BILL ANALYSIS Ó
SB 365
Page 1
SENATE THIRD READING
SB 365 (Wolk)
As Introduced February 20, 2013
Majority vote
SENATE VOTE :22-11
REVENUE & TAXATION 5-2
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|Ayes:|Bocanegra, Gordon, | | |
| |Mullin, Pan, Ting | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Dahle, Nestande | | |
| | | | |
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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
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for review of tax preference programs, including tax credits.
2)Applies to bills introduced on or after January 1, 2014.
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
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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
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 this bill 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 forgone
revenues). A recent report by the Legislative Analyst's
Office (LAO) shows that tax expenditure programs cost the
state nearly $50 billion in fiscal year (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), Res. Chapter 70, which called upon the
LAO to prepare a biennial "tax expenditure" report.
Additionally, the Department of Finance (DOF) currently
publishes an annual report on tax expenditures, pursuant to
Government Code (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
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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
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 Sales and Use Tax (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.
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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
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 the Assembly Revenue and
Taxation 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 the Assembly
Revenue and Taxation 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 the Assembly Revenue
and Taxation 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.
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001285