BILL ANALYSIS Ó
AB 405
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 405
(Brough) - As Introduced February 19, 2015
SUSPENSE
Majority vote. Fiscal committee.
SUBJECT: State Board of Equalization: administration:
interest
SUMMARY: Applies the same interest rate to both late tax
payments and overpayment refunds, for purposes of the tax and
fee programs administered by the State Board of Equalization
(BOE). Specifically, this bill :
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1)Amends Revenue and Taxation Code Section 6591.5 to revise the
definition of "modified adjusted rate per annum".
2)Provides that the rate shall be determined by adding three
percentage points to the rate specified in Internal Revenue
Code (IRC) Section 6621(a)(2), which establishes the IRC
underpayment rate.
3)Results in determining the interest on overpayments in the
same manner as interest on underpayments.
EXISTING LAW:
1)Requires those who are late in paying their BOE-administered
taxes, fees, or surcharges to pay a penalty equal to 10% of
the tax, plus interest on the unpaid tax, from the date the
tax became due. The underpayment interest rate is established
by adding three percentage points to the rate specified in IRC
Section 6621, and is adjusted semiannually. The underpayment
rate is currently 6%.
2)Grants credit to taxpayers who have overpaid their
BOE-administered taxes. The credit is first applied to offset
any additional taxes owed. Then any remaining credit will
accrue interest until remitted back to the taxpayer. The
overpayment interest rate is based on 13-week treasury bills
auctioned, adjusted semi-annually, and rounded to the nearest
full percent. Since July 2009, that rate has been 0%.
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3)Additionally, the BOE is required to pay interest on tax
overpayments only if the overpayment was unintentional or not
due to carelessness.
FISCAL EFFECT: Assuming the overpayment interest is 6%, the BOE
estimates state and local revenue losses of $3.5 million in
fiscal year (FY) 2015-16, $13 million in FY 2016-17, $29.5
million in 2017-18, and $30.1 million in 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
AB 405 revises the interest calculation for tax and fee
programs administered by the Board of Equalization so that
the same rate of interest is applied to both underpayments
and overpayments of tax. In 1991, the Legislature
significantly reduced the interest rates on overpayments to
avoid substantial interest payments on refunds owed as a
result of an unfavorable court decision. We should not
hold the government to a different standard than taxpayers.
Allowing the Board of Equalization to pay taxpayers
interest on their overpayments at the same rate as the
interest rate these taxpayers are charged when they are
late in paying their taxes is not only a taxpayer friendly
concept, but it is a matter of principle and fairness.
This bill attempts to fix a gross inequity in the law under
which taxpayers have been treated unfairly for over two
decades.
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2)Arguments in Support . The California Chamber of Commerce
states "[m]andating the payment of interest on taxpayers for
underpayments to the state, without imposing the same burden
on the state is simply unfair." The Howard Jarvis Taxpayers
Association notes that "[t]axpayers are often required to pay
what they owe before entering litigation. In the event they
win their case, they should receive a fair interest rate for
the time the government has been holding their money. . .
[t]axpayers willing to expend their time, energy, and
resources to contest their taxes deserve nothing less than
just treatment by tax agencies."
3)Arguments in Opposition : The California Tax Reform
Association states that this bill "addresses a problem that
does not exist and would remove from current law an incentive
for taxpayers to take due care when paying and calculating
their tax. . . . Providing interest for such overpayments,
as this measure suggests, could incentivize overpayments at
the expense of the state." The California Professional
Firefighters notes that, "interest paid by the state on
carelessly or intentionally made overpayments is needed
revenue that could otherwise be earmarked for critical
firefighting and other vital public safety services. . . . "
4)Background . From 1937 to 1991, the BOE's interest rate for
overpayment and late payment were the same. However, in 1991,
the Legislature reduced the interest rate on overpayments as a
result of an unfavorable court decision in Aerospace Co. v.
State Board of Equalization (1990) 218 Cal.App.3d 1300
[requiring the state to refund significant amounts with
interest]. The State has since repaid the balance and
proponents argue the disparity is outdated and lacks continued
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justification. There have been 15 previous attempts to enact
legislation to address the issue and only one bill reached the
Governor's desk; that bill was subsequently vetoed by Governor
Wilson. Governor Wilson noted the following in his veto
message:
Imposing a lower rate for refunds minimizes the impact on
the state in the event of large taxpayer refund liability.
Imposing a higher rate on amounts owed by taxpayers serves
as an incentive for taxpayers to remit those amounts in a
timely manner as well as to comply with the law. I do not
wish to change these incentives.
5)The Overpayment Interest Rate: Internal Revenue Services
(IRS) and Franchise Tax Board (FTB) . The IRS and the FTB have
the same interest rates for non-corporate overpayments and
underpayments. The IRS has only a 1% disparity for corporate
overpayments (the disparity is higher if the corporate
underpayment is over $100,000 or the corporate overpayment
[exceeds $10,000]). The FTB has a 3% disparity for corporate
overpayments. The Committee may want to consider adjusting
BOE's overpayment interest rate to bring it in-line with the
rates used by the IRS and the FTB.
6)Interest v. Penalty . BOE staff, in its analysis of this bill,
notes that the law "imposes penalties for late payments of
tax. Interest, however, is a charge for the use of funds. In
the same manner the state charges interest when a taxpayer
makes a late payment, the state too should pay interest when
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taxpayers overpay." Charging interest is what allows banks
and other institutions to continue lending and provide the
necessary funding to drive the economy. Penalties are
consequences intended to prevent a certain pattern of
behavior.
Requiring the State to pay an equitable interest rate for
overpayments, while minimizing the impact on the state's
General Fund, and maintaining the efficacy of a penalty are
not incompatible goals. If the concern is to minimize the
impact on the State in the event of large taxpayer refund
liability, the State could temporarily lower interest rates as
it did in the past when Aerospace Co. v. State was decided.
Additionally, adjusting the overpayment interest rate to
conform to the underpayment rate would not reduce the
incentive created by the penalty because both rates address
fundamentally different purposes. As noted above, interest
incentivizes the use of money, penalties incentivizes the
cessation of a pattern of behavior. In other words,
increasing the interest rate on overpayments would not
disincentivize taxpayers to pay on time. Moreover, existing
law prevents taxpayers from gaming the system by intentionally
overpaying and acquiring a greater return from the government
than from the marketplace.
7)Prior legislation :
a) AB 2429 (Patterson), of the 2013-2014 Legislative
Session, contained provisions identical to this bill. AB
2429 was held in this Committee.
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b) AB 1049 (Harkey), of the 2013-13 Legislative Session,
contained provisions identical to this bill. AB 1049 was
held in this Committee.
c) AB 2048 (Donnelly), of the 2011-12 Legislative Session,
contained provisions nearly identical to this bill. AB
2048 was held in the Assembly Appropriations Committee.
d) SB 421 (Correa), of the 2011-12 Legislative Session,
would have reduced the interest rate on underpayments by
3%. SB 421 was held in the Senate Appropriations
Committee.
e) AB 1926 (Horton), of the 2007-08 Legislative Session,
would have equalized the underpayment and overpayment
interest rates. AB 1926 was held in this Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
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California Chamber of Commerce
California Taxpayers Association
Howard Jarvis Taxpayers Association
Member, First District, State Board of Equalization
Member, Second District, State Board of Equalization
Member, Fourth District, State Board of Equalization
State Board of Equalization
Opposition
American Federation of State, County and Municipal Employees
California Profession Firefighters
California Tax Reform Association
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Analysis Prepared by:Paul Kim / REV. & TAX. / (916) 319-2098