BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2666|
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THIRD READING
Bill No: AB 2666
Author: Skinner (D)
Amended: 6/30/10 in Senate
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-0, 6/23/10
AYES: Wolk, Alquist, Padilla
NO VOTE RECORDED: Walters, Ashburn
SENATE APPROPRIATIONS COMMITTEE : 7-4, 8/12/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee
NOES: Ashburn, Emmerson, Walters, Wyland
ASSEMBLY FLOOR : 45-28, 6/2/10 - See last page for vote
SUBJECT : Tax expenditures: Franchise Tax Board
SOURCE : California Labor Federation
DIGEST : This bill requires the Franchise Tax Board to
compile information on corporation tax expenditures claimed
and reported by publicly traded companies and requires the
State Chief Information Officer to publish this information
on the Reporting Transparency in Government Internet
Website, as specified.
ANALYSIS : The Corporation Tax Law authorize various
credits, deductions, exclusions, exemptions, and other tax
benefits with respect to the taxes imposed by those laws.
CONTINUED
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This bill:
1. Requires the Franchise Tax Board (FTB) to compile,
beginning with the 2010 tax year, information on any tax
expenditure, authorized under 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 Chief Information
Officer (CIO) for publication on the Reporting
Transparency in Government Internet Website.
4. Requires the CIO to develop a database searchable by
company name and amount of tax expenditures claimed.
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
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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 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
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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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 8/17/10)
California Labor Federation (source)
American Federation of State, County and Municipal
Employees, AFL-CIO
Asian Health Services
California Nurses Association
California Professional Firefighters
Service Employees International Union, Local 1000
Sierra Club
State Building & Construction Trades Council of California
OPPOSITION : (Verified 8/17/10)
California Aerospace Technology Association
California Banker Association
California Business Properties Association
California Chamber of Commerce
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California Manufacturing and Technology Association
California Retailers Association
California Taxpayer's Association
TechAmerica
ARGUMENTS IN SUPPORT : The author's office states that,
"In this era of perennial budget deficits, lawmakers need
accountability for any tax revenue that is dispersed to
corporations to determine if they are using the money to
create or retain jobs. In 2009, nearly $14.5 billion in
tax expenditures went to corporations as an incentive for
them to do business and create jobs in the state. There is
no oversight or accountability of that money to assess its
effectiveness at creating or retaining jobs." According to
the author's office, this bill is intended to bring needed
transparency and accountability to corporate tax
expenditures. While the federal lawmakers have access,
albeit limited, through the SEC filings, to some
information on corporate profits, federal corporate taxes
paid, and sometimes tax credits claimed, 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 business 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. AB 2666 is
part of a package of bills that will ensure that
corporations that receive tax credits use taxpayer dollars
to create or retain jobs.
The proponents of this bill argue that a publicly
accessible database that displays all the recipients of
economic development subsidies "will provide policymakers
as well as the public with the transparency needed to hold
the recipients of tax expenditures accountable to taxpayer
goals." The proponents also note that, as billions of
dollars flow out to corporations without oversight, "the
Governor proposes an elimination of social safety net
programs like CalWORKS, while demanding little from
corporations in terms of sharing the pain of California's
broken economy." Finally, the proponents assert that,
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since beneficiaries of state programs are required to
provide fingerprints, "report their income every three
months, be checked continuously for fraud, and prove that
they found work for thirty-two hours per week to keep their
grants and assistance, we should require corporations to
report to the state what they are doing with the billions
they receive each year." This bill, the proponents state,
will cast a little sunshine on which corporations to see
which corporations are properly using state taxpayer
dollars and which are not.
ARGUMENTS IN OPPOSITION : The opponents of corporate
disclosure, generally, argue that public disclosure is
unconstitutional, it also violates corporate privacy,
jeopardizes corporate trade secrets and encourages business
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.
ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Bass, Beall, Block, Blumenfield,
Bradford, Brownley, Caballero, Charles Calderon, Carter,
Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Evans,
Feuer, Fong, Furutani, Galgiani, Hall, Hayashi,
Hernandez, Huffman, Jones, Bonnie Lowenthal, Ma, Mendoza,
Monning, Nava, V. Manuel Perez, Portantino, Ruskin,
Salas, Saldana, Skinner, Solorio, Swanson, Torlakson,
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Torres, Torrico, Yamada, John A. Perez
NOES: Adams, Anderson, Bill Berryhill, Buchanan, Conway,
Cook, DeVore, Emmerson, Fletcher, Fuller, Gaines,
Garrick, Gilmore, Hagman, Harkey, Hill, Huber, Jeffries,
Knight, Logue, Miller, Nestande, Niello, Nielsen, Silva,
Smyth, Tran, Villines
NO VOTE RECORDED: Tom Berryhill, Blakeslee, Fuentes, Lieu,
Norby, Audra Strickland, Vacancy
DLW:do 8/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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