BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1335 HEARING: 4/30/14
AUTHOR: Leno FISCAL: No
VERSION: 4/2/14 TAX LEVY: No
CONSULTANT: Grinnell
INCOME AND CORPORATION TAX CREDIT INFORMATION
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. 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 1335 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,
2015, 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
effective, and the specific taxpayers, state agencies,
SB 1335 -- 4/2/14 -- Page 2
or other entities required to collect and remit data.
The measure also makes findings regarding tax preferences
generally and their current fiscal impact on federal and
state governments.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . According to the author,
"Policymakers and the public need tools to measure the
performance of tax credits and evaluate their
effectiveness. California forgoes more than $47 billion in
revenue from tax preferences. Tax credits should be
evaluated alongside direct spending programs, as both are
public initiatives meant to accomplish specified goals. For
example, families in our state who receive child care,
health care, and other state supports are subject to strict
reporting and eligibility requirements. Businesses that
work with the state are subject to strict performance based
contracts to ensure they meet goals set out by the state.
Tax credits, however, do not include similarly stringent
accountability measures and face less oversight than many
activities on the direct spending side of the budget. The
lack of scrutiny makes it difficult for us to demonstrate
transparency and accountability when investing public
dollars in tax credits. SB 1335 provides the Legislature
with the tools to apply the same level of review and
performance measure to tax credits that it applies to
spending programs."
2. A Bill About Bills . SB 1335 applies specified
requirements to legislative bills introduced on or after
January 1, 2015 that enact new tax expenditures. Future
authors would have to think about a few things prior to
introducing a bill that creates a tax expenditure, such as
finding indicators that they expect to change as a result
of the tax expenditure, identifying data that they expect
to measure the change in the indicator, and selecting an
entity to collect the data. The Legislature would use this
SB 1335 -- 4/2/14 -- Page 3
information when considering whether to reauthorize,
expand, or limit the tax expenditure before the mandatory
sunset ends it.
SB 1335 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 1335 applies
only contingently to forthcoming measures; a future
Legislature could waive the section of law put in place by
SB 1335, 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 by amending a
previously introduced bill to evade the requirement.
3. 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
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
SB 1335 -- 4/2/14 -- Page 4
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.
4. Plus Ça Change, Plus C'est La Même 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 provide a detailed accounting of
federal tax expenditures in the federal budget. In 1976,
Congress reduced tax expenditures as part of the Tax Reform
Act. 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. 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 would allow 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.
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" is a list of all tax expenditures
SB 1335 -- 4/2/14 -- Page 5
http://www.dof.ca.gov/research/economic-financial/#anch
orTaxExpenditureReports .
Second, 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.
5. Once more, with feeling . SB 1335 is similar to SB 1272
(Wolk, 2010), lacking only the latter measure's mandatory
sunset requirement on new tax expenditures. Governor
Arnold Schwarzenegger vetoed SB 1272, 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 1272 was 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.
SB 1335 -- 4/2/14 -- Page 6
Last year, the Committee approved SB 365 (Wolk), almost
identical to SB 508. The author subsequently deleted that
bill's contents, and added provisions relative to prison
construction, which were subsequently enacted.
Support and Opposition (04/24/14)
Support : California Conference of Machinists; California
Conference of the Amalgamated Transit Union; Engineers &
Scientists, IFPTE Local 20; International Longshore and
Warehouse Union, Coast Division; Professional & Technical
Engineers, IFPTE Local 21; UNITE HERE; Utility Workers
Union of America, Local 132.
Opposition : None received.