BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1335
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          Date of Hearing:  June 25, 2013


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

                     SB 1335 (Leno) - As Amended:  April 2, 2014


          Majority vote.  

           SENATE VOTE  :  22-13
           
          SUBJECT  :  Income and corporation taxes:  credits:  information

           SUMMARY  :  Applies performance measurement standards to any new  
          tax credit under either the Personal Income Tax (PIT) or  
          Corporation Tax (CT) Law if enacted by a bill introduced on or  
          after January 1, 2015.  Specifically,  this bill  :   

          1)Requires a bill, introduced on or after January 1, 2015,  
            authorizing a new credit under either the PIT Law or the CT  
            Law, to state 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 the bill; and,

             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, including a requirement to specify both of the  
               following:

               i)     The baseline data, to be collected and remitted in  
                 each year the credit is effective, for the Legislature to  
                 measure the change in performance indicators; and,

               ii)    The taxpayers, state agencies, or other entities  
                 required to collect and remit data.

          2)Makes legislative findings and declarations regarding the need  








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            for review of tax credit programs.  

           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  
            (e.g., 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 made. 

          3)Defines a tax expenditure as "a credit, deduction, exclusion,  








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            exemption, or any other tax benefit as provided for by the  
            state."

           FISCAL EFFECT :  Unknown

           COMMENTS  :   

           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:
             
                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)Arguments in Support  .  Supporters of this bill argue that  
            "[n]ational and state public finance experts recommend that  
            tax preferences be evaluated alongside direct spending  
            programs, as both are public initiatives meant to accomplish  
            specified goals.  Tax expenditures do not include 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 government to  
            demonstrate transparency and accountability when investing  
            public dollars in economic incentives such as tax  
            preferences."  Furthermore, supporters argue that this bill  
            provides the "Legislature and public with the necessary tools  
            to make transparent and hold accountable when investing public  
            dollars by requiring new tax credits ? to include specific  








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            goals, detailed performance indicators, and data collection  
            requirements."

           3)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  
            1960's 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 report by the Legislative Analyst's  
            Office (LAO) shows that tax expenditure programs cost the  
            state nearly $50 billion in fiscal year 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.

           4)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 expenditures reports.  In 1985, the Legislature  
            passed Assembly Concurrent Resolution 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 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 Franchise Tax Board is  
            required to prepare an annual report, California Income Tax  
            Expenditures, describing tax expenditures found in the PIT and  
            the CT laws.

           5)What Does This Bill Do  ?  This bill 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, this bill requires each bill enacting a new tax  
            credit to describe the goals, purposes, and objectives for  








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            authorizing such a credit, and to specify detailed performance  
            indicators intended to measure the effectiveness of the  
            credit.  This bill applies only to tax credits, as opposed to  
            all tax expenditures.  Furthermore, this bill would only apply  
            to tax credits enacted by bills introduced on or after January  
            1, 2015.  
                
          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.  This can offer taxpayers greater economic certainty,  
            but it can also result in tax expenditures remaining a part of  
            the tax code in perpetuity without demonstrating any public  
            benefit.  Second, 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 slightly different.   
            While an appropriation requires a two-thirds vote, tax  
            expenditure measures 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 their efficacy,  
            without a supermajority vote.

           7)How Effective Is This Bill  ?  Even if the performance standards  
            in this bill were enacted into statute, there would be nothing  
            to prevent a future legislature from introducing new tax  
            credit expenditures "notwithstanding" the statutory  
            requirements.  [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 measure, and not a constitutional  
            measure, any subsequent legislature could easily dispense with  
            this requirement by simply including a provision in a statute  








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            that would override Revenue and Taxation Code Section 41.

           8)Should a Tax Credit be Enacted  ?  Creating performance  
            indicators, assuming they are perfectly designed to assess the  
            performance of a tax credit, may aid the Legislature in  
            determining whether a subsidy is functioning as designed.  For  
            tax credits aimed at increasing economic growth, this could be  
            done by specifying that a certain level of unemployment,  
            inflation rate, or unemployment claims be met within a certain  
            period of time.  However, these indicators fail to address  
            whether the tax credit is even needed.  For example, as noted  
            by the Tax Foundation when discussing job growth that result  
            from increasing available tax credits, "subsidizing anything  
            gets you more of that thing."  The appropriate question,  
            therefore, is not whether employment rises to predetermined  
            level but "whether the benefits of a given amount of net new  
            job creation and the net new investment exceed the cost."   
            (Important Questions to Ask in Evaluating a Film Tax Incentive  
            Program, Tax Foundation, March 2012.)  

            As noted earlier, subsidies can be used as a way of promoting  
            economic growth.  However, providing a subsidy in a perfectly  
            competitive market increases the supply of a good or service  
            beyond the point of equilibrium, creating inefficiencies in  
            the market because the additional consumer/supplier surplus  
            created by the credit is less than the cost of the subsidy.   
            This does not mean that all subsidies produce inefficiencies.   
            For example, subsidies created to take advantage of positive  
            externalities, which are third-party benefits resulting from  
            an economic activity, may be appropriate in order to maximize  
            society's well-being.  Therefore, the question of whether a  
            tax credit is needed should probably be answered before  
            attempting to measure the credit's success.

            However, even if such an analysis is undertaken, understanding  
            the economic implications of a subsidy is not always clear.   
            As noted by the Joint Committee on Taxation when discussing  
            additional subsidies for research and development, "[i]t is  
            difficult to determine whether, at the present levels and  
            allocation of government subsidies for research, further  
            government spending on research or additional tax benefits for  
            research would increase or decrease overall economic  
            efficiency."  (Joint Committee on Taxation, Description of  
            Revenue Provisions Contained in the President's Fiscal Year  
            2010 Budget Proposal, Part Two:  Business Tax Provisions.)   








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            Part of the reason why it is unclear if additional tax credits  
            properly increase research and development, assuming more is  
            warranted, is that not everyone agrees with extent to which  
            taxes influence research.  (Id.)  Likewise, determining the  
            influence tax credits have on other areas of the economy will  
            also be problematic.  

           9)Previous Legislation  .  This bill is very similar to SB 1272  
            (Wolk), of the 2009-10 Legislative Session, and SB 508 (Wolk),  
            of the 2011-12 Legislative Session.  The only real difference  
            between SB 1272 and SB 508 and this bill is the elimination of  
            the mandatory seven-year sunset date for all new tax credits.   
            Both SB 1272 and SB 508 were vetoed by the Governor.  SB 1272  
            was vetoed by Governor Arnold Schwarzenegger, stating:

               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.

            SB 508, which was almost identical to SB 1272, was vetoed by  
            Governor Brown, stating:

               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.

            The Governor's veto message for SB 508 raised an issue with  
            the sunset clause.  That sunset clause is not include in SB  
            1335 and may, therefore, address the concern raised by the  
            current Governor.  However, the Legislature's inability to  
            bind a future legislature may also prevent this bill from  
            becoming law.  

              10)  Proposed Amendment .  The author wishes to add an  
               amendment ensuring that Revenue and Taxation Code (R&TC)  
               Section 19542, relating to the disclosure of taxpayer  
               information, applies to data collected by the Legislature  
               for purposes of this bill.  Additionally, the amendment  
               states that no reimbursement is required because the only  
               costs that may be incurred by a local agency or school  








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               district will be incurred because this act creates a new  
               crime or infraction, eliminates a crime or infraction, or  
               changes the penalty for a crime or infraction. 

              11)  Related Legislation  .  SB 365 (Wolk) requires that a new  
               tax credit 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.  SB 365 was substantially amended, deleting  
               the tax provisions and, instead, made changes to jail  
               construction and juvenile facilities.

           12)Prior Legislation  :

             a)   SB 508 (Wolk), of the 2011-12 Legislative Session, would  
               have provided that a new tax credit shall be operative for  
               a period of seven years and shall include specified goals,  
               objectives, and purposes, as well as other detailed  
               information relating to the credit's effectiveness.  SB 508  
               was vetoed by the Governor.

             b)   SB 1272 (Wolk), of the 2009-10 Legislative Session,  
               would have provided that a new tax credit, enacted by a  
               bill introduced on or after January 1, 2011, shall be  
               operative for a period of seven years and shall include  
               specified goals, objectives, and purposes, as well as other  
               detailed information relating to the credit's  
               effectiveness.  SB 1272 was vetoed by the Governor.

             c)   AB 2171 (Charles Calderon), of 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 on the Assembly Committee on Appropriations' Suspense  
               File.  

             d)   AB 2641 (Arambula), of 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 provides that every new tax  
               expenditure that is enacted after the effective date of AB  
               2641 shall be repealed automatically on January 1, 2015,  
               and on January 1 of every fifth year thereafter, unless a  
               later statute provides otherwise.  AB 2641 was held on the  
               Assembly Committee on Appropriations' Suspense File. 









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             e)   ACA 6 (Charles Calderon), of 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 was never taken up on the Assembly  
               Floor. 

             f)   AB 831 (Parra), of 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 was not  
               heard by Senate Committee on Revenue and Taxation. 

             g)   AB 1933 (Coto), of 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  
               passage in the Senate Committee on Revenue and Taxation.  

             h)   AB 2199 (Brown), of 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), of the 1995-96 Legislative  
               Session, would have required the Legislative Analyst,  
               together with 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), of the 1993-94 Legislative Session,  
               would have required the Legislative Analyst 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 exceed 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 








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          California Conference of the Amalgamated Transit Union
          California Conference of Machinists
          California Nurses Association
          California School Employees Association
          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 on file

           Analysis Prepared by  :  Carlos Anguiano / REV. & TAX. / (916)  
          319-2098