BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  SB 1185|
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                                 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 
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          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 

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                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.


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             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 

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             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.


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          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 

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            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 

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            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 

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          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

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