership's reporting requirements on January 1, 2020. Staff Comments: Most of the participating entities are unable to determine costs to administer the bill because the responsibilities of each department or agency would be defined by the advisory committee, and the scope of activities of the Partnership would depend upon the amount of funds appropriated by the Legislature. Staff assumes that each participating entity would initially provide one investigator-level staff person until the Partnership is fully operational. In addition, SB 1185 (Price) Page 4 staff assumes that each entity would need to perform IT system improvements to interface with the central processing center, at a total estimated cost in the range of $2 million. Since the first report to the Legislature is due on July 1, 2014, staff assumes these system improvements would need to occur in the first six months of 2013 in order to have one year of data available for the first report. SB 1185 creates significant cost pressures to provide staff and funding for future Partnership activities. These cost pressures are unknown and would depend upon recommendations of the advisory committee and the ability to identify effective collaborative measures for addressing the underground economy. For illustrative purposes, the Labor Enforcement Task Force serves as a successful example of collaborative enforcement efforts. The Governor's proposed 2012-13 budget includes $7.2 million and 66 positions to fund the LETF: $3.5 million and 30 positions within DIR; $2.6 million and 25 positions within EDD; and $918,000 and 11 positions within the Contractors State Licensing Board. The scope of the Partnership established by SB 1185 appears to be much broader than the activities of the LETF, so the total resources needed for the Partnership upon full implementation are likely to significantly exceed the budget for the LETF. Staff notes that the impact that SB 1185 would have on existing collaborative efforts to address the underground economy among numerous state entities is unknown, but there appear to be overlapping goals. Staff assumes that the Partnership would require the addition of new staff, but may also result in the redirection of existing staff. The redirection of staff currently dedicated to successful revenue-generating activities would have a detrimental impact on state revenues, and also has the potential to compromise ongoing investigations. These revenue losses could be mitigated by the revenue-generating capacity of Partnership activities, if they are more successful than existing efforts. SB 1185 would result in unknown revenue gains due to increased investigative and enforcement efforts, likely in the tens of millions annually once the CIP is fully implemented. As an example, the BOE estimates sales and use tax revenue gains of approximately $15 million annually, and FTB estimates direct tax revenue gains of approximately $1 million annually and an additional $11 million per year from deterrence. Other agencies were unable to provide revenue estimates at this time. Revenue SB 1185 (Price) Page 5 gains would depend upon the availability of investigative and enforcement staffing levels, and the outcomes of any analytic data findings that would maximize benefits. Staff notes that there could be offsetting revenue losses to the extent the activities of the CIP supplant or overlap existing and ongoing efforts among various state agencies to address the underground economy. Proposed author amendments would: Define the "underground economy" in the legislative findings and declarations. Revise the membership of the partnership to specify that BOE, FTB, and EDD are included in the partnership, and that the HHS Agency, DCA, DIR, DOI, DOJ, and DMV shall participate in the partnership in an advisory capacity. Authorizes the six agencies that serve in an advisory capacity to offer guidance and advice to the partnership's advisory committee, and to participate in data and intelligence sharing with the other members of the partnership. Require each of the six advisory agencies to notify the appropriate taxing agency if a violation is discovered in the normal course of investigation that would result in increased tax revenues to the state. Proposed committee amendments would make participation in the partnership by HHS Agency, DCA, DIR, DOI, DOJ, and DMV voluntary, change the due date for the final report to January 2, 2016, and sunset the partnership on January 1, 2018.