BILL ANALYSIS                                                                                                                                                                                                    Ó






                 Senate Committee on Labor and Industrial Relations
                              William W. Monning, Chair

          Date of Hearing: June 26, 2013               2013-2014 Regular  
          Session                              
          Consultant: Gideon L. Baum                   Fiscal:Yes
                                                       Urgency: No
          
                                   Bill No: AB 576
                               Author: V. Manuel Perez
                         As Introduced/Amended: May 1, 2013
          

                                       SUBJECT
          
           Revenue Recovery and Collaborative Enforcement Team Act: pilot  
                                      program.


                                      KEY ISSUE

          Should the Legislature create another collaborative task force  
          to address the problem of the underground economy and tax  
          evasion in California?


                                      ANALYSIS
          
           Existing Federal law  provides that any person who willfully  
          fails to collect or truthfully account for and pay over taxes  
          shall, in addition to other penalties provided by law, be guilty  
          of a  felony  and, upon conviction thereof, shall be fined  not  
          more than $10,000, or imprisoned not more than 5 years, or both,  
          together with the costs of prosecution.   (26 USC §7202)

           Existing Federal law  also provides that any person who willfully  
          fails to collect such tax, or truthfully account for and pay  
          over such tax, or willfully attempts in any manner to evade or  
          defeat any such tax or the payment thereof, shall, in addition  
          to other penalties provided by law, be  liable to a penalty equal  
          to the total amount  of the tax evaded, or not collected, or not  
          accounted for and paid over.  (26 USC §6672)

           Existing law  requires the director of the Employment Development  
          Department (EDD) to serve as Chairperson of the Joint  
          Enforcement Strike Force on the Underground Economy (JESF). The  









          strike force shall include, but not be limited to,  
          representatives of: 

             a)   The Employment Development Department, 
             b)   The Department of Consumer Affairs, 
             c)   The Department of Industrial Relations, 
             d)   The Department of Insurance, and 
             e)   The Office of Criminal Justice Planning. 

          Other agencies that are not part of the administration, such as  
          the Franchise Tax Board, the State Board of Equalization, and  
          the Department of Justice, are encouraged to participate in the  
          strike force.  (Unemployment Insurance Code §329)
           
          Existing law provides that it is a violation of the law for any  
          employer or employing unit to willfully fail or refuse to make  
          any contributions which are due under the Unemployment Insurance  
          or Disability Insurance programs.  (Unemployment Insurance Code  
          §2108)

           Existing law  provides that any person or employer who,  with or  
          without intent to evade  ,
          fails to withhold or fails to pay over any personal income tax  
          withheld, is guilty of a misdemeanor and, upon conviction, shall  
          be fined an amount not to exceed one thousand dollars ($1,000),  
          or imprisoned for not more than one year, or both the fine and  
          imprisonment, at the discretion of the court.  (Unemployment  
          Insurance Code §2118)

           Existing law  provides that any person required to collect,  
          account for, and pay over any personal income tax or amount  
          required to be withheld who  willfully fails to collect or  
          truthfully account for and pay over the tax or amount  shall, in  
          addition to other penalties provided by law, be guilty of a  
          felony  and, upon conviction thereof, shall be fined an amount  
          not more than  twenty thousand dollars ($20,000), or imprisoned  
          16 months to 3 years,  or both the fine and imprisonment, at the  
          discretion of the court.  (Unemployment Insurance Code §2118.5)
           
          This bill  would create the Revenue Recovery and Collaborative  
          Enforcement Team pilot project as a collaborative effort to  
          combat criminal tax evasion.
          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 2

          Senate Committee on Labor and Industrial Relations 
          









           Specifically, this bill would:  

             1)   Create the Revenue Recovery and Collaborative  
               Enforcement Team, made up of the Franchise Tax Board (FTB),  
               the Department of Justice (DOJ), and the Board of  
               Equalization (BOE);

             2)   Permit the California Health and Human Services Agency,  
               Department of Consumer Affairs, Department of Industrial  
               Relations, Department of Insurance, Employment Development  
               Department and Department of Motor Vehicles to participate  
               as advisory agencies;

             3)   Allows advisory agencies to notify the Team of criminal  
               violations that, through enforcement, would lead to  
               increased revenues for California; and 

             4)   Require the Team to meet at least quarterly.

           This bill would also require the Team to:  
          
             1)   Develop a plan for a central intake process and  
               organizational structure to document, review, and evaluate  
               data and complaints;

             2)   Evaluate the benefits of 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  
               investigative leads where collaboration opportunities exist  
               for felony-level criminal investigations, including, but  
               not limited to, referring leads to agencies with  
               appropriate enforcement jurisdiction.

             4)   On or before July 1, 2015, and annually thereafter,  
               report on its activities and accomplishments to the  
               Legislature and to each participating agency

             5)   Submit to the Legislature on or before December 1, 2017,  
               a report of the pilot program that includes, but is not  
          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 3

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               limited to, the following information:
               a)     The number of leads or complaints received by the  
                 team.
               b)     The number of cases investigated or prosecuted  
                 through civil action or criminal prosecution as a result  
                 of team collaboration.
               c)     Recommendations for modifying, eliminating, or  
                 continuing the operation of any or all of the provisions  
                 of this part.

           This bill  would also  sunset the provisions  on January 1, 2019,  
          unless a later enacted statute, that is enacted before January  
          1, 2019, deletes or extends that date.

           This bill  would also make findings and declarations on the  
          problems of tax evasion and the underground economy and its  
          impacts on California's economy.


                                      COMMENTS

          
          1.  A Brief Discussion on the Underground Economy:

            The State of California faces significant challenges from the  
            underground economy, which is defined by the Employment  
            Development Department as individuals and businesses that deal  
            in cash and/or use other schemes to conceal their activities  
            and their true tax liability from government licensing,  
            regulatory, and taxing agencies.  In short, it is an entire  
            universe of illegal activities that can include such diverse  
            activities as tax fraud, cigarette smuggling, and failure to  
            provide employees the minimum wage. A 2005 Legislative  
            Analyst's Office study on the underground economy estimated  
            that California loses $6.5 billion in annual income tax  
            revenues.  

            Estimating the size of California's underground economy is a  
            difficult task.  A 2012 International Monetary Fund (IMF)  
            paper puts the size of the underground economy in America at  
            less than 10% of Gross Domestic Product (Europe was between  
            10% and 30%, depending on the country).  Assuming California's  
          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 4

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            underground economy is 10% of California's GDP, it would be  
            $185 billion, with revenue losses of $ 19.43 billion (assuming  
            an average tax rate of 10.5%).  Other estimates, however, have  
            been more modest, placing the size of California underground  
            economy at between $60 billion and $140 billion, suggesting  
            that California's underground economy is smaller than the  
            nation's average.

            Irrespective of the size of the underground economy, it is  
            worth noting that a sizeable portion (and possibly a majority)  
            of the underground economy is not in what we might think of as  
            the classical vision of the underground economy: legal or  
            semi-legal businesses skimming tax dollars.  Rather, according  
            to a Board of Equalization analysis, it is largely in illicit  
            drugs ($28.14 billion), illegal gambling ($19.63 billion),  
            counterfeiting ($12.79 billion), and identity theft ($4.84  
            billion).

          2.  Do We Really Need a Revenue Recovery and Collaborative  
            Enforcement Team?:

            Currently, California has two official collaborative efforts  
            to combat the underground economy, particularly in the area of  
            Labor Law: the Joint Enforcement Strike Force (JESF) and the  
            Labor Enforcement Task Force (LETF).  JESF is led by the  
            Employment Development Department (EDD) and LETF is led by the  
            Department of Industrial Relations (DIR).  LETF focuses on  
            wages and worker safety, which is tangential to the issues  
            raised in this bill.

            JESF, as was discussed above, encourages the Franchise Tax  
            Board, the State Board of Equalization, and the Department of  
            Justice, to participate.  One of its duties includes  
            coordinating efforts to fight tax evasion.  In addition, the  
            Franchise Tax Board offers information on their website to  
            report income tax evasion, which the FTB itself investigates,  
            as well as multiple links for reporting other types of illegal  
            tax fraud, which is investigated by other agencies.

            While it would be the rare stakeholder who would argue that  
            California is doing everything it can to combat the  
            underground economy, the Committee may wish to consider if the  
          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 5

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            best way to encourage collaboration and coordination is to  
            create another task force.

          3. A Brief Word on a Central Intake Process:

            As was discussed above, AB 576 calls for the creation of a  
            central intake process to evaluate and review complaints.   
            While this could be as simple as a website, it would almost  
            certainly require personnel to review and direct.  Without  
            funding or personnel, it is possible that the complaints would  
            be not reviewed or directed, creating a backlog and further  
            frustrating the various stakeholders who are victims of the  
            underground economy.  Addressing this requirement may  
            necessitate a funding stream for the pilot project.

          4.  Proponent Arguments  :
            
            Proponents note that 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.  Proponents further note that such bad  
            actors either underpay or completely neglect to pay required  
            taxes, licenses, insurance, or wages.  Proponents argue that,  
            by unlawfully reducing their expenses, these businesses  
            undercut legitimate businesses that in good faith comply with  
            required laws, and that many compliant businesses are  
            unfortunately forced to shut down due to this unfair  
            competitive advantage, further impeding California's economic  
            recovery.  Proponents believe that AB 576 will help coordinate  
            governmental efforts in the fight against the underground  
            economy.

          5.  Opponent Arguments  :

            None on file.


          6.  Double Referral:  

            This bill has been double referred and, if approved by this  
            committee, it will be sent to the Senate Governance and  
            Finance Committee for a hearing.
          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 6

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          7. Prior Legislation  :

            SB 1185 (Price) of 2012 would have created a pilot project for  
            centralizing the investigative efforts of several governmental  
            agencies in order to combat the underground economy.  SB 1185  
            was held by the Assembly Committee on Appropriations.  


                                       SUPPORT
          
          Association for Los Angeles Deputy Sheriffs
          California Association of Professional Employees
          California Building Industry Association
          California Chamber of Commerce
          California Chapter of American Fence Contractors Association
          California Construction and Industrial Materials Association
          California Farm Bureau Federation
          California Fence Contractors Association
          California Manufactures and Technology Association
          California Municipal Revenue & Tax Association
          California Professional Association of Specialty Contractors
          California State Council of Laborers
          City of Bellflower
          City of Lakewood
          Engineering Contractors Association
          Flasher Barricade Association
          Los Angeles Area Chamber of Commerce
          Los Angeles Police Protective League
          Marin Builders Association
          Riverside Sheriffs' Association
          

                                     OPPOSITION
          
          None on file.





          Hearing Date:  June 26, 2013                             AB 576  
          Consultant: Gideon L. Baum                               Page 7

          Senate Committee on Labor and Industrial Relations