BILL ANALYSIS Ó AB 576 Page 1 Date of Hearing: April 29, 2013 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Raul Bocanegra, Chair AB 576 (V. Manuel Pérez) - As Introduced: February 20, 2013 Majority vote. Fiscal committee. SUBJECT : Centralized Intelligence Partnership Act: pilot program SUMMARY : Establishes a multiagency partnership consisting of the Employment Development Department (EDD), the Franchise Tax Board (FTB), and the State Board of Equalization (BOE), to collaborate in combating illegal underground operations, as specified. Specifically, this bill : 1)Contains numerous legislative findings, including the following: a) According to the EDD's analysis of findings made by the Internal Revenue Service, the underground economy in California is estimated to be between $60 billion and $140 billion each year; b) According to the BOE, an estimated $8 billion in corporate, personal, and sales and use tax (SUT) goes uncollected in California each year, with unreported and underreported economic activity responsible for the vast majority of that total; c) The underground economy hurts all Californians. Revenues to support government services are lost, workers are forced to go without basic employment protections, and legitimate businesses are confronted with unfair competition; d) Since the activities of many operating in the underground economy span across multiple jurisdictions, various joint agency enforcement efforts have been undertaken to combat the underground economy, including the creation of the Joint Enforcement Strike Force on the Underground Economy (Strike Force) in 1993, and the creation of the Economic and Employment Enforcement AB 576 Page 2 Coalition in 2005; e) Many collaborative efforts are already under way, pursuant to which investigators periodically meet to discuss current investigations, collaborate to conduct sting operations, and develop best practices policies; and, f) The Legislature intends this act to enhance existing efforts to combat the underground economy by institutionalizing collaboration among state agencies through a Centralized Intelligence Partnership (Partnership), a pilot program that acquires relevant data for collaborative data analysis, economic threat assessment, strategic planning, and provides a referral tracking and value-added referral disbursement process to monitor the progress of the Partnership activities. 2)Establishes the Partnership in state government as a pilot program. 3)Provides that the Partnership shall include the EDD, the FTB, and the BOE. In addition, the following agencies are authorized to participate in the pilot program in an advisory capacity: a) The California Health and Human Services Agency; b) The Department of Consumer Affairs; c) The Department of Industrial Relations; d) The Department of Insurance; e) The Department of Justice; and, f) The Department of Motor Vehicles (collectively, 'Advisory Agencies'). 4)Provides that if, in its normal course of investigation, an Advisory Agency discovers a violation of law that would result in increased tax revenues to the state, that Advisory Agency shall notify the EDD, the FTB, or the BOE, as appropriate. 5)Requires the Partnership to do all of the following to combat AB 576 Page 3 illegal underground operations: a) Provide a central intake process and organizational structure to document, review, and evaluate data and complaints; b) Establish a processing center to receive and analyze data, share complaints, and research leads from the input of each impacted agency; c) Provide both participating and nonparticipating agencies with value-added investigative leads where collaboration opportunities exist for felony-level criminal investigations, including referring leads to agencies with appropriate enforcement jurisdiction; and, d) Document and provide "intake data analysis, analytic data findings, referrals, collaborative opportunities, outcomes, emerging evasion trends, lessons learned, as well as additional enforcement, administrative, and legislative opportunities." 6)Permits duly authorized representatives of Partnership members, and Advisory Agencies, to exchange intelligence, data, documents, information, complaints, or lead referrals to investigate illegal underground operations. 7)Provides that information exchanged pursuant to this act shall retain its confidential status and shall remain subject to the confidentiality provisions contained in various specified code sections. 8)Provides that the scope of activities undertaken by the Partnership shall be consistent with the amount of funds appropriated by the Legislature. 9)Authorizes the Partnership to hire "an administrator and staff." 10)Establishes an advisory committee to the Partnership (Advisory Committee) to provide guidance to, and advice on, the activities and operations of the Partnership. 11)Provides that the Advisory Committee shall be comprised of one representative from each of the Partnership entities AB 576 Page 4 (i.e., the EDD, the FTB, and the BOE). Each representative shall be appointed by the head of the entity in the Partnership and shall serve at the pleasure of the appointing authority. In addition, any Advisory Agency may provide a representative to the Advisory Committee to offer guidance and advice to the Partnership. 12)Provides that the Advisory Committee shall determine the appropriate agency to house the Partnership's processing center. 13)Requires the Advisory Committee to meet as needed, but at least quarterly, to conduct its business. 14)Provides that, on or before July 1, 2015, and annually thereafter, the Partnership shall report on its activities and accomplishments to the Legislature and each entity in the Partnership. 15)Requires the Partnership to submit to the Legislature on or before December 1, 2017, a report of the pilot program that includes the following information: a) The number of leads or complaints received by the Partnership; b) The number of cases investigated or prosecuted through civil action or criminal prosecution; and, c) Recommendations for modifying, eliminating, or continuing the pilot program. 16)Sunsets the act's provisions on January 1, 2019. EXISTING LAW : 1)Establishes the EDD. Among its many duties, the EDD administers the collection, accounting, and auditing of payroll taxes and maintains employment records for more than 16 million California workers. 2)Establishes the FTB as a three-person board comprised of the State Controller, the Director of the Department of Finance, and the Chair of the BOE. Among its many duties, the FTB is charged with administering the state's Personal Income Tax Law AB 576 Page 5 and the Corporation Tax Law. 3)Establishes the BOE, which consists of five voting members: the State Controller and four members elected for four-year terms at gubernatorial elections. Among its many duties, the BOE administers the SUT Law, sets property values for state-assessees, monitors the property tax assessment practices of county assessors, and serves as the administrative appellate body for final actions of the FTB. 4)Requires various state entities, including the BOE, the FTB, and the Department of Justice, to enforce laws relating to the taxation and legal operation of businesses throughout the state under their respective jurisdictions. FISCAL EFFECT : Unknown. However, the BOE's analysis estimates that this bill will increase SUT revenues by approximately $550,000 in fiscal year (FY) 2013-14, and by $1.1 million in FY 2014-15. The FTB, in turn, estimates that "revenue gains could reach approximately $1 million per year in direct revenues and an additional $11 million per year in revenues from deterrence once the Partnership is fully implemented." COMMENTS : 1)The author has provided the following statement in support of this bill: At a time when California has been reducing and in some cases eliminating funding for vital public services, it is estimated the state loses up to $8 billion a year in tax revenue due to the effects of the state's prolific underground economy, currently valued at between $60 and $140 billion. While the impact of the underground economy on the state is extensive, the state lacks a coordinated effort among its various agencies to tackle the underground economy. AB 576 will address the problem by establishing a California Intelligence Partnership between nine state agencies to enable the sharing of information and investigate leads. A collaborative, strategic, targeted and focused effort to combat the underground economy would create a synergy among AB 576 Page 6 the various enforcement agencies, increasing the state's effectiveness in recapturing revenue lost to businesses operating illegally in the State of California. As such, AB 576 will create a Centralized Intelligence Partnership (CIP) between nine member agencies including the Board of Equalization, the Franchise Tax Board, the Employment Development Department and [the] California Department of Justice. Each duly authorized representative of the partnership would be allowed to exchange intelligence, data, documents, information, complaints, or lead referrals for the purpose of investigating illegal, underground operations. Information obtained by the CIP would retain its confidential status and would be subject to all the existing confidentiality statutes guiding each agency. 2)Proponents state: Businesses that operate in the underground economy gain an unfair advantage over law-abiding employers by conducting their operations outside the parameters of the law. Such bad actors either underpay or completely neglect to pay required taxes, licenses, insurance, or wages. By unlawfully reducing their expenses, these businesses undercut legitimate businesses that in good faith comply with required laws. Many compliant businesses are unfortunately forced to shut down due to this unfair competitive advantage, further impeding California's economic recovery. 3)The BOE notes the following in its staff analysis of this bill: a) Sponsor and purpose : "BOE Chairman Horton is sponsoring the creation of the CIP as a collaborative, strategic, and focused effort to combat the underground economy through comprehensive data and resources analysis. He envisions a synergy among the various enforcement agencies that addresses issues which impact California industries. This collaborative effort is intended to significantly increase the efficiency and effectiveness in recapturing revenue lost to illegally operating businesses, thereby resulting in a more robust, legitimate economy." AB 576 Page 7 b) Underground economic activities span across multiple jurisdictions : "Many collaborative efforts are already underway in which investigators periodically meet to discuss current investigations, team up to conduct sting operations, and collaborate on best practices. However, despite these significant efforts, California continues to lose revenue due to the underground economy." 4)Committee Staff Comments: a) The Joint Enforcement Strike Force on the Underground Economy : On October 26, 1993, the Governor signed Executive Order W-66-93, which established the Strike Force. The Governor subsequently signed legislation placing the Executive Order's provisions into law effective January 1, 1995. (Unemployment Insurance Code Section 329). The Strike Force, which is chaired by the EDD's Director, is responsible for both developing and sharing information necessary to combat the underground economy. The Strike Force also works to improve the coordination of enforcement activities, and to develop methods to target the enforcement resources of participating agencies. The Strike Force is empowered to form "joint enforcement teams" when appropriate to utilize the investigative and enforcement capabilities of the Strike Force's members. In addition to the EDD, the Strike Force's formal membership is comprised of the Department of Consumer Affairs, the Department of Industrial Relations, the Department of Insurance, and the Office of Criminal Justice Planning. The FTB, the BOE, and the Department of Justice are each encouraged, under existing law, to participate in the Strike Force's activities. The Strike Force is required to report to the Governor and the Legislature annually regarding its activities. b) The Labor Enforcement Task Force : The Department of Industrial Relations also works to combat the underground economy in California through its Labor Enforcement Task Force. In this joint effort between state agencies and affected communities, information and resources are shared to ensure workers receive proper payment of wages and are provided a safe working environment. In addition, the Labor Enforcement Task Force works to ensure that AB 576 Page 8 California receives all employment taxes, fees, and penalties due from employers. The Labor Enforcement Task Force is comprised of the Labor and Workforce Development Agency, the Department of Industrial Relations, the EDD, the Contractor's State Licensing Board, the California Department of Insurance, the BOE, the Bureau of Automotive Repair, and the State Attorney General. c) What would this bill do? : This bill would establish a multiagency partnership consisting of the EDD, the FTB, and the BOE to collaborate in combating illegal underground operations. Specifically, this bill would establish the Partnership as a pilot program to, among other things, create a processing center to receive and analyze data, share complaints, and research leads from the input of each impacted agency. d) The right approach? : California's underground economy is a well-documented problem that places legitimate businesses at a competitive disadvantage. Moreover, prosecuting bad actors in the underground economy is notoriously challenging. Often, violators fail to obtain appropriate business licenses or report taxes, and pay their employees in cash, leaving little or no paper trail. Nevertheless, it appears that this bill's proposal is largely duplicative of existing state efforts to curb activity in the underground economy. As noted above, existing law already provides for the Strike Force, and encourages both the BOE and the FTB to take part in its activities. The Strike Force is presently authorized to facilitate the sharing of information among participating agencies, and to reduce enforcement costs wherever possible by eliminating duplicative audits and investigations. In addition, the Strike Force is empowered to establish procedures for soliciting leads from the public through an advertised telephone hotline. If improvements in agency collaboration and enforcement are needed, the Committee may wish to consider whether it would make more sense to reform the existing Strike Force program, instead of creating an entirely new program, involving many of the same state agencies. Indeed, this may be an appropriate subject for interim study. At AB 576 Page 9 present, this Committee is essentially being asked to authorize the creation of a new bureaucracy, with staff-hiring authority, to engage in many of the same practices the Strike Force is already authorized to carry out. e) Who makes the call? : As noted above, this bill authorizes the Advisory Committee to determine the "appropriate agency" to house the Partnership's processing center. The Committee may wish to consider whether it would be more appropriate for the Legislature to make this determination. f) Double-referral : This bill was heard in the Assembly Committee on Public Safety on April 9, 2013, and passed out on a vote of 5 to 2. g) Related legislation : This bill is nearly identical to SB 1185 (Price) of the 2011-12 legislative session. SB 1185 was held by the Assembly Committee on Appropriations. REGISTERED SUPPORT / OPPOSITION : Support California Chamber of Commerce California Chapter of the American Fence Contractors Association California Construction and Industrial Materials Association California Farm Bureau Federation California Fence Contractors Association California Framing Contractors Association California Manufacturers and Technology Association Engineering Contractors Association Flasher Barricade Association Marin Builders Association Opposition None on file Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098 AB 576 Page 10