BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 576 (V.M. Perez) - Underground Economy: Pilot Program
Amended: August 12, 2013 Policy Vote: L&IR 4-0, G&F 7-0
Urgency: No Mandate: No
Hearing Date: August 12, 2013
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 576 would create, until January 1, 2019, a
pilot project to create a multiagency team consisting of the
Board of Equalization (BOE), the Franchise Tax Board (FTB) and
the Department of Justice (DOJ) to combat criminal tax evasion.
Fiscal Impact:
BOE, FTB, and DOJ indicate minor and absorbable costs.
Unknown future revenue gains, potentially in the low
millions of dollars annually (General Fund), related to the
pilot project's enforcement actions and increased tax
collections. A portion of the revenue gains could be offset
by revenue losses to the extent partnership activities
supplant existing revenue-generating enforcement efforts
among the participating entities.
Significant cost pressures to hire additional
administrative, investigative, and enforcement staff among
the participating state entities upon full implementation
of the Partnership (General Fund). These costs would
likely be mitigated and perhaps completely offset by future
revenue gains resulting from increased enforcement
activities (See staff comments).
Background: Although undefined in the bill, the Employment
Development Department indicates that the term "underground
economy" refers to individuals and businesses that deal in cash
or use other schemes to conceal their activities and true tax
liability from government licensing, regulatory, and taxing
agencies. Underground economy activities include tax evasion,
tax fraud, cash pay, tax gap, under the table payments, and
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other "off-the-books" activities. The ultimate impact of the
underground economy is erosion of the economic stability and
working conditions in California.
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 (DCA),
the Office of Criminal Justice Planning, the Franchise Tax Board
(FTB), the Board of Equalization (BOE), and the Department of
Justice (DOJ). The Task Force was codified by the Legislature
with the enactment of SB 1490 (Johnston) Chap 1117/1994. The
JESF publishes an annual report documenting its efforts.
In 2005, Governor Schwarzenegger's established the Economic and
Employment Enforcement Coalition (EEEC), housed in the
Department of Industrial Relations (DIR), and comprised of
investigators and auditors from DIR's Division of Labor
Standards Enforcement and Occupational Safety and Health, and
partnering with EDD, the Department of Consumer Affairs, 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 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 (DOI), DOJ, and local district
attorneys. According to a recent report, enforcement activities
have identified nearly 50,000 violations of labor, licensing,
and tax laws since the inception of the EEEC, valued at $62.8
million in penalty assessments. EEEC activities also resulted
in the referral of 3,446 cases to district attorney's offices,
with 1,696 criminal convictions.
Proposed Law: This bill would establish a multi-agency Revenue
Recovery and Collaborative Enforcement Team (RRACE), consisting
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BOE, FTB and DOJ to combat criminal tax evasion associated with
the underground economy.
The California Health and Human Services Agency, DCAs, DIR, DOI,
the Department of Motor Vehicles, and EDD may participate in an
advisory capacity.
RRACE would be required to do the following:
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.
Additionally, the bill would require RRACE to report to the
Legislature by December 1, 2017, on its activities and
accomplishments.
Related Legislation: SB 1185 (Price) of 2012 similarly 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.
Staff Comments: This bill intends to improve agency
collaboration to combat the underground economy. While it could
be considered duplicative of existing joint agency enforcement
programs that are intended to address the underground economy,
its focus on criminal tax evasion differentiates it from
existing efforts.
The bill directs that the pilot project use existing funding and
not request additional resources until its 2017 report is
prepared. However, the Legislature adopts the Budget Act every
year based on workload assumptions and legislative priorities
for spending. The Appropriations Committee cannot assume that
additional workload resulting from this bill can be undertaken
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within existing resources without displacing other activities
the Legislature has explicitly or implicitly recognized in
adopting the annual Budget Act. In addition, as some
departments (such as FTB) have experienced budget reductions and
staff furloughs in recent years, it has become more difficult
for state agencies to undertake additional responsibilities
within existing resources.
Finally, the bill creates significant cost pressures to provide
staff and funding for future team activities. These cost
pressures (as well as any revenues realized) are unknown and
would depend upon the results of the pilot project with respect
to its ability to identify effective collaborative measures for
addressing the underground economy.