BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 576 HEARING: 7/3/13
AUTHOR: V. M. Perez FISCAL: Yes
VERSION: 5/1/13 TAX LEVY: No
CONSULTANT: Grinnell
REVENUE RECOVERY AND COLLABORATIVE ENFORCEMENT TEAM ACT
Enacts the Revenue Recovery and Collaborative Enforcement
Team Act.
Background and Existing Law
I. Underground Economy. The California Constitution
establishes the Board of Equalization (BOE) as a
five-member board composed of four members elected by each
district plus the State Controller. Currently, BOE
administers sales and use taxes, excise taxes, special
taxes, and the state's fee programs. Retailers collect
sales taxes from customers when they purchase tangible
personal property, and remit those taxes quarterly to BOE.
The Franchise Tax Board (FTB) is a three-person board
comprised of the State Controller, Director of the
Department of Finance, and Chair of the BOE. FTB
administers the Personal Income Tax and Corporation Tax
Law, and collects debts on behalf of state and local
agencies.
State law additionally directs:
The California Employment Development Department
(EDD) to administer the Unemployment Insurance Fund,
the Disability Insurance Fund, and the Employment
Training Fund, and collect deposits from employers for
these funds as well as personal income tax
withholding.
The Department of Insurance (DOI) to administer and
collect the Gross Premiums Tax, assessed on insurance
companies.
The Department of Motor Vehicles (DMV) to
administer and collect vehicle license and
registration fees, regulate the sale of vehicles, and
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protect consumers purchasing vehicles.
The Department of Industrial Relations (DIR) to
regulate workforce safety, administer the worker's
compensation program, and enforce most labor laws.
The Department of Justice (DOJ) to adequately and
uniformly enforce the state's laws, and represent the
people of the State of California in legal matters.
The Department of Consumer Affairs (DCA) and its
member bureaus, boards, and commissions generally
serve to protect California consumers, regulating more
than 100 business and 200 professional categories,
including barbers and cosmetologists, dentists, and
contractors, among others.
The Health and Human Services Agency (HHS) oversees
departments that provide Medi-Cal and In-Home
Supportive Services, among others.
In 1994, Governor Pete Wilson signed executive order
W-66-93, creating the Joint Economic Strike Force (JESF) to
address the problem of the underground economy. The JESF
is led by the Employment Development Department (EDD) and
housed within its Underground Economy Operations, and also
consists of the Labor Commissioner's Office, the Department
of Consumer Affairs, the Office of Criminal Justice
Planning, the Franchise Tax Board, the Board of
Equalization, and the Department of Justice, and was
codified by the Legislature (SB 1490, Johnston, 1994). The
JESF publishes an annual report documenting its efforts.
In 2005, Governor Arnold Schwarzenegger's 2005-06 Budget
established the Economic and Employment Enforcement
Coalition (EEEC), housed in DIR, and comprised of
investigators and auditors from DIR's Division of Labor
Standards Enforcement and Occupational Safety and Health,
together with EDD, DCA, and the Contractors' State License
Board. The United States Department of Labor also
participates in the coalition, which states that it is
"collaborating for vigorous and targeted enforcement
against unscrupulous businesses. EEEC aids in leveling
the playing field while restoring competitive advantage to
law abiding businesses and their employees."
Governor Brown renamed the EEEC the DIR Labor Enforcement
Task Force (LETF), effective January 1, 2012. DIR launched
a new collaborative effort between state agencies to combat
illegal business practices and improve California's
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business environment. LETF's primary partners are EDD, the
Contractors' State License Board, BOE, and the Bureau of
Automotive Repair, with collaboration by the Department of
Insurance, the Attorney General, and local district
attorneys.
Additionally, EDD operates the Questionable Employment Tax
Practices Program, initiated in 2007, which is a
collaborative effort between EDD and the Internal Revenue
Service (IRS). A memorandum of understanding between IRS
and EDD provides for information exchange.
II. Confidential Information. State law generally
prohibits unlawful disclosure or inspection of any income
tax return information except as specified in law.
Criminal sanctions, including possible imprisonment for
violation of income tax confidentiality, apply to BOE
personnel convicted of unlawful disclosure or inspection of
tax records. Other state agencies also have statutes
restricting use of information for administrative purposes,
and apply criminal misdemeanor or felony for unauthorized
uses.
Proposed Law
I. Underground Economy. Assembly Bill 576 establishes the
Revenue Recovery and Collaborative Enforcement Team, which
includes FTB, BOE, and DOJ. HHS, DCA, DIR, DOI, EDD, and
DMV may participate in the pilot in an advisory capacity to
the team, but must notify the appropriate tax agency of its
discovery of a violation of law that would result in
increased tax revenues to the state.
AB 576 requires the team to meet quarterly. The measure
requires participating agencies to:
Develop a plan for a central intake process and
organizational structure to document, review, and
evaluate data and complaints,
Evaluate the benefits of a processing center to
receive and analyze data, share complaints, and
research leads from the input of each impacted agency,
Provide participating and nonparticipating agencies
with investigative leads where collaboration
opportunities exist for felony-level criminal
investigations.
On or before July 1, 2015, and annually thereafter, the
AB 576 -- 5/1/13 -- Page 4
team shall report on its performance to the Legislature and
to each participating agency. The team shall submit to the
Legislature a report of the pilot program that includes:
The number of leads or complaints received by the
team,
The number of cases investigated or prosecuted
through civil action or criminal prosecution as a
result of team collaboration, and
Recommendations for modifying, elimination, or
continuing the operations of any or all of the bill.
II. Confidential Information. AB 576 allows duly
authorized team members and representatives of other
participating agencies to exchange information for the
purpose of investigating criminal tax evasion associated
with underground economic activities. Team members,
ex-members, any agent employed by the tea, or any person
who has received knowledge from any agency, are barred from
divulging or making known any confidential information
received by the team. Any such information retains its
confidential status and is subject to each agency's
confidentiality laws.
The measure makes findings and declaration to support its
provisions. The bill sunsets on January 1, 2019.
AB 576 -- 5/1/13 -- Page 5
State Revenue Impact
BOE estimates annual collections revenue increases of
between $1.5 million and $3.8 million.
FTB states that once the team is fully implemented, it is
estimated that revenue gains of approximately $1 million
per year in direct revenues could be realized with an
additional $11 million increase per year in revenues as a
result of deterrence, for a total revenue gain of $12
million annually.
Comments
1. Purpose of the bill . The author states that
"According to a recent report by the UCLA Labor Center
titled "California and the Underground Economy," an average
of $8.5 billion in corporate, personal, and sales and use
tax goes uncollected in California each year due to the
underground economy. Thus, revenues to support government
services are lost, workers are forced to go without basic
employment protections, and legitimate businesses are
confronted with unfair competition. This is a growing
problem that is not adequately addressed by existing law.
While California has two task forces to combat the
underground economy -- the Labor Enforcement Task Force
(LETF) and the Joint Enforcement Strike Force (JESF) --
these programs primarily focus on labor violations without
focusing on criminal tax evasion. Moreover, despite
various MOU's to share information among state agencies, no
formalized process exists for the agencies to collaborate.
To efficiently pursue criminal tax evasion, state agencies
must be able to share data and intelligence. The solution
is AB 576. This bill will position California to recapture
billions in lost tax revenue from criminals operating in
the black market and level the playing field for
California's legitimate businesses. "
2. Once more, with feeling . AB 576 creates the Revenue
Recovery and Collaborative Enforcement Team to formalize
the process of interagency discussion of criminal tax
evasion. Prosecuting illegal activity in the underground
economy is notoriously difficult: violators don't file for
businesses licenses or pay taxes, and compensate their
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employees in cash, leaving little to no paper trail. Often
times when authorities find violators, the taxes avoided
don't justify the costs of deploying more auditors and
prosecutors.
The problem of the underground economy is well-documented.
However, AB 576's team isn't the state's first effort,
having been preceded by the JESF and the EEEC, both of
which have documented successes in bringing together state
agencies. The Governor has also taken recent action,
renaming the EEEC into the LETC, building on EDD's
expertise and previous work to address the underground
economy through the EDD. Should policymakers create
another effort to address a problem it's already tried
twice to address? The bill's supporters and intent
language respond by saying neither the EEEC nor the LETC
are focused on criminal tax evasion, but what are the
specific ways that the bill will build on current
interagency communication? The Committee may wish to
consider adding the Team on top of existing programs adds a
valuable tool, or simply duplicates existing efforts.
3. Have we met before ? AB 576 is substantially similar to
SB 1185 (Price), which the Committee approved last year.
The Assembly Appropriations Committee held it on its
suspense file.
4. Incoming ! The Committee on Labor approved AB 576 at
its June 26, 2013 hearing by a vote of 4 to 0. The
Committee on Governance and Finance is hearing the measure
as the committee of second referral.
5. Technicals : Committee staff recommends the following
amendments to AB 576.
On Page 6, line 4, strike out "participating
agencies" and insert "agencies listed in subdivision
(a) of Section 15912."
On Page 6, line 13, strike out "each impacted
agency" and insert "agencies listed in subdivisions
(a) and (b) of Section 15912."
On Page 6, line 38, insert "or advisory agencies,"
after "agencies listed in subdivisions (a) and (b) of
Section 15912."
On Page 7, line 4, strike "agency" and insert
"agency listed in subdivisions (a) and (b) of Section
15912."
AB 576 -- 5/1/13 -- Page 7
On Page 7, line 38, strike "annually thereafter"
and insert "each January 1 thereafter until January 1,
2020"
On Page 8, line 2, strike out "participating
agency" and insert "agencies listed in subdivisions
(a) and (b) of Section 15912"
Assembly Actions
Assembly Public Safety 6-2
Assembly Revenue and Taxation 8-0
Assembly Appropriations 17-0
Assembly Floor 75-3
Support and Opposition (6/27/13)
Support : California State Board of Equalization (sponsor);
Association for Los Angeles Deputy Sheriffs; California
Association of Professional Employees; California Attorney
General; 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 Manufacturers and
Technology Association; California Municipal Revenue and
Tax Association; California Professional Association of
Specialty Contractors; California State Association of
Electrical Workers; California State Council of Laborers;
California State Pipe Trades Council Engineering
Contractors Association; City of Bellflower; City of
Lakewood; Flasher Barricade Association; Los Angeles Area
Chamber of Commerce; Los Angeles Police Protective League;
Marin Builders Association; Riverside Sheriffs'
Association; UCLA Labor
Center for Labor Research and Education; Western State
Council of Sheet Metal Workers.
Opposition : Unknown.