BILL ANALYSIS Ó
AB 405
Page 1
Date of Hearing: May 6, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
405 (Brough) - As Introduced February 19, 2015
-----------------------------------------------------------------
|Policy |Revenue and Taxation |Vote:|8 - 0 |
|Committee: | | | |
| | | | |
| | | | |
-----------------------------------------------------------------
Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill applies the same interest rate to overpayment refunds
as is currently applied to late tax payments with respect to
Board of Equalization (BOE) administered tax and fee programs,
and specifies that both shall be determined by adding 3% to the
rate specified as the underpayment rate in the federal Internal
Revenue Code (IRS). As applied to the current IRS rate, both
the overpayment and underpayment interest rates would be 6%.
FISCAL EFFECT:
AB 405
Page 2
1)Minor and absorbable administrative costs to BOE.
2)Assuming an overpayment interest rate of 6%, estimated GF
revenue decreases from the increased interest payable on
overpayments of $3.5 million, $13.0 million, $29.6 million,
and $30.1 million for FY 2015-16, FY 2016-17, FY 2017-18, and
FY 2018-19, respectively. The interest rate change affects
interest accrued only after the bill's effective date, and as
a result, the full effect of the increased overpayment
interest rate will only be realized after 4 years.
COMMENTS:
1)Purpose. According to the author, the Legislature
significantly reduced the interest rates on overpayments in
1991 to avoid substantial interest payments on refunds owed
following an unfavorable court decision (Aerospace v. BOE).
The author contends it is unfair and inequitable to impose a
different interest rate on taxpayers who underpay than is
charged to state government on tax overpayments. The Howard
Jarvis Taxpayers Association posits taxpayers are often
required to pay any disputed tax before entering litigation,
and in the event they win their case, those taxpayers should
receive a fair interest rate on their overpayment.
2)Corporate Overpayment Interest. From 1937 to 1991, the
interest charged on underpayments and the interest paid on
overpayments by the BOE were the same. In 1991, however, the
Legislature lowered the interest rate on overpayments.
The IRS and the Franchise Tax Board (FTB) each use the same
interest rates for non-corporate overpayments and
underpayments, while both agencies pay less interest on
corporate overpayments - 1% for the IRS and 3% for FTB - than
AB 405
Page 3
they charge for underpayments.
3)Heads I Win, Tails You Lose? The state has long since paid
the judgment in the Aerospace case, and proponents assert the
disparity lacks continued justification, and remains an issue
of fundamental fairness. Previous attempts to resolve the
interest disparity, however, have all failed to pass the
Legislature or been vetoed by the Governor. Governor Wilson
argued in a notable veto message that imposing a lower rate
for refunds minimizes the impact on the state in the event of
large refund liabilities, while imposing a higher rate on
amounts owed incentivizes taxpayers to remit the correct
amounts in a timely manner.
Opponents, led by the California Tax Reform Association, argue
this bill removes the incentive for taxpayers to take due care
when paying and calculating tax. Providing 6% interest for
such payments could incentivize overpayments at the expense of
the state, and introduces additional volatility to state
finances. Given the differences in core purpose and motives
between government and private enterprise, the Committee may
wish to consider whether it is appropriate to seek alignment
of incentives in this instance, or whether state behavior
would change as a result of additional interest payable on tax
overpayments.
4)Tax Interest Verses Penalty. In general, tax penalties are
imposed for the late payment of tax, and are intended to
incentivize compliance. Interest, on the other hand, is
charged for the use of funds, as a late taxpayer enjoys the
use of funds it owes to the state during the period the tax
payment is late. In the same manner, the state enjoys the use
of taxpayer funds during the period prior to refund of the
AB 405
Page 4
overpayment. Assigning two different rates of interest on the
use of funds arguably confuses tax interest with penalties and
generates windfall revenues for the state without
disincentivising unwanted taxpayer behavior.
5)Prior Legislation. Since the interest rate was changed in
1991, there have been 17 previous attempts to repeal the
change, including bills in SB 421 (Correa) in 2011, AB 2048
(Donnelly) in 2012, AB 1049 (Harkey) in 2013, and AB 2429
(Patterson) in 2014. This bill represents the 18th such
attempt. While two of the previous attempts made it to
Governor Wilson and were vetoed, the majority were held in the
Revenue & Taxation or Appropriations Committees of the
Assembly and Senate.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081