BILL ANALYSIS
AB 2230
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2230 (Charles Calderon) - As Amended: April 5, 2010
Majority vote. Fiscal committee.
SUBJECT : Corporate tax disclosure: Franchise Tax Board: list
of publicly traded corporations.
SUMMARY : Requires the Franchise Tax Board (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. Specifically, this bill :
1)Requires FTB to make available as a matter of public record
and post on its website, by March 31, 2011, and annually
thereafter, a list of the 100 largest publicly traded
corporations that file tax returns for a taxable year.
2)Specifies that the 100 largest publicly traded corporations
shall be determined based on gross receipts.
3)States that the publication shall commence with tax returns
filed for taxable years beginning on or after January 1, 2008.
4)Provides that the list of corporations shall include all of
the following information for each corporation:
a) The name of the corporation;
b) The California corporation number;
c) The address of the principal office;
d) The aggregate amount of tax expenditures; and,
e) The effective tax rate.
5)Defines "effective tax rate" as an amount expressed as a
percentage and determined by dividing the amount of taxes paid
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by a taxpayer for a taxable year by an amount equal to the sum
of the following:
a) The taxable income of the taxpayer for the taxable
year; and,
b) The tax expenditures of the taxpayer that were
deducted by the taxpayer in arriving at
its taxable income for the taxable year.
6)Defines "tax expenditure" as tax expenditures detailed in the
California Income Tax Expenditures, Compendium of Individual
Provisions Report, compiled by the FTB.
EXISTING STATE LAW :
1)Requires tax agencies to keep taxpayer information
confidential. Consistent with federal law, it is a
misdemeanor for FTB to disclose or make known in any manner
information as to the amount of income or any other
particulars of taxpayer information, unless expressly
provided. Similarly, the State Board of Equalization (BOE) is
forbidden to divulge taxpayer information.
2)Requires the FTB to make available as public record a list of
the 250 largest tax delinquencies in excess of $100,000 for
each calendar year.
3)Requires each annual list to include the name of the tax
debtor, the amount of the delinquency on the notice plus
interest or penalties less any amounts paid, the earliest date
that a notice of state tax lien was filed, and the type of
delinquent tax.
4)Directs FTB to include a taxpayer's contact information on the
list as well as the aggregate number of persons that had
appeared on the list that have satisfied their delinquencies.
5)Allows a taxpayer who satisfied all or part of the tax
delinquency to request FTB to publish the payment information
on the list.
6)Requires the State BOE, quarterly, to make available as public
record a list of the 250 largest tax delinquencies in excess
of $100,000.
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EXISTING FEDERAL LAW requires all publicly held corporations to
file annual reports with the Securities and Exchange Commission
(SEC), disclosing the amount of corporate profits, amounts of
federal taxes paid, and, in some instances, information on
specific tax expenditures claimed by each corporation.
FISCAL EFFECT : Unknown.
COMMENTS :
1)The Purpose of this Bill . According to the author, corporate
tax disclosure is the best available tool to determine whether
California's largest corporations, as a group, pay their fair
share of taxes, whether tax policies designed to promote
economic development are effective, and whether the existing
corporate income tax system needs to be reformed. This bill,
by shedding light on the details of corporate tax payments,
will aid policymakers in evaluating whether California has the
highest corporate tax in the nation and whether a sensible tax
reform is warranted.
2)Federal Tax Disclosure . Since the Civil War, tax information
had often been available to the public, and it was not until
1976 that the Internal Revenue Service (IRS) was prohibited
from disclosing tax returns. In fact, from the enactment of
the Revenue Act of 1913 until 1976, income tax returns were
classified as public records. (Lenter, Slemrod, Shackelford,
Public Disclosure of corporate tax return information:
accounting, economics, and legal perspectives, National Tax
Journal, 2003). Over the entire period, the President
controlled access to tax returns through executive order and
Treasury regulations. "The shift in 1976 that made tax
returns confidential came in response to allegations that the
Nixon administration had improperly used tax returns against
its political opponents. The Tax Reform Act of 1976
consequently eliminated executive branch control over tax
return disclosure. Thus, confidentiality as a general rule is
a relatively recent phenomenon." (Id.). Since 1976, IRS
officials, other federal government employees, state
government employees, and others who have access to returns
and return information have been prohibited from disclosing
the information, unless an exception to the general rule of
confidentiality is available under Internal Revenue Code (IRC)
Section 6103. Nonetheless, certain tax information is still
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readily available to the public. For example, an annual
federal information return filed by a tax-exempt organization
and containing the amount of taxable revenues the non-profit
organization earned is not confidential. Similarly, annual
statements filed by property and casualty insurers with the
state insurance department that include net income data are
public.
3)Disclosure of Tax Information in California . The State of
California, as well as other states, readily publishes
information on unpaid taxes and delinquent taxpayers with
respect to property taxes. An unpaid property tax becomes a
lien against the real property and dissemination of
information on such liabilities is important for protecting
potential buyers, lenders, etc. In the area of income tax
liabilities, however, the state law generally prohibits
disclosure or inspection of any income tax return information,
except as specified in law. In fact, the FTB is required to
notify taxpayers if criminal charges have been filed for
willful unauthorized inspection or disclosure of their tax
data. However, FTB may release tax return information to
certain other agencies, including legislative committees, the
Attorney General, the California Parent Locator Service, the
Commissioner of the IRS, and others, for certain statutorily
enumerated purposes. BOE is similarly restricted from
divulging taxpayer information. Furthermore, since 2007, both
FTB and BOE are required to make as a matter of public record
a list of the largest 250 tax delinquencies over $100,000.
4)Corporate Tax Disclosure in Other States . Several states have
some sort of public disclosure of state income tax
information. The State of Wisconsin was the first to provide
for public disclosure of income tax returns in 1923,
authorizing a release of state income tax, franchise tax, or
gift tax information reported by an individual or corporation
if the person requesting information is a Wisconsin resident.
In the early 1990s, Massachusetts, West Virginia, and Arkansas
enacted public disclosure rules as well. The Massachusetts
law, which was enacted in 1993, is broad and requires a bank,
an insurance company, and a publicly traded company doing
business in Massachusetts to file annual reports stating its
name, address, the amount of state taxable income, total
excise tax due, gross receipts or sales, either gross profit
or credit carryovers to future years, income subject to
apportionment, and the amount of each credit taken against the
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excise tax due. [Massachusetts General Law, Chapter 62C,
Section 83(n)]. These reports are available for public
inspection but only after the names and addresses on the
companies have been expunged.
The West Virginia and Arkansas laws allow the disclosure of the
names of taxpayers who receive certain tax credits or rebates
and the amounts of those credits, but do not authorize the
disclosure of total tax liability. The North Carolina law
requires the Department of Revenue to publish the names of
taxpayers who claim certain job development and research and
development credits as well as the amounts of credits they
claim. Currently, some 12 states mandate disclosure of
economic development tax incentives claimed by companies.
(Company-Specific Subsidy Disclosure in the States,
www.goodjobsfirst.org ). Seven of these 12 states -
Connecticut, Illinois, Maine, Minnesota, North Carolina, North
Dakota, and West Virginia - require disclosure of state
corporate income tax incentives received by companies,
including the value of those incentives.
5)Should Corporate Tax Information Be Made Public ? Public
disclosure of corporate tax information has been debated since
1909 when the corporate excise tax, a precursor to the current
corporation income tax, was enacted. The advocates of public
disclosure have since argued that making corporate income tax
returns public would shed light on the effectiveness of tax
policies designed to promote economic development, would
improve tax compliance, and would increase political pressure
for a more fair and efficient tax system.
a) Effectiveness of Tax Incentives . The latest data does
suggest that the state corporate income tax is in decline.
The Center for Budget and Policy Priorities reports that
the share of tax revenue supplied by corporate income tax
in the 45 states fell from more than 10% in the late 1970s,
to less than 9% in the late 1980s, to less than 7% today.
(State Corporate Disclosure Report, The next Step in
Corporate Tax Reform, M. Mazerov, February, 2007). "The
effective rate at which states tax corporate profits fell
from 6.9 percent in the 1981-85 period, to 5.4 percent in
1991-95, to 4.8 percent in 2001-05. Also, many
state-specific studies have found that most corporations
filing income tax returns paid the minimum corporate tax -
often $0 - even in years in which the economy was growing
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strongly." (Id.). While the federal lawmakers have access,
albeit limited, through the SEC filings, to some
information on corporate profits and federal corporate
taxes paid, almost no public information is available to
state legislators in evaluating the "state" of the state
corporate income taxes. Thus, when a state enacts a
corporate tax incentive for the purpose of creating jobs or
encouraging investment in the state, unless the incentive
itself is expressly contingent upon a determinable number
of jobs created, it is difficult, if not impossible, to
ascertain the effectiveness of such policies without the
information provided by company-specific tax disclosure.
b) Increase in Tax Compliance . It has also been argued
that disclosure of corporate income tax information will
increase tax compliance for two reasons: a potential
adverse public reaction if the company's reported taxable
income is suspiciously low and an incentive to forgo an
aggressive tax planning. (See, e.g. Public Disclosure of
corporate tax return information: accounting, economics,
and legal perspectives). However, no study has shown
conclusive evidence linking company performance to these
consumer perceptions. (Id., p.17). Furthermore, as
argued by some, disclosure is not an appropriate mechanism
for achieving full compliance with tax laws. (See, e.g.,
the 2006 policy statement by the Council on State Taxation
asserting that, if lawmakers are concerned that tax laws
are not being correctly administered, the appropriate
response is proper oversight of the tax agency and not
disclosure of confidential taxpayer information).
c) Tax Reform . Lately, some proponents of corporate tax
disclosure have been arguing that the primary goal of tax
disclosure is not an evaluation of the tax compliance
behavior of corporations. They note that "the vast
majority of corporations - even those paying little or no
tax in a particular state in a particular year - are doing
so in full compliance with the law." (State Corporate
Disclosure Report, Center for Budget and Policy Priorities,
p. 29). Rather, they state that, "the aim of tax
disclosure is to help policymakers and the public evaluate
whether existing tax laws implement good corporate tax
policy - or at least the tax policy and tax incentives that
policymakers intended to put in place." (Id.). As an
example, in 1985, the Citizens for Tax Justice (CTJ)
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reported that more than half of 250 most profitable
corporations in the United States (U.S.) paid absolutely
nothing in federal income taxes in at least one year
between 1981 and 1985. The CTJ's report also showed that
these zero-tax corporations benefited from special tax
breaks and demonstrated that, because of this preferential
treatment, direct competitors in the same industry were
treated very differently. According to Representative Dan
Rostenkowski (D-Illinois), the former chair of the House
Ways and Means Committee, the public outcry that resulted
from this disclosure led to the passage of the Tax Reform
Act of 1986. (R. Pomp, The Political Economy of Tax Return
Privacy - Revisited, State Tax Notes 8, June 12, 1995).
Similarly, a report by the Wisconsin Action Coalition based
on disclosure of the state income tax liabilities of the 40
largest corporations sparked a debate about whether
Wisconsin should adopt a minimum corporate tax. (R.
Tannenwald, Corporate Tax Disclosure: Good or Bad for the
Commonwealth?" Paper prepared for the Massachusetts Special
Commission on Business Tax Policy, Boston, May 28, 1993).
6)Would State Corporate Tax Disclosure Harm Businesses ? The
opponents of corporate disclosure, generally, argue that
public disclosure is unconstitutional; it also violates
corporate privacy, jeopardizes corporate trade secrets and
encourages businesses to move to other states. But, is the
disclosure of corporate tax return information
unconstitutional? In 1911, the U.S. Supreme Court dismissed
the claim that the 1909 corporate excise tax was
unconstitutional and concluded that the publicity of corporate
tax returns violated neither the Fourth nor the Fifth
Amendment to the U.S. Constitution. Flint v. Tracy Co. (1911)
220 U.S. 107, 174. Thus, it appears that the legislative
policy of permitting limited disclosure of corporate tax
returns would, most likely, be upheld as constitutional.
a) Corporate Privacy . Opponents of making corporate tax
returns public also argue that corporate tax disclosure
would violate corporate privacy and would reveal valuable
proprietary business information. As far as the privacy
rights are concerned, publicly traded corporations cede any
privacy rights to keep their affairs private when they
issue stock traded on public stock exchanges. These
corporations must file with the SEC detailed public
disclosures of their current finances and the aggregate
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amount of state corporate income taxes, among other items
of information. The right to privacy argument is much more
compelling in the case of a privately held company than in
the case of a publicly traded corporation.
b) Loss of Proprietary Information . The loss of
proprietary information was a primary objection in the
1930s to the original mandated financial disclosures for
publicly traded companies and has been raised for every new
financial disclosure. (See, e.g., Disclosure of corporate
tax return information: accounting, economics, and legal
perspectives, p. 20). While full disclosure of corporate
tax returns, most likely, would result in a loss of some
proprietary business information, the extent to which
companies would be disadvantaged is uncertain. The 1993
Massachusetts study found that the company-specific
disclosure "would reveal little information of value to
competitors for the following reasons: (1) comparable
information is available from other reports, such as annual
financial reports and reports compiled by consulting firms
and underwriters, (2) the information would not be
disaggregated enough to be of much value, even if reported
on a subsidiary-by-subsidiary basis; (3) tax accounting
principles differ so much from financial accounting
principles (especially in the case of banks) that tax
information provides very little insight into the financial
condition and operational characteristics of a company;
[and] (4) the information would be disclosed with a long
lag." [Richard D. Pomp, Corporate Tax Policy and the Right
to Know, (Albany, New York: Fiscal Policy Institute) 1993,
p. 45]. Thus, to reduce the potential utility of
tax-related information to out-of-state competitors not
subject to the disclosure requirement, it is advisable to
delay the disclosure of a corporation's tax return
information for a particular tax year for at least two
calendar years following the end of the tax year. (See,
e.g., State Corporate Disclosure Report, Center for Budget
and Policy Priorities, p. 21).
c) Anti-Business Climate . Finally, some business
representatives argue that corporate tax disclosure would
raise the cost of doing business and would create, or
exacerbate, an anti-business climate in the state adopting
this policy. It is possible, however, that some
corporations may welcome disclosure of tax information to
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"dispel the negative image that corporations are somehow
tax freeloaders." (Richard D. Pomp, Corporate Tax Policy
and the Right to Know, p. 49). The publication of
corporate tax information may also reveal that some
businesses pay more than their competitors and are at an
economic disadvantage. When the CTJ's 1985 study
highlighted the fact that some corporations pay more taxes
than their competitors, those corporations actively
supported the 1986 Tax Reform Act.
7)The Limited Scope of the Corporate Tax Disclosure Proposed by
this Bill . Under this bill, the FTB will have to prepare and
publish annually a list of the 100 largest publicly traded
companies and will have to disclose specified tax-related
information provided by those companies on their tax returns.
The list will provide basic identifying information, such as
the corporate name, the California corporation number and the
address of the principal office, as well as the aggregate
amount of tax expenditures and the corporation's effective tax
rate for that taxable year. A corporation that filed no
California income tax return in a particular taxable year will
not be included on the list for that year, even though it may
be subject to disclosure based on its gross receipts. Thus, a
publicly-traded corporation that is doing business in
California but is not subject to the state's corporate income
tax will not be included on the list.
The scope of the corporate tax disclosure proposed by this bill
is very limited - it does not require a disclosure of the
amount of gross receipts or sales, gross profit, the amount of
credit carryovers, income subject to apportionment, or the
amount of each individual credit claimed on the tax return.
There is no requirement to describe the source of any
non-business income reported on the return and the state to
which the income was assigned for taxation; nor is there an
obligation to include the tax information related to the
corporation's affiliated companies or to disclose the
corporation's total employment in the state. Furthermore,
this bill provides that the publication of the list shall
commence with tax returns filed for taxable years beginning on
or after January 1, 2008. Thus, the tax-related information
disclosed by a corporation on its 2008 tax return will not be
published until March 31, 2011, which ensures that the
disclosure provides no meaningful benefit to the corporation's
competitors. It is unclear, however, whether this three-year
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delay would also apply to the tax information disclosed by
corporations in subsequent taxable years. Committee staff
suggests that this bill be amended to clarify that a
corporation's tax information for a particular tax year that
is disclosed pursuant to this bill may not be published for at
least two calendar years following the end of the tax year in
question.
8)Clarification of definitions . This bill uses the terms "gross
receipts" and "aggregate amount of tax expenditures" without
defining them. Thus, it is uncertain whether the FTB should
determine the 100 largest corporations based on the amount of
a corporation's California gross receipts or worldwide gross
receipts. Similarly, there is no clear guidance as to what
tax expenditures must be disclosed - is it the amount of tax
expenditures claimed by a corporation in a particular tax year
or the aggregate amount of tax expenditures accumulated by the
corporation and "carried over" for use in future years?
Committee staff suggests that this bill be amended to address
these issues.
Related Legislation .
AB 2666 (Skinner), introduced in the current legislative
session, requires the FTB to compile annually the information
received from taxpayers regarding the amount of tax credits
claimed by the taxpayer on the return, commencing with
information based on the 2010 tax year. AB 2666 is scheduled
to be heard in this Committee on April 19, 2010.
SB 1272 (Wolk), introduced in this legislative session,
requires any bill that creates a new tax credit to include
specific goals, purposes, and objectives of the credit,
performance measures for the credit within the language of the
bill, and repeal dates that are five years after the enactment
date of the bill. SB 1272 is currently with the Senate Revenue
and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Tax Reform Association
Opposition
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California Taxpayers Association
California Aerospace Technology Association
California Bankers' Association
California Chamber of Commerce
California Manufacturers and Technology Association
TechAmerica
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098