BILL ANALYSIS
AB 2171
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2171 (Charles Calderon) - As Amended: April 5, 2010
Majority vote. Fiscal committee.
SUBJECT : Tax benefits: annual appropriation.
SUMMARY : Conditions the allowance of a tax benefit established
on or after January 1, 2011, on the passage of a separate
statute that establishes the allowable amount of the tax
benefit. Provides that the tax benefit shall be paid pursuant
to an annual appropriation by the Legislature for that purpose.
Specifically, this bill :
1)Provides that any tax benefit enacted on or after January 1,
2011, is subject to all of the following conditions:
a) For each calendar year, or a portion thereof, the tax
benefit shall be allowed only in the amount that is
annually determined in a statute, in order to be consistent
with the government's ability to meet its expenditure
obligations under law.
b) Is not allowed for any year until the allowable amount
has been established, as specified.
c) The benefit shall be paid to each taxpayer pursuant to
an annual appropriation made by the Legislature for that
purpose.
2)Defines "tax benefit" as a credit, deduction, exclusion,
exemption, or other tax advantage to a person that has the
effect of reducing the person's tax liability to the state.
3)Takes effect on January 1, 2011.
EXISTING LAW :
1)Provides various tax credits and other tax benefits designed
to provide tax relief for taxpayers who incur certain expenses
(e.g., child adoption) or to influence behavior, including
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business practices and decisions [e.g., research and
development (R&D) credit or economic development area hiring
credits]. These benefits, generally, are designed to provide
incentives for taxpayers to perform various actions or
activities that they may not otherwise undertake.
2)Does not require tax credit provisions to include specific
goals, purposes, and objectives, performance measures, or a
sunset date.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Statement . The author states that, "Each year, the
state provides billions of dollars in tax expenditures to
corporations, without regard to the state's ability to
actually pay for these tax benefits. This measure is intended
to provide accountability for every new tax expenditure to
ensure that the state has the necessary resources to continue
providing these tax benefits."
2)The Purpose of this Bill . This bill conditions the
utilization of any new tax benefit, i.e. an expenditure that
is enacted on or after January 1, 2011, upon the passage of
two separate annual statutes. In the first statute, the
Legislature would establish, for each calendar year, an amount
of a tax expenditure that is allowed to be claimed by
taxpayers. The allowable amount cannot exceed, but may be
less than, the amount of the tax benefit as authorized in the
original statute enacting that benefit. The other legislative
measure would appropriate money to "fund" the allowable
amounts of tax expenditures. In effect, this bill requires an
annual appropriation for any new tax expenditure, or extension
of an existing tax expenditure.
3)Arguments in Opposition . The opponents of this bill argue
that imposing limitations on tax benefits would create
uncertainty regarding long-term planning, would erect a
barrier for businesses to locate their businesses in
California and would further aggravate the employment
challenges. The opponents state that "requiring annual
appropriations would have the same effect as having a one-year
sunset on all tax incentives which would make them completely
ineffective in attracting jobs to California, since a business
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would not know whether it could rely on those incentives in
future years."
4)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). By contrast, others argue that the "tax
expenditure" theory is nothing more than a linguistic and
academic construct by those who wish to couch the desire for
increased government spending in language of "closing tax
loopholes." They argue that taxpayers, not government, have
first claim to their own earnings, and the idea that a dollar
of tax that is not collected is somehow equivalent to a dollar
that is collected and then spent by government is the most
distorted form of government "logic."
A recent report by the Legislative Analyst Office (LAO),
however, 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.
5)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 Department of Finance (DOF) currently
publishes an annual report on tax expenditures, pursuant to
Government Code (GC) Section 13305, 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
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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 Personal Income Tax and the Corporation Tax laws.
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 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 different. While it takes a two-thirds vote
to make a budgetary appropriation, a tax expenditure measure
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)Federal Budget . In 1967, the United States (U.S.) Treasury
compiled a list of preferences and concessions in the income
tax that had the nature of expenditure programs and published
a list of tax expenditures in 1967. In 1974, the
Congressional Budget Act required the Administration to
publish a list of tax expenditures as part of its annual
budget submission. It appears that the concept of tax
expenditures also gained acceptance outside of the U.S., and
the late 1970s, both Canada and the United Kingdom started
publishing lists of tax expenditures. Many other Organization
for Economic Cooperation and Development countries had either
adopted formal tax expenditure budgets or conducted
preliminary studies by 1985. (Leonard E. Burman Senior
Fellow, Is the Tax Expenditure Concept Still Relevant?, The
Urban Institute, September 2003, p.1).
8)Potential Issues :
a) Item of Appropriation vs. Tax Expenditure . Generally, a
tax expenditure does not fall within the category of an
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item of appropriation. An appropriation is a statute
giving a state officer authority to expend an ascertainable
sum of money for a particular purpose, whereas a tax
expenditure is a benefit granted to a taxpayer by means of
a reduction in the amount of taxes the taxpayer otherwise
owes to the state.
b) Binding Future Legislature . This bill requires the
Legislature annually to determine the allowable amounts for
each existing tax benefit and then appropriate money to
fund those tax benefits. However, 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, and not
a constitutional, measure, any subsequent legislature could
easily dispense with this requirement by simply including a
provision in a statute that would override any limitation
imposed on tax benefits by this bill.
c) Calendar or Tax Year ? Under this bill, the Legislature
will have to determine the allowable amount of a tax
benefit for each calendar year or any portion thereof.
Presumably, the allowable amount of at least some tax
benefits may vary depending on a particular calendar year.
This inconsistency, however, may present certain
administrative problems since most taxpayers report their
income tax liability on a taxable year basis, which may or
may not coincide with a calendar year. Committee staff
suggests that this bill be amended to provide that an
allowable amount of a tax benefit shall be established for
a taxable, instead of a calendar, year.
9)Related Legislation .
AB 2641 (Arambula), introduced in the current legislative
session, requires the Legislature to review, before January 1,
2014, and every fifth year thereafter, each tax expenditure,
as specified. Repeals every new tax expenditure that is
enacted after the effective date of this bill automatically on
January 1, 2015, and on January 1 of every fifth year
thereafter, unless a later statute provides otherwise. AB
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2641 is scheduled to be heard in this Committee on April 19,
2010.
AB 2666 (Skinner), introduced in the current legislative
session, requires a taxpayer doing business in California to
submit to FTB, under penalty of perjury, specified information
relating to the amount of tax credits claimed by the taxpayer,
and authorizes the State Chief Information Officer to publish
this information on the Reporting Transparency in Government
Internet Website. AB 2666 is scheduled to be heard in this
Committee on April 19, 2010.
AB 2230 (Charles Calderon), introduced in the current
legislative session, requires FTB to post on its website, by
March 31, 2011, and annually thereafter, a list of the 100
largest publicly traded corporations disclosing certain
tax-related information reported by those corporations, as
specified. AB 2230 is scheduled to be heard in this Committee
on April 19, 2010.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Aerospace Technology Association
California Bankers Association
California Chamber of Commerce
California Manufacturers & Technology Association of America
California Taxpayers' Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098