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
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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
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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
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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,
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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
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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.