BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SBx6 19 - Florez
Introduced: May 26, 2010
Hearing: June 9, 2010 Fiscal: Yes
SUMMARY: Directs FTB to Compile Specified Information
Regarding Corporate Tax Credits; Requires the
Data be Subsequently Published on the State
Reporting Transparency in Government Internet
Website.
EXISTING LAW generally prohibits unlawful disclosure
or inspection of any income tax return information except
as specified in law. Criminal sanctions, including
imprisonment, apply to FTB personnel convicted of unlawful
disclosure or inspection of tax records. The Franchise
Tax Board (FTB) must notify a taxpayer if criminal charges
have been filed for willful unauthorized inspection or
disclosure of their tax data. However, FTB may publish
statistical data related to taxpayer information so long as
nothing specific to a single taxpayer is disclosed.
Notwithstanding these provisions, the Legislature directed
FTB to publish a list of the top 250 tax delinquencies over
$100,000 (AB 1418, Horton, 2006).
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
SBx6 19 - Florez
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encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING LAW directs the Department of Finance to
annually publish a report detailing tax expenditures, and
relevant costs.
THIS BILL waives the above confidentiality protections
and requires FTB to annually compile the name, mailing
address, and California corporation number when applicable
of any business entity receiving $20,000 or more in
corporate tax expenditures commencing with information in
the 2010 tax year.
THIS BILL directs the Franchise Tax Board starting in
the 2010 taxable year to compile all of the following
information:
The name, mailing address, and California
corporation number for any firm receiving more
than $20,000 in credits against the Corporation
Tax.
The amount of tax credits claimed.
THIS BILL states that the following information shall
be included in a timely manner on the State Reporting
Transparency in Government Internet Website:
The corporation name
The California corporation number, if
applicable
The name of the tax credit claimed
The amount of the tax credit claimed
A description of the initial
justification of the expenditure.
THIS BILL requires that the information shall be
compiled on a credit-by-credit basis, and searchable by
taxpayer name, corporation number when applicable,
SBx6 19 - Florez
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expenditure type, and keyword.
FISCAL EFFECT:
FTB estimated that SB 1086 (Florez), a substantially
similar measure, did not affect state revenues; however,
FTB will incur currently unspecified implementation costs.
COMMENTS:
A. Purpose of the Bill
The author provided the following statement:
According to the Franchise Tax Board's 2009 report on
tax subsidies, "The term tax expenditure [tax subsidy]
alludes to the fact that the policy objectives could
be achieved by means other than the tax provisions.
Rather than reducing the beneficiaries' taxes, the
Legislature could, for example, establish direct
expenditure programs to allocate money toward its
policy goals. "In short, tax payers expect some
return on their investment.
One of the best ways to ensure that corporations are
holding up their end of the bargain with the public is
to make the system more transparent. At a minimum we
must know who is getting our tax dollars and how much
they get. Without this information there is no
accountability.
Thanks to Governor Schwarzenegger's executive order
creating California's transparency website, the
perfect venue for disclosing corporate tax subsidies
already exists. The website,
www.reportingtransparency.ca.gov , currently tracks all
of the state's contracts. It simply needs to be
updated to include corporate tax subsidies.
SBx6 19 - Florez
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B. Tradeoffs
SB 1086 poses a clear tradeoff in tax policy: Are
taxpayer privacy protections more important than making
public information necessary to determine which
corporations receive how big of a slice of California's
corporate tax credit pie? While taxpayer privacy is the
cornerstone of a self-assessed income tax system, how can
the Legislature evaluate whether tax expenditures work when
it doesn't know who gets tax breaks, and how much each
taxpayer gets? Financial information is highly sensitive
to both individuals and businesses, allowing friends and
neighbors to know your financial investments or personal
spending, or to disclose vital data in a tax return to a
competitor is a violation of privacy and can lead to very
bad things. For these reasons, state law allows felony
prosecution for unlawful inspection and disclosure to
enforce these safeguards.
C. Will a 10-k be Okay?
The Securities and Exchange Act of 1934 requires
companies with more than $10 million in assets whose
securities are held by more than 500 owners to file annual
and other periodic reports for the benefit of its
shareholders and the investing public. These reports are
available to the public through the SEC's EDGAR database.
Shareholders and potential investors should have some idea
of a firm's profits and losses, and assets and liabilities.
This data famously lead to the largest national tax policy
change since the enactment of the federal income tax:
Robert McIntyre, working at Citizens for Tax Justice combed
through the financial reports of the nation's largest
companies and found that 128 of the 250 largest U.S firms
paid no federal corporate income tax in at least one year
between 1981 and 1983 (17 paid no tax in all three). The
resulting furor pushed Congress to enact the Tax Reform Act
SBx6 19 - Florez
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of 1986.
SB 1086 requires FTB to compile and have subsequently
published tax information for all firms, regardless of
whether they are privately held or publicly traded. While
public firms are used to filing reports with the Securities
and Exchange Commission, which ostensibly enforce the
Securities and Exchange Act, privately-held firms do not,
as they have made the tradeoff not to forgo public equity
investment in exchange for keeping private sensitive
information to itself. The Committee may wish to consider
limiting SB 186 to apply solely to firms which already
publicly share a great deal of information.
D. Change You Can Conceive Of?
The Legislature previously waived individual taxpayer
confidentiality when it directed the tax agencies to
disclose the top delinquents in the hopes that scarlet
letters enforce compliance. SB 1086 goes much further:
instead of the current reports that FTB compiles on the
aggregate use of each credit, the measure directs state
authorities to publish the value of every credit that any
kind of business takes, regardless of whether the firm is
delinquent in taxes paid, or has stock traded on public
exchanges.
The important question embedded in SB 1086 is whether
more information will result in substantive policy changes
that produce a better return on investment from
California's tax expenditure. FTB and the Department of
Finance already publish tax expenditure reports detailing
each expenditure and its costs. McIntyre did his
calculations using information that existed in 1983,
without the benefit of a searchable database. SB 1086
intends to supply Californians with information about any
tax credit taken by any corporation doing business in the
state claiming more than $20,000 in tax credits. The
Committee may wish to consider whether substantive change
will result from the marginal benefit of individualized
SBx6 19 - Florez
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information compelled by SB 1086, especially given the
likely workload tradeoffs for FTB and the taxpayer privacy
compromises necessary to obtain it.
E. It's the PITS!
SB 1086 directs that specified information regarding
tax credits against the Corporation Tax be compiled and
published; however, taxpayers increasingly form companies
as pass-through entities, where little to no tax is paid at
the business entity level beyond the $800 corporate
franchise tax, instead passing through the income to its
partners who include the income on their personal income
tax returns filed under the Personal Income Tax Law (PIT).
These entity types include S-Corps, which pay 1.5% of net
income in tax, and Limited Liability Companies, which pay
an LLC fee according to its California income, among
others. SB 1086 will compel information regarding
corporate tax credit usage, but the measure does not affect
similarly situated firms that choose a different business
model.
F. Technical Amendments Needed
Taxpayers don't receive tax credits under the law,
they claim them. Page 2, Line 8, strike "receive,"
and insert "claim"
The measure states that FTB compiles the
information, and the information be included in a
timely manner on the State Reporting Transparency in
Government Internet Website; however, the measure does
not specify what entity is responsible for taking the
information from the FTB, and subsequently ensuring
that the information is published. Additionally, the
measure states that the information shall be compiled
in specific ways, but does not state what entity does
the compiling.
SBx6 19 - Florez
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The term "credit by credit basis" needs to be
defined or distinguished from the other searchable
fields required.
It is unclear how data would be compiled by
"expenditure type" and "key word" given that FTB only
compiles names, mailing addresses, California
corporation numbers of specified taxpayers, and the
amounts claimed.
Support and Opposition
Support:California Public Interest Research Group
Oppose:California Taxpayers' Association
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Consultant: Colin Grinnell