BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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.









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           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  








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            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