BILL ANALYSIS �
SB 365
Page 1
Date of Hearing: June 24, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 365 (Wolk) - As Introduced: February 20, 2013
Majority vote. Fiscal committee.
SENATE VOTE : 22-11
SUBJECT : Income and corporation taxes: credits: information
and operative limitations.
SUMMARY : Provides that a new tax credit, enacted by a bill
introduced on or after January 1, 2014, shall be operative for a
period of 10 years and shall include specified goals,
objectives, and purposes, as well as other detailed information
relating to the credit's effectiveness. Specifically , this
bill:
1)Requires any bill that would authorize a new credit under
either the Personal Income Tax (PIT) Law or the Corporation
Tax (CT) Law to include all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve.
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in this bill.
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives.
d) A requirement that the tax credit shall cease to be
operative 10 years after its enactment date.
1)Makes legislative findings and declarations regarding the need
for review of tax preference programs, including tax credits.
2)Applies to bills introduced on or after January 1, 2014.
SB 365
Page 2
EXISTING LAW:
1)Provides various tax credits, deductions, exclusions, and
exemptions. Some of these tax expenditures are designed to
provide relief to taxpayers who incur specified expenses, such
as, for example, costs incurred in adopting a child. Other
tax expenditures are designed to encourage socially or
economically beneficial behavior.
2)Requires, under Government Code (GC) Section 13305, the
Department of Finance (DOF) to provide an annual report to the
Legislature on tax expenditures by no later than September 15
of each year. The report must contain each of the following:
a) A list of all tax expenditures exceeding $5 million in
annual cost;
b) The statutory authority for each tax expenditure;
c) A description of any legislative intent articulated for
each tax expenditure;
d) The sunset date of each tax expenditure, if applicable;
e) Identification of the beneficiaries of each tax
expenditure;
f) An estimate or range of estimates for the state and
local revenue loss for the current fiscal year (FY) and the
two subsequent FYs;
g) For PIT expenditures, the number of affected taxpayers;
h) For CT and sales and use tax (SUT) expenditures, the
number of returns filed or businesses affected;
i) Identification of any comparable federal tax
expenditure; and,
j) A description of any tax expenditure evaluation
completed by any state agency since the last report was
made.
1)Defines a tax expenditure as "a credit, deduction, exclusion,
exemption, or any other tax benefit as provided for by the
SB 365
Page 3
state."
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill would not impact General Fund revenue.
COMMENTS:
1)Author's Statement . The author states, "Today's public
finance system in California requires major reform. While I
have pushed 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)Arguments in Support . As noted by the proponents of this
bill, California spends about $47 billion annually in tax
expenditures and despite this large amount, tax expenditures
are not given the "same amount of scrutiny and examination as
direct programmatic expenditures". The proponents assert that
it is "in the interest of California taxpayers to have
requirements placed upon tax expenditures that are designed to
clearly identify the intent and purpose" as well as their
"overall effectiveness." The proponents argue that this bill
brings much needed performance review and oversight to tax
expenditure programs in order to make those programs more
transparent and effective.
3)Arguments in Opposition . The opponents, in contrast, argue
that this bill would create uncertainty regarding long-term
tax planning. The opponents state that, "When businesses
choose to locate in a state, factors such as the availability
of a skilled workforce, infrastructure, regulatory
environment, and tax structure all play a significant role,
and businesses evaluate whether they can rely on these factors
to remain relatively stable and consistent in the long term."
The opponents contend that the imposition of a mandated
10-year sunset on all future tax credits will have an adverse
effect on businesses because it would create uncertainty with
respect to the future of the state's tax structure. While
SB 365
Page 4
many of the opponents recognize that the state needs to
analyze the effectiveness of tax policies and make sure that
they are sensible for the future of California's economy, they
stand firm in believing that this bill will negate that
purpose. The opponents suggest amending SB 365 to eliminate
the 10-year sunset.
4)What is a "Tax Expenditure "? Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. According to legislative analyses prepared
for prior related measures, United States Treasury officials
and some Congressional tax staff began arguing in the late
1960s that these features of the tax law should be referred to
as "expenditures," since they are generally enacted to
accomplish some governmental purpose and there is a
determinable cost associated with each (in the form of
foregone revenues). A recent report by the Legislative
Analyst's Office (LAO) shows that tax expenditure programs
cost the state nearly $50 billion in FY 2008-09. The LAO
report noted that resources are allocated to a new tax
expenditure program automatically each year, with limited, if
any, legislative review, and there is no limit or control over
the amount of money forgone since the Legislature does not
appropriate funds for tax expenditure programs. The LAO
report also stated that the tax expenditure programs offer
many opportunities for tax evasion, given the relatively low
level of audits.
5)Current Review of Tax Expenditures . Although there is no
requirement for the Legislature itself to review existing tax
expenditures, several state agencies are required to issue
annual tax expenditure reports. In 1985, the Legislature
passed ACR 17 (Bates), which called upon the LAO to prepare a
biennial "tax expenditure" report. Additionally, the DOF
currently publishes an annual report on tax expenditures,
pursuant to GC Section 13305, and provides it to the
Legislature by no later than September 15 of each year. The
DOF report includes a list of tax expenditures exceeding $5
million in annual cost. Finally, since 2007, the FTB is
required to prepare an annual report, "California Income Tax
Expenditures," describing tax expenditures found in the PIT
and the CT Laws.
6)How is a Tax Expenditure Different from a Direct Expenditure ?
As the DOF notes in its annual Tax Expenditure Report, there
SB 365
Page 5
are several key differences between tax expenditures and
direct expenditures. First, tax expenditures are reviewed
less frequently than direct expenditures once they are put in
place. While infrequent legislative review offers taxpayers
greater certainty, it also results in tax expenditures
remaining a part of the tax code in perpetuity without
demonstrating any public benefit. Secondly, there is
generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, the vote
requirements for direct expenditures and tax expenditures are
different. While it takes a two-thirds vote to make a
budgetary appropriation, a tax expenditure measure can be
enacted by a simple majority vote. It should also be noted
that, once enacted, it generally takes a two-thirds vote to
rescind an existing tax expenditure. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of the efficacy, without a supermajority vote.
7)How Much Do Tax Expenditures "Cost" the State ? According to
the DOF, the vast majority of tax expenditures are included in
the PIT Law. To this end, the DOF estimates that tax
expenditures would reduce PIT revenues by roughly $33 billion
in FY 2012-13. The SUT Law, in turn, contains identifiable
state tax expenditures worth about $10 billion annually, and
CT expenditures amount to roughly $6 billion.
8)What Does This Bill Do ? SB 365 is intended to create a
mechanism for the legislative review of certain tax
expenditures for the purpose of evaluating their effectiveness
and compatibility with present day state policy objectives.
Specifically, it requires each bill enacting a new tax credit
to describe the goals, purposes, and objectives for
authorizing such a credit, to specify detailed performance
indicators intended to measure the effectiveness of the
credit, and to mandate an automatic 10-year sunset for the
operation of the credit. This bill is narrowly tailored to
apply only to tax credits, as opposed to all tax expenditures.
Furthermore, it would only apply to new tax credits, i.e. tax
credits that are enacted by bills introduced on or after
January 1, 2014.
9)The 10-Year Sunset . This bill limits the operation of every
new tax credit to a 10-year period, as long as it is enacted
by a bill introduced on or after January 1, 2014. Business
SB 365
Page 6
representatives often argue that companies need
predictability, and that a short-term business tax credit
would not be of any particular benefit to a taxpayer whose
business projections span over decades. However, this sunset
date may be easily extended by a subsequent statute enacting
or re-enacting a tax expenditure.
10) How Effective is This Bill? Both this Committee and its
Senate counterpart already require the vast majority of tax
expenditure measures that pass out to contain a built-in
repeal date. However, while this Committee routinely requires
sunset dates to be added to tax expenditure measures, there is
nothing in existing law that would require it to do so in the
future. Moreover, in the past few years, some of the most
dramatic changes to our tax code have been enacted as part of
the budgetary process beyond the review of this Committee.
However, even if a general sunset requirement were included in
statute, there would be nothing to prevent a future
Legislature from enacting an open-ended tax expenditure
"notwithstanding" the statutory prohibition. Indeed, there is
considerable question as to whether such a prohibition would
have any binding effect. [See e.g., United Milk Producers of
California v. Cecil (1941) 47 Cal.App.2d 758, 764-65, noting
that the Legislature cannot declare in advance the intent of a
future Legislature]. Courts have long held that one
legislative body may not limit or restrict its own power or
that of subsequent Legislatures, and the act of one
Legislature may not bind its successors [County of Los Angeles
v. State of California (1984) 153 Cal.App.3d 568, 573]. In
practical terms, it means that subsequent Legislatures are
under no legal obligation to comply with the provisions of
this bill. Furthermore, since this bill is a statutory, and
not a constitutional, measure, any subsequent Legislature
could easily dispense with this requirement by simply
including a provision in a statute that would override Revenue
and Taxation Code Section 41.
11)Related Legislation:
a) SB 508 (Wolk), introduced in the 2011-12 legislative
session, was identical to this bill. Governor Brown vetoed
SB 508 stating that, "While I agree that we should consider
SB 365
Page 7
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."
b) SB 1272 (Wolk), introduced in the 2009-10 legislative
session, was similar to this bill. Governor Schwarzenegger
vetoed SB 1272 stating that, "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."
c) AB 2171 (Charles Calderon), introduced in the 2009-10
legislative session, would have conditioned the allowance
of a tax benefit on the passage of a separate statute. AB
2171 was held under submission by the Assembly Committee on
Appropriations.
d) AB 2641 (Arambula), introduced in the 2009-10
legislative session, would have required the Legislature to
review, before January 1, 2014, and every fifth year
thereafter, each tax expenditure, as specified, and
provided that every new tax expenditure that is enacted
after the effective date of AB 2461 shall be repealed
automatically on January 1, 2015, and on January 1 of every
fifth year thereafter, unless otherwise provided. AB 2641
was held under submission by the Assembly Committee on
Appropriations.
e) ACA 6 (Charles Calderon), introduced in the 2009-10
legislative session, would have amended the State's
Constitution to, among other things, limit the operative
period to seven years from the date of the enactment of a
new or amended tax credit. ACA 6 died on the Assembly
Floor.
f) AB 831 (Parra), introduced in the 2007-08 legislative
session, would have required any legislation creating a new
tax expenditure, or extending the operation of an existing
tax expenditure, to include a sunset provision. AB 831
failed to pass out of the Senate Committee on Revenue and
Taxation.
SB 365
Page 8
g) AB 1933 (Coto), introduced in the 2005-06 legislative
session, would have required any legislative measure
creating a new tax expenditure, or extending the operation
of an existing tax expenditure, to include legislative
findings regarding the purpose of the tax expenditure, an
estimate of the attributable revenue losses, a specific
methodology for measuring the anticipated benefits, and a
sunset date no later than five years in the future. AB 1933
failed to pass out of the Senate Committee on Revenue and
Taxation.
h) AB 2199 (Brown), introduced in the 1995-96 legislative
session, would have required all tax expenditures to be
authorized via an appropriation in the annual Budget Act.
AB 2199 failed to pass out of this Committee.
i) AB 2884 (Villaraigosa), introduced in the 1995-96
legislative session, would have required the LAO, together
with the DOF, FTB, and the Board of Equalization, to
conduct an evaluation of all tax expenditures, as defined.
AB 2884 failed to pass out of this Committee.
j) SB 1233 (Hayden), introduced in the 1993-94 legislative
session, would have required the LAO to review each tax
expenditure program, as directed by this Committee and its
Senate counterpart, to determine if its objectives are
being realized, whether its benefits exceeded its revenue
costs, and whether there is a less costly way of providing
the same benefits. Governor Wilson vetoed SB 1233.
REGISTERED SUPPORT / OPPOSITION :
Support
AFSME
Opposition
Silicon Valley Leadership Group
California Chamber of Commerce
TechAmerica
California Taxpayers' Association
California Manufacturers and Technology Association
California Retailers Association
SB 365
Page 9
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098