BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 365 HEARING: 4/10/13
AUTHOR: Wolk FISCAL: No
VERSION: 2/20/13 TAX LEVY: No
CONSULTANT: Grinnell
TAX EXPENDITURE ACCOUNTABILITY
Applies performance measurement standards to tax
expenditures.
Background and Existing Law
California law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and geo-graphically
targeted economic development area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something that but for the tax
credit, they would not do. The Department of Finance is
required to annually publish a list of tax expenditures.
Proposed Law
Senate Bill 365 provides that any bill that enacts a credit
against the Personal In-come Tax Law or Corporation Tax Law
for taxable years beginning on or after January 1, 2014,
contain:
Specific goals, purposes, and objectives that the
tax credit will achieve.
Detailed performance indicators for the Legislature
to use when measuring whether the tax credit met its
specific goals, purposes, and objectives.
Data collection requirements to enable the
Legislature to determine whether the tax credit is
meeting, failing to meet, or exceeding its goals,
purposes, and objectives. The requirements shall
include specific data and baseline data to be
collected and remitted in each year the credit is
SB 365 (Wolk) - 2/20/13 -- Page 2
effective, and the specific taxpayers, state agencies,
or other entities required to collect and remit data.
A ten-year sunset.
The measure also makes findings regarding tax preferences
generally and their current fiscal impact on federal and
state governments.
State Revenue Impact
According to the Franchise Tax Board, SB 365 does not
impact state revenue.
Comments
1. Purpose of the bill . According to the Author, "Today's
public finance system in California requires major reform.
While I have pursued changing our budgeting system to apply
performance measurements for spending programs, I am trying
to do the same with SB 365, which applies a
performance-based methodology to future tax expenditures
enacted by the state. There is no good reason not to
evaluate tax expenditure programs with the same rigor that
we use when judging spending decisions, especially when
California's tax preference portfolio now exceeds $47
billion, equal to half of our total revenue. While we
cannot change existing tax preferences, we can at least
start keeping better track of future ones."
2. Don't Count on It ? Currently, California's two most
significant business tax incentives, the Research and
Development Tax Credit and Geographically Targeted Economic
Development Area credits, do not have sunsets. Firms have
certainty that they can claim these credits so long as they
qualify, and can make long-term investment decisions
accordingly. Some opponents to SB 365 state that mandatory
sunsets for tax expenditures are inappropriate and unfair
when similar requirements do not apply to spending
programs. Others state that the ten-year standard is
arbitrary; while sunset provisions and performance review
are important, a firm's investment horizon and the tax
credits themselves vary from case to case, and the same,
fixed sunset period should not apply to tax incentives
which may require different periods of time to accomplish
SB 365 (Wolk) - 2/20/13 -- Page 3
its purposes.
3. A Bill About Bills . SB 365 applies to legislative
bills introduced on or after January 1, 2014 that provide
new tax expenditures enacted by applying specified
requirements, including a mandatory seven-year sunset.
Future authors would have to put considerable thought into
a bill adding a tax expenditure prior to introduction, such
as find indicators that they expect to change as a result
of the tax expenditure, identify data that they expect to
measure the change in the indicator, and select an entity
to collect the data. The Legislature would use this
information when considering whether to reauthorize,
expand, or limit the tax expenditure before the mandatory
sunset ends it.
SB 365 could apply these requirements to existing tax
preferences, but doing so in a way that would restrict the
eligibility of a taxpayer to claim a credit would trigger
the 2/3 vote requirement under Section 3 of Article XIIA of
the California Constitution. Additionally, SB 365 applies
only contingently to forthcoming measures; a future
Legislature could waive the section of law put in place by
SB 365, as this Legislature cannot affirmatively bind
future ones under County of Los Angeles v. State of
California (1984) 153 Cal.App.3d 568, 573. Future authors
could simply add a "notwithstanding clause" to future
measures to nullify the bill's requirement. Similarly,
authors could choose to add a tax expenditure as an
amendment to an already introduced bill to evade the
requirement.
4. A Rose By Any Other Name . The terms "tax expenditures"
and "tax preferences" have caused considerable debate. One
school of thought states that tax revenue inherently
belongs to taxpayers, and laws allowing them to keep more
of it for performing a specific activity cannot
appropriately be called or compared to direct spending as
the money involved never flows to the State's treasury.
Others disagree, indicating that laws allowing taxpayers to
reduce tax by engaging in specific behavior is
indistinguishable from spending except on a balance sheet.
To illustrate the point, the late economist David Bradford
stated that instead of purchasing weapons systems from
defense contractors, Congress could instead provide a
Weapons Supply Tax Credit for defense contractors equal to
SB 365 (Wolk) - 2/20/13 -- Page 4
the cost of goods sold to the government. Defense spending
would then vanish from the spending side of the federal
government's accounting ledger, and revenues would
concomitantly decline by an equal amount.
The Congressional Budget Office (CBO) defines tax
expenditures as "revenue losses attributable to provisions
of the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide
a special credit, a preferential rate of tax, or a deferral
of tax liability." CBO states that tax expenditures may be
considered analogous to direct outlay programs, and the two
can be considered as alternative means of accomplishing
similar budget policy objectives. The Department of
Finance defines tax expenditures as "any special provision
in the tax law that results in the collection of fewer tax
revenues than would be collected under the basic tax
structure."
The semantic distinction is politically important. While
tax expenditures are parts of current federal and state
law, and need not be authorized as part of the federal
budget process, both Congress and the Legislature must
authorize spending programs by legislative appropriation or
in the State Budget with the notable exception of spending
mandated by initiative. In Congress, legislation
authorizing tax expenditures and direct spending programs
are treated identically. In California, unless the tax
expenditure is subject to a sunset provision, the
Legislature can only reduce or limit tax expenditure
programs by 2/3 vote of each house of the Legislature, as
Legislative Counsel considers any reduction in a current
tax benefit a tax increase for the purposes of Section 3 of
Article XIIA of the California Constitution.
In recent years, the Legislature allowed two tax
expenditures to sunset but extended another, and created
new ones. The Rice Straw Credit and the Child Care
Facilities Credit have expired, but the Legislature
reauthorized Community Development Financial Institutions
credit two years ago (AB 624, Perez, 2011). New tax
expenditures include the motion picture production tax
credit and small business hiring credit (ABx3 15
(Krekorian)/SBx3 15 (Calderon), 2009), as well as Sales and
Use Tax exclusions for alternative energy manufacturing (SB
71, Padilla, 2010) and advanced manufacturing (SB 686,
SB 365 (Wolk) - 2/20/13 -- Page 5
Padilla, 2012).
5. Plus �a Change, Plus C'est La M�me Chose . According to
Stanley Surrey and Paul McDaniel's "Tax Expenditures," the
United States Department of the Treasury first published a
tax expenditure budget in 1968. The Congressional Budget
Act of 1974 required that all future budgets detail the tax
expenditure concept and providing a detailed accounting of
federal tax expenditures in the federal budget. In 1976,
Congress reduced tax expenditures as part of the Tax Reform
Act that year. Soon after, President Jimmy Carter urged
Treasury to recommend whether tax expenditures could be
repealed to reduce taxes overall, and Congress considered
sunset reviews and statutory caps on federal spending
during that time. Currently, federal tax expenditures
result in $1.1 trillion in foregone revenue (half of total
revenues), or 8% of U.S. Gross Domestic Product, and exceed
any other category of federal spending. The President's
National Commission on Fiscal Responsibility and Reform
stated that eliminating all tax expenditures allows
Congress to cut income tax rates by half without
significant change to overall revenues, and called for
eliminating or limiting many tax expenditures as part of
its plan. Limiting tax expenditures in exchange for
lowering marginal income tax rates was a prominent issue in
the last presidential campaign.
California does not include tax expenditures as part of the
budget, instead choosing to publish two excellent reports
on the subject. First, the Department of Finance's "Tax
Expenditure Report" serves as a listing of all tax
expenditures
(http://www.dof.ca.gov/research/economic-financial/#anchorTa
xExpenditureReports) and Franchise Tax Board's "California
Income Tax Expenditures: Compendium of Individual
Provisions,"
(http://ftb.ca.gov/aboutftb/plans_reports.shtml) describes
and discusses each item in addition to providing foregone
revenue totals and number of returns affected. Finance's
report shows that tax expenditures resulted in revenue
foregone in 2002-03 of $24.2 billion, but roughly doubled
to $49 billion in 2012-13 - an amount equal to about half
of total state revenues.
6. Of third times and charms . SB 365 is almost identical
to SB 1272 (Wolk, 2010) which Governor Schwarzenegger
SB 365 (Wolk) - 2/20/13 -- Page 6
vetoed, stating:
To the Members of the California State Senate:
I am returning Senate Bill 1272 without my signature.
While the sponsors seem intent on eliminating
measures that will generate jobs and stimulate the
economy, the average California taxpayer would
probably be better served if the Legislature were
willing to automatically sunset every new spending
entitlement, program expansion and business mandate
after 7 years.
For this reason, I am unable to sign this bill.
Sincerely,
Arnold Schwarzenegger
SB 365 is also almost identical to SB 508 (Wolk, 2012),
which Governor Brown vetoed, stating:
To the Members of the California State Senate:
I am returning Senate Bill 508 without my signature.
While I agree that we should consider sunset clauses
for personal income and corporate tax credits, one
size does not fit all. The legislature should examine
all its bills to determine how long they should exist
or, indeed, whether they should exist at all.
Sincerely,
Edmund G. Brown Jr.
Support and Opposition (4/4/13)
Support : American Federation of State, County, and
Municipal Employees
Opposition : California Taxpayers' Association