BILL ANALYSIS
AB 2641
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2641 (Arambula) - As Amended: April 13, 2010
Majority vote. Fiscal committee.
SUBJECT : Tax expenditures: legislative review.
SUMMARY : Requires the Legislature to review, before January 1,
2014, and every fifth year thereafter, each tax expenditure, as
specified. Provides that every new tax expenditure that is
enacted after the effective date of this bill shall be repealed
automatically on January 1, 2015, and on January 1 of every
fifth year thereafter, unless a later statute provides
otherwise. Specifically, this bill :
1)Requires the Legislature to review, on or before January 1,
2014, each tax expenditure for the purpose of ensuring that
only tax expenditures with a measurable benefit are provided
by the state.
2)Specifies that the review shall include, but not be limited
to, all of the following information, as required by
Government Code (GC) Section 13305:
a) A comprehensive list of every tax expenditure,
regardless of its annual cost.
b) The statutory authority for each credit, deduction,
exclusion, exemption, or any other tax benefit as provided
by state law.
c) A description of the legislative intent for each tax
expenditure, if the act adding or amending the expenditure
contains legislative findings and declarations of that
intent, or that legislative intent is otherwise expressed
or specified by that act.
d) The sunset date of each credit, deduction, exclusion,
exemption, or any other tax benefit as provided by state
law, if applicable.
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e) A brief description of the beneficiaries of the credit,
deduction, exclusion, exemption, or other tax benefit as
provided by state law.
f) An estimate or range of estimates for the state and
local revenue loss for the current fiscal year and the two
subsequent fiscal years. For sales and use tax
expenditures, this would include partial year exemptions
and all other tax expenditures when the State Board of
Equalization has obtained that information.
g) For personal income tax expenditures, the number of
taxpayers affected and returns filed, as applicable, for
the most recent tax year for which full year data is
available.
h) For corporation tax and sales and use tax expenditures,
the number of returns filed or business entities affected,
as applicable, for the most recent tax year for which full
year data is available.
i) A listing of any comparable federal tax benefit, if any.
j) A description of any tax expenditure evaluation or
compilation of information completed by any state agency
since the last report made by the Department of Finance
(DOF) pursuant to GC Section 13305.
3)Requires the Legislature, based on the information from the
review, to assess whether a "tax expenditure not subject to
limitation" meets stated objectives and, for each of those not
meeting the objectives, to restrict or eliminate that tax
expenditure in accordance with specified procedures.
4)Provides that if the Legislature decides to restrict or
eliminate a "tax expenditure not subject to limitation", it
shall do so by enacting a statute in which any expected
revenue increase resulting from that restriction or
elimination is offset by the amount of revenue loss resulting
from the enactment of a new tax expenditure, or expenditures,
to ensure that the statute is revenue neutral.
5)Defines the term "tax expenditure not subject to limitation"
as any credit, deduction, exclusion, exemption, or any other
tax benefit provided by the state that was enacted prior to
the effective date of this bill.
AB 2641
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6)Provides that each "tax expenditure subject to limitation"
shall cease to be operative and shall be repealed on January
1, 2015, and on January 1 of every fifth year thereafter,
unless a later enacted statute deletes or extends that date.
7)Defines the phrase "tax expenditure subject to limitation" as
any credit, deduction, exclusion, exemption, or any other tax
benefit provided by the state that is enacted on or after the
effective date of this bill.
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
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, "The Franchise
Tax Board says that there are two primary policy reasons for
adopting tax expenditures: to create a more equitable tax
system and to provide incentives to alter behavior.
"California currently provides billions of dollars in tax
expenditures annually. However, once a tax expenditure is
adopted, it is rarely reviewed for its effectiveness or
continued compatibility with California's long-term policy
goals.
"AB 2641 establishes a systematic and periodic legislative
review of all tax expenditures to ensure that the expenditures
remain effective and continue to support California's policy
objectives."
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2)What Does this Bill Do? According to the author, this bill is
intended to create a mechanism for the legislative review of
tax expenditures for the purpose of evaluating their
effectiveness and compatibility with present day state policy
objectives. Thus, this bill requires the Legislature to
review every tax expenditure on the books, at least once every
five years, and to act upon its review to repeal or restrict
those tax expenditures that do not provide any measurable
benefit to the state. It also provides that every new tax
expenditure, i.e. a tax expenditure that is enacted after the
effective date of this bill, will automatically sunset on
January 1, 2015, or if re-enacted, then on January 1 of every
fifth year thereafter. Finally, this bill prescribes a
mechanism by which an already existing tax expenditure, i.e. a
tax expenditure that was enacted prior to the effective date
of this bill, may be repealed or limited by the Legislature.
Specifically, the Legislature must enact a revenue neutral
statute, by offsetting any revenue increase from the repeal of
the tax expenditure with a revenue loss resulting from an
enactment of a new tax expenditure, or multiple expenditures.
3)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). A recent report by the Legislative
Analyst Office (LAO) 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.
4)Current Review of Tax Expenditures . Although there is no
requirement for the Legislature itself to review existing tax
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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 DOF currently publishes an annual report on
tax expenditures, pursuant to 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 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.
5)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.
6)Binding Future Legislature ? This bill adds Revenue and
Taxation Code (R&TC) Section 41 to require the Legislature not
only to review but, most importantly, act to repeal or limit
the tax expenditures that do not meet the state objectives or
provide no measurable benefit to the state. 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
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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 R&TC
Section 41.
7)The Automatic Sunset . This bill provides for an automatic
sunset on January 1, 2015, for every new tax expenditure,
regardless of when it was enacted as long as it is enacted
after the effective date of this bill. Conceivably, if this
bill becomes law, a tax credit enacted in 2014 would
automatically be repealed at the end of that year. Business
representatives often argue that companies need
predictability, and that a short-term business tax credit
would not be of any particular benefit to a taxpayer whose
business projections span over decades. However, as discussed
above and stated in this bill, this sunset date may be easily
extended by a subsequent statute enacting or re-enacting a tax
expenditure.
8)Definitions . Committee staff suggests that the author amend
this bill to provide the definitions of "measurable benefit"
and "other tax benefit."
Related Legislation .
AB 2171 (Charles Calderon), introduced in the current
legislative session, conditions the allowance of a tax benefit
on the passage of a separate statute. AB 2171 is scheduled to
be heard by this Committee on April 19, 2010.
SB 1272 (Wolk), introduced in the current 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.
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
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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 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. AB 2230 is scheduled to be heard in this Committee
on April 19, 2010.
ACA 6 (Charles Calderon), introduced in the current
legislative session, would amend the State's constitution to,
among other things, limit the operative period to seven years
from the date of the enactment of a new or amended tax credit.
ACA 6 is currently pending before the Assembly.
REGISTERED SUPPORT / OPPOSITION :
Support
California Tax Reform Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098