BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1185| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1185 Author: Price (D) Amended: 5/29/12 Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 9-0, 4/11/12 AYES: Wolk, Dutton, DeSaulnier, Fuller, Hancock, Hernandez, Kehoe, La Malfa, Liu SENATE GOVERNMENTAL ORGANIZATION COMM. : 13-0, 4/24/12 AYES: Wright, Anderson, Berryhill, Calderon, Cannella, Corbett, De León, Evans, Hernandez, Padilla, Walters, Wyland, Yee SENATE APPROPRIATIONS COMMITTEE : 7-0, 5/24/12 AYES: Kehoe, Walters, Alquist, Dutton, Lieu, Price, Steinberg SUBJECT : Centralized Intelligence Partnership: underground operations SOURCE : Board of Equalization DIGEST : This bill (1) creates a multiagency partnership consisting of specified state entities, to be known as the Centralized Intelligence Partnership, to collaborate in combating illegal underground operations by, among other activities, providing a central intake process and organizational structure, with an administrator and support staff, to document, review, and evaluate data and CONTINUED SB 1185 Page 2 complaints; (2) creates an advisory committee, comprised of one representative from each entity in the partnership, to provide guidance on the activities and operations of the partnership; (3) requires the advisory committee to the partnership to determine the appropriate agency to house the processing center for the partnership; (4) authorizes duly authorized representatives of members of the partnership to exchange information for the purpose of investigating illegal underground operations; (5) requires the partnership, starting on or before July 1, 2014, to annually report to the Legislature and entities participating in the partnership on its activities; (6) requires an additional report to be filed with the Legislature by December 1, 2016, to include the number of complaints received by the partnership and cases investigated or prosecuted, as specified; and (7) sunsets on January 1, 2018. ANALYSIS : I. Underground Economy . The California Constitution establishes the Board of Equalization (BOE) as a five-member board composed of four members elected by each district plus the State Controller. Currently, BOE administers sales and use taxes, excise taxes, special taxes, and the state's fee programs. Retailers collect sales taxes from customers when they purchase tangible personal property, and remit those taxes quarterly to BOE. The Franchise Tax Board (FTB) is a three-person board comprised of the State Controller, Director of the Department of Finance, and Chair of the BOE. FTB administers the Personal Income Tax and Corporation Tax Law, and collects debts on behalf of state and local agencies. FTB may issue forms necessary to administer the taxes. Employees and others receiving payments reconcile amounts previously withheld with actual tax due when filing their annual tax returns with FTB. State law additionally directs: The Employment Development Department (EDD) to administer the Unemployment Insurance Fund, the CONTINUED SB 1185 Page 3 Disability Insurance Fund, and the Employment Training Fund, and collect deposits from employers for these funds as well as personal income tax withholding. The Department of Insurance (CDI) to administer and collect the Gross Premiums Tax, assessed on insurance companies. The Department of Motor Vehicles (DMV) to administer and collect vehicle license and registration fees, regulate the sale of vehicles, and protect consumers purchasing vehicles. The Department of Industrial Relations (DIR) to regulate workforce safety, administer the worker's compensation program, and enforce most labor laws. The Department of Justice (DOJ) to adequately and uniformly enforce the state's laws, and represent the people of the State of California in legal matters. The Department of Consumer Affairs (DCA) and its member bureaus, boards, and commissions generally serve to protect California consumers, regulating more than 100 business and 200 professional categories, including barbers and cosmetologists, dentists, and contractors, among others. The Health and Human Services Agency (HHS) oversees departments that provide Medi-Cal and In-Home Supportive Services, among others. 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 EDD and housed within its Underground Economy Operations, and also consists of the Labor Commissioner's Office, the DCA, the Office of Criminal Justice Planning, the FTB, the BOE, and the DOJ, and was codified by the Legislature (SB 1490, Johnston, 1994). The JESF publishes an annual report documenting its efforts. CONTINUED SB 1185 Page 4 In 2005, Governor Arnold Schwarzenegger's 2005-06 Budget established the Economic and Employment Enforcement Coalition (EEEC), housed in DIR, and comprised of investigators and auditors from DIR's Division of Labor Standards Enforcement and Occupational Safety and Health, together with EDD, DCA, and the Contractors State License Board (CSLB). 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 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 CSLB, BOE, and the Bureau of Automotive Repair, with collaboration by the Department of Insurance, the Attorney General, and local district attorneys. Additionally, EDD operates the Questionable Employment Tax Practices Program, initiated in 2007, which is a collaborative effort between EDD and the Internal Revenue Service (IRS). A memorandum of understanding between IRS and EDD provides for information exchange. II. Confidential Information . State law generally prohibits unlawful disclosure or inspection of any income tax return information except as specified in law. Criminal sanctions, including possible imprisonment for violation of income tax confidentiality, apply to BOE personnel convicted of unlawful disclosure or inspection of tax records. Other state agencies also have statutes restricting use of information for administrative purposes, and apply criminal misdemeanor or felony for unauthorized uses. This bill enacts the Centralized Intelligence Partnership Act, and requires it to: 1. Provide a central intake process and organizational structure to document, review, and evaluate data and CONTINUED SB 1185 Page 5 complaints. 2. Establish a processing center to receive and analyze data, share complaints, and research leads from the input of each impacted agency. 3. Provide participating and nonparticipating agencies with value-added investigative leads where collaboration opportunities exist for felony-level criminal and civil investigations. 4. Provide that each participating and nonparticipating agency retain jurisdictional authority over whether to pursue partnership strategies or collaborative investigative leads. 5. 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 Partnership includes the HHS, DCA, DIR, CDI, DOJ, DMV, EDD, FTB, and the BOE. This bill establishes an advisory committee comprised of one representative from each of the above-listed entities, appointed by and serving at the pleasure of the entity's head. The committee shall meet as needed, but at least quarterly. The committee shall decide which agency shall house the partnership's processing center. This bill allows duly authorized representatives of members of the partnership to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating illegal, underground operations. Any member or ex-member of the partnership, or any agent employed by the partnership, or any person who has obtained such knowledge from any of the above, shall not divulge or make known any information in a manner not allowed by law. Information shall retain its confidential status and shall remain subject to specifically enumerated confidentiality statutes guiding each agency. CONTINUED SB 1185 Page 6 The Partnership shall report to the Legislature on or before January 1, 2016, specifying: 1. The number of leads or complaints the Partnership receives, 2. The number of cases investigated and prosecuted through criminal or civil action, and 3. Recommendations for modifying, eliminating, or continuing the operation of the Partnership. This bill sunsets the Partnership on January 1, 2018, and is of that date repealed. Comments According to the author: I authored Senate Bill 118 at the request of Board of Equalization Chairman Jerome Horton to combat the underground economy. According to the California Chamber of Commerce the "underground economy" is a term that refers to individuals and businesses that deal in cash and/or use other schemes to conceal their business activities. In doing so, they escape their true tax liability, responsibilities to employees, government licensing, regulatory and taxing agencies. The underground economy hurts legitimate businesses, creates an enormous tax gap and hurts all California due to the loss of revenue. The Board of Equalization (BOE) estimates that the State of California losses about $8 billion dollars annually in tax revenue due to the underground economy. This revenue is needed to fund critical programs such as education, public safety, infrastructure and social services. Given the need to eliminate the underground economy in order to support legitimate businesses and fund critical programs to improve the quality of life for Californians this bill must be immediately approved by the Legislature and Governor. SB 1185 will establish a Centralized Intelligence Partnership among nine state entities in order to share CONTINUED SB 1185 Page 7 information, resources and best practices to reign in on the underground economy. While there have been numerous efforts and attempts to reign in on the underground economy they have not been successful because of the lack of coordination and collaboration among state agencies. Combating the underground economy is a difficult task and it takes teamwork and the elimination state agencies working only in functional silos. The Centralized Intelligence Partnership would include the following state entities: Board of Equalization, Franchise Tax Board, Health and Human Services Agency, Department of Consumer Affairs, Department of Industrial Relations, Department of Insurance, Department of Justice, Department of Motor Vehicles, and the Employment Development Department. According to the Board of Equalization's revenue estimate with the enactment of SB 1185 the Centralized Intelligence Partnership will increase the BOE investigations of underground economy activities by 120% of its 2010-2011 figures. In its first year the Centralized Intelligence Partnership is estimated to yield $15 million dollars in tax revenues for the state. SB 1185 is a win-win for California. This legislation addresses the underground economy by establishing a multi-agency partnership among state agencies. Given chronic budgets deficits the state faces on an annual basis we must reign in on the underground economy that robs our state if the vital resources needed to fund programs so that our residents can thrive and prosper. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee, as it relates to the prior version of the bill: 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 CONTINUED SB 1185 Page 8 administrator and staff to the Partnership. Additional increased staffing costs in the range of $300,000 annually (General Fund and various Special Funds) to require 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 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). SUPPORT : (Verified 5/30/12) Board of Equalization (source) California Association for Health Services at Home California Building Industry Association California Chamber of Commerce California Grocers Association California Healthcare Institute California Manufacturers and Technology Association California Spa & Pool Industry Educational Council California Statewide Law Enforcement Association California Taxpayers Association Cities of Carson , Gardena, Hawthorne, and South Gate CONTINUED SB 1185 Page 9 Construction Industry Legislative Council Culver City Chamber of Commerce Fullerton Chamber of Commerce Los Angeles Area Chamber of Commerce Motion Picture Association of America, Inc. Southwest California Legislative Council AGB:mw 5/30/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED