BILL ANALYSIS Ó SB 1335 Page 1 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 SB 1335 Page 2 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, SB 1335 Page 3 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 SB 1335 Page 4 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 SB 1335 Page 5 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 SB 1335 Page 6 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.) SB 1335 Page 7 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 SB 1335 Page 8 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. SB 1335 Page 9 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 SB 1335 Page 10 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