BILL ANALYSIS                                                                                                                                                                                                    �



                                                                  AB 458
                                                                  Page  1

          Date of Hearing:   May 24, 2013

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                  Mike Gatto, Chair

               AB 458 (Wieckowski) - As Introduced:  February 19, 2013 

          Policy Committee:                              Revenue and  
          Taxation     Vote:                            6-3

          Urgency:     No                   State Mandated Local Program:  
          No     Reimbursable:              

           SUMMARY  

          This bill bars taxpayers from claiming a deduction for amounts  
          paid for punitive damages.  Specifically, this bill:

          1)Provides that no deduction shall be allowed for any amount  
            paid or incurred for punitive damages in connection with any  
            judgment, or settlement. 

          2)Applies to taxable years beginning on or after January 1,  
            2014.   

          3)Takes immediate effect as a tax levy.

           FISCAL EFFECT  

          The Franchise Tax Board estimates revenue gains of $400,000 in  
          fiscal year (FY) 2013-14, $1 million in FY 2014-15, and $1.1  
          million in FY 2015-16.

           COMMENTS 

           1)Purpose  .  Supporters argue that tax deductions are intended to  
            reward or incentivize good behavior, based upon italicize  
            business expenses incurred in the production of income.   
            Punitive damages, however, are by definition, not incurred in  
            the production of income.  In the employment context, that  
            could be racism, sexism, homophobia or any number of other  
            civil rights violations.  Supporters state that in other  
            contexts it could be the calculated decision to put corporate  
            profits ahead of public health and safety or a widespread  
            Ponzi scheme directed at the elderly.  Punitive damages exist  








                                                                  AB 458
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            to punish and deter wrongdoing, and reflect the opposite of a  
            bona fide business expense.


           2)Opposition .  Opponents, including the California Taxpayers  
            Association and the California Association of Health Services  
            at Home, argue AB 458 would eliminate the current deduction  
            allowed for punitive damages in connection with any judgments,  
            settlements or actions.   They note punitive damages are often  
            times not associated with any culpability on the part of the  
            company or association, but represent little more than a deep  
            pocket to pursue.  Opponents contend denying this deduction  
            will ultimately hurt employers, employees and the economy.   
            Opponents argue California cannot afford to negatively impact  
            the companies that are still here providing critical jobs to  
            Californians.


           3)Background.   As the name implies, compensatory damages are  
            awarded to compensate a plaintiff for a loss or injury  
            suffered as a result of another's breach of duty.  Punitive or  
            exemplary damages, by contrast, are generally not designed to  
            compensate the plaintiff for actual losses, but rather to  
            deter the defendant (and other similarly situated persons)  
            from engaging in the underlying behavior that caused harm.   
            Thus, juries typically assess punitive damages in an amount  
            they believe will be sufficient to punish the defendant and  
            deter future wrongdoing.  Defendants, however, are not always  
            punished to the degree sought.  This is because punitive  
            damages paid by business defendants are tax deductible.  As a  
            result, these businesses often pay far less after taxes than  
            the jury intended.



          Analysis Prepared by  :    Roger Dunstan / APPR. / (916) 319-2081