BILL ANALYSIS
AB 2666
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 2666 (Skinner)
As Amended August 17, 2010
Majority vote
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|ASSEMBLY: |45-28|(June 2, 2010) |SENATE: |22-14|(August 23, |
| | | | | |2010) |
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Original Committee Reference: REV. & TAX.
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 (RTG) Web site.
The Senate amendments :
1)Make clarifying changes to the definition of "publicly traded
companies."
2)Define the term "tax expenditure" as a credit against the
corporation tax imposed under Revenue and Taxation Code (R&TC)
Part 11 (commencing with Section 23001).
3)Require the FTB to submit the specified information to the State
CIO on June 30, 2013, and by June 30 of each year thereafter,
instead of March 30, 2012, and March 30 of each year.
4)Make a technical non-substantive change to delete the reference
to the personal income tax (PIT) expenditures.
AS PASSED BY THE ASSEMBLY , this bill:
1)Required FTB to compile, beginning with the 2010 tax year,
information on any tax expenditure, authorized under either the
PIT Law or the Corporation Tax Law that was claimed and reported
by a publicly traded company on its annual tax return filed with
the FTB pursuant to R&TC Part 10.2 (commencing with Section
18401).
2)Defined a "publicly traded company" as a company with securities
that are either listed or admitted to trading on a national or
foreign exchange, or was the subject to two-way quotations, such
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as both bid and asked prices, that was regularly published by
one or more broker-dealers in the National Daily Quotation
Service or a similar service.
3)Required 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 RTG Website.
4)Required 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 : Existing law provides various credits, deductions,
exclusions, and exemptions for particular taxpayer groups.
According to legislative analyses prepared for prior related
measures, United States (U.S.) Treasury officials and some
Congressional tax staff began arguing in the late 1960s 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.
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
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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.
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
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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 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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Under this bill, the FTB will have to compile information relating
to the tax credits claimed by all publicly traded companies on
their California income tax returns, beginning with the 2010 tax
year. 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: 0006249