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 Senate Committee on Labor and Industrial Relations 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 Senate Committee on Labor and Industrial Relations 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 Senate Committee on Labor and Industrial Relations 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 Senate Committee on Labor and Industrial Relations 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