BILL ANALYSIS Ó SB 211 Page 1 Date of Hearing: August 21, 2013 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair SB 211 (Hernandez) - As Amended: August 13, 2013 Policy Committee: Revenue and Taxation Vote: 6-1 Urgency: No State Mandated Local Program: Yes Reimbursable: No SUMMARY This bill extends the sunset on the state-local tax information sharing program. Specifically, this bill: 1)Extends the January 1, 2014 sunset date on the reciprocal sharing of tax information between the FTB and city tax officials until January 1, 2019. 2)Allows a city, participating in the tax information sharing program, to provide tax information to third party agents. 3)Requires that tax information provided to a city shall be utilized in a form and manner to safeguard the tax information as required by the FTB. FISCAL EFFECT FTB indicates that this measure would result in revenue gains of $1.5 million in 2014-15 and $4.9 million in 2015-16. FTB indicates it currently has reciprocal agreements with 102 cities and its costs to administer the program are about $700,000 annually. COMMENTS 1)Purpose . The author states SB 211 would extend the sunset date currently in statute until January 1, 2019 to ensure the continuity of a proven cost effective tax data sharing program and would preserve the revenue benefit to the state and participating cities. SB 211 Page 2 2)Support . Proponents state that this bill clarifies that cities may contract with third party agents in pursuing such activities. Passage of this measure will continue to allow disclosure of limited confidential tax information for the specific purpose of enhancing local and state tax enforcement activities. This is an important tool that cities across California use for business license discovery efforts to identify businesses that are operating without a license. 3)Opposition . The California Taxpayers Association states, despite safeguards, outsourcing tax administration functions heightens the risk for security breaches, resulting in dissemination of confidential information for unauthorized use. They note this information can be sold for profit, resulting in physical or financial risk to taxpayers. They argue potential security breaches are exacerbated by inappropriate incentives, usually a contingency-fee, to contractors. 4)Increased Security Risk. Providing confidential taxpayer information to third party agents may increase the likelihood of data breaches. In July, the Office of the Attorney General released the first report detailing 131 data breaches, which compromised the personal information of 2.5 million Californians. According to the report, Pinkerton Government Services and Advanced Data Processing, two companies that contract with government entities, suffered at least three data breaches in 2012, compromising the social security numbers of potentially thousands of Californians. 5)Contingency Fee : According to the FTB, only 102 of the 478 incorporated cities in California currently participate in the sharing program. FTB cites a lack of funds by smaller cities, although it is unclear why the increased revenues from joining the data sharing program would not provide an incentive for more local governments to participate. This bill is intended to increase participation by allowing smaller cities to contract with third parties. These contracts could be done on a contingency fee basis. However, contingency fees, when used for tax audits, may also create an incentive to distort tax administration for private gain. In Sears, Roebuck and Co. v William J. Parsons, the Georgia Supreme Court voided a contract between Chatham County Board of Tax Assessors and Atlantic Resources because the contract SB 211 Page 3 allowed for a 35% contingency fee on additional revenue plus 100% of all first-year penalties. The Supreme Court noted "the people's entitlement to fair and impartial tax assessments lies at the heart of our system, and, indeed, was a basic principle upon which this country was founded. Fairness and impartiality are threatened where a private organization has a financial stake in the amount of tax collected as a result of the assessment it recommends." Contingency fee agreements make it less likely that a taxpayer will be informed of audit adjustments like tax credits and refund claims that could lower tax payments. Incidentally, if a tax is later found to have been assessed incorrectly, the city will remain liable to the taxpayer for the full amount. Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081