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
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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
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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