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 ----------------------------------------------------------------- |Ayes:|Bocanegra, Gordon, | | | | |Mullin, Pan, Ting | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Dahle, Nestande | | | | | | | | ----------------------------------------------------------------- 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 SB 365 Page 2 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 SB 365 Page 3 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 SB 365 Page 4 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. SB 365 Page 5 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. SB 365 Page 6 Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0001285