BILL ANALYSIS
AB 2666
Page 1
ASSEMBLY THIRD READING
AB 2666 (Skinner)
As Amended May 28, 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 compile
information on tax expenditures claimed and reported by publicly
traded companies and requires the State Chief Information Officer
(CIO) to publish this information on the Reporting Transparency in
Government Internet RGT) Website. Specifically, this bill :
1)Requires FTB to compile, beginning with the 2010 tax year,
information on any tax expenditure, authorized under either the
Personal Income Tax Law or the Corporation Tax Law, that is
claimed and reported by a publicly traded company on its annual
tax return filed with the FTB pursuant to Revenue and Taxation
Code Part 10.2 (commencing with Section 18401).
2)Defines a "publicly traded company" as a company with securities
that are either listed or admitted to trading on a national or
foreign exchange, or is the subject to two-way quotations, such
as both bid and asked prices, that is regularly published by one
or more broker-dealers in the National Daily Quotation Service
or a similar service.
3)Requires FTB, beginning on March 30, 2012, and by March 30 of
each year thereafter, to submit this compiled tax expenditure
information to the State CIO for publication on the RGT Website.
AB 2666
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4)Requires the CIO to develop a database searchable by company
name and amount of tax expenditures claimed.
FISCAL EFFECT : It is estimated that FTB will incur one-time costs
in the range of $125,000 for programming and testing system needed
to compile tax expenditure information. Ongoing costs for
collecting data would likely be minor. In addition, the CIO is
expected to incur a one-time cost of $70,000 and ongoing costs of
$15,000 to develop and maintain a database of tax expenditures.
COMMENTS :
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's 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.
How is a Tax Expenditure Different from a Direct Expenditure? As
the Department of Finance 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
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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, which 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.
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, and 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.
(Company-Specific Subsidy Disclosure in the States,
www.goodjobsfirst.org ). In contrast, 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.
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 Securities and Exchange Commission (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.
The opponents of corporate disclosure, generally, argue that
public disclosure is unconstitutional; it also violates corporate
AB 2666
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privacy, jeopardizes corporate trade secrets and encourages
businesses to move to other states. In 1911, the United States
(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 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.
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 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.
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The Limited Scope of the Corporate Tax Disclosure Proposed by this
Bill. Under this bill, the FTB will have to compile information
relating to the tax expenditures claimed by all publicly traded
companies on their California income tax returns, beginning with
the 2010 tax year. This bill also requires the State CIO to
develop on its Web site a database that would contain this
information and would be searchable by company name and the amount
of tax expenditures claimed by the company. 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. Finally, 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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098
FN: 0004735