BILL ANALYSIS
AB 2230
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REPLACE - 06/02/2010 Technical change (Member name)
ASSEMBLY THIRD READING
AB 2230 (Charles Calderon)
As Amended May 11, 2010
Majority vote
REVENUE & TAXATION 6-3 APPROPRIATIONS 12-5
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|Ayes:|Portantino, Beall, |Ayes:|Fuentes, Ammiano, |
| |Charles Calderon, Coto, | |Bradford, |
| |Fuentes, Saldana | |Charles Calderon, Coto, |
| | | |Davis, |
| | | |Monning, Ruskin, Skinner, |
| | | |Solorio, |
| | | |Torlakson, Torrico |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Conway, Harkey, Nestande |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Norby |
| | | | |
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SUMMARY : Requires the Franchise Tax Board (FTB) to publish on
its Internet Web site, 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 Web site, 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 derived from, or
attributable to, the state of California.
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
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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;
e) The effective tax rate; and,
f) Information on whether the taxpayer has elected to file
its tax return on a water'-edge basis.
5) Defines "effective tax rate" as an amount expressed as a
percentage and determined by dividing the amount of taxes
payable by a taxpayer for a taxable year by an amount equal
to the sum of the following:
a) The net income, as defined, 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 net 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, other than the
water's-edge election and depreciation.
7)Defines "taxes payable" as taxes imposed under Revenue &
Taxation Code Part 11 (commencing with Section 23001), reduced
by any allowable credit.
FISCAL EFFECT : The FTB estimates this bill would result in: 1)
one-time costs of $70,000 for programming changes and testing,
and staff time determining the top 100 publicly traded
corporations in California; and, 2) minimal ongoing costs to
maintain and update the list.
COMMENTS : 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,
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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.
Disclosure of Tax Information. 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. 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
(e.g., 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. However, California prohibits
disclosure or inspection of any income tax return information,
except as specified in law, even though it allows a disclosure
of unpaid taxes and delinquent taxpayers with respect to
property taxes.
Should Corporate Tax Information Be Made Public? Public
disclosure of corporate tax information has been debated for a
long time. The advocates of public disclosure have 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.
While the federal lawmakers have access, albeit limited, through
the SEC filings, to some information on corporate profits and
the amount of federal corporate taxes paid, almost no public
information is available to state legislators in evaluating the
"state" of the state corporate income tax laws. 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. 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
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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). 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)
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).
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. 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. The opponents
also believe that corporate tax disclosure would violate
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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 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.
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).
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
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adopting this policy. It is possible, however, that some
corporations may welcome disclosure of tax information to
"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.
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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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FN: 0004540