BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 32X8|
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THIRD READING
Bill No: SB 32X8
Author: Wolk (D) & Liu (D)
Amended: 2/11/10
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-2, 2/11/10
AYES: Wolk, Alquist, Padilla
NOES: Walters, Ashburn
SENATE APPROPRIATIONS COMMITTEE : 6-1, 2/12/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Yee
NOES: Walters
SUBJECT : Tax conformity
SOURCE : Author
DIGEST : This bill generally conforms California personal
income tax, corporation tax, and administration of
franchise and income tax laws to federal income tax laws as
set forth in the Internal Revenue Code (IRC) as of January
1, 2009. The bill conforms to one provision of federal tax
law enacted in 2009, from the Recovery and Reinvestment Act
of 2009 by excluding income grants made-in-lieu of federal
renewable energy tax credits.
ANALYSIS :
I. Tax Conformity
CONTINUED
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Although there are many exceptions, California's personal
income tax and corporation tax laws are generally
patterned after federal law. In most cases, state
legislation is needed to conform to federal law changes.
Over the past five years since the Legislature passed the
last conformity bill, significant differences have
emerged between state and federal law. The lack of
conformity can be attributed to several factors, some
involving fiscal concerns, and others involving policy
related issues.
This bill changes the specified date of those referenced
Internal Revenue Code sections to January 1, 2010, for
taxable years beginning on or after January 1, 2010, and
thereby makes numerous substantive changes to both the
Personal Income Tax Law and the Corporation Tax Law with
respect to those areas of preexisting conformity that are
subject to changes under federal laws enacted after
January 1, 2005, and that have not been, or are not
being, excepted or modified. This bill makes certain
other changes in federal income tax laws applicable, with
specified exceptions and modifications, and make
specified supplemental, technical, or clarifying changes
for purposes of the Personal Income Tax Law or the
Corporation Tax Law, or both, with respect to, among
other things, the tax treatment of qualifying income of
publically traded partnerships, certain disaster
mitigation payments, depreciation of electric
transmission property and natural gas gathering lines,
nuclear decommissioning cost provisions, a small refiner
exception to oil depletion deduction, recapture rules for
amortizable Section 197 intangibles, amortization of
expenses incurred in creating or acquiring music or music
copyrights, treatment of certain self-created musical
works and qualified retirement income, funding for
self-employed defined benefit pension plans and for
multiemployer defined benefit pension plans, withdrawals
from retirement plans for individuals called to active
duty, waiver of an early withdrawal penalty tax on
certain distributions of pension plans for public safety
employees, allowance of additional IRA payments in
certain bankruptcy cases, inflation indexing of gross
income limitations on certain retirement savings
incentives, treatment of death benefits from
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corporate-owned life insurance, exemption of income from
leveraged real estate held by church plans, gratuitous
transfer for benefits of employees, exclusion from gross
income of specified grants for renewable energy property,
discharge of qualified principal residence indebtedness,
penalties for bad checks, penalty for understatement of
taxpayer's liability by a tax preparer, frivolous tax
submissions, exclusion of gain from sale of principal
residence by certain employees of the intelligence
community, sale of property by judicial officers, excise
tax on UBTI of charitable remainder trusts, certain
listed and reportable transactions provisions, the
taxation of certain settlement funds, the active business
requirement, loans to qualified continuing care
facilities, exception from suspension rules, and
specified federal acts. This bill also increases the age
of children whose unearned income is taxed as if a
parent's income, would require a penalty to be imposed
for a claim or credit made for an excessive amount, would
increase the penalty for willful failure to file
specified returns, and would revise, in modified
conformity with the federal income tax laws, various
provisions applicable to tax-exempt organizations.
II. Renewable Energy Grants
Federal law allows an income tax credit for the
production of electricity from qualified energy resources
at qualified facilities. Congress enacted and the
President signed the American Recovery and Reinvestment
Act (ARRA), which authorizes the Secretary of Treasury to
provide a grant to each person who places in service
during 2009 or 2010 energy property that is either (1) an
electricity production facility otherwise eligible for
the renewable electricity production credit or (2)
qualifying property otherwise eligible for the energy
credit. In lieu of the tax credits, ARRA allows for the
exclusion of the grant proceeds from a taxpayer's federal
income. However, the basis of the property is reduced by
fifty percent of the amount of the grant. In addition,
some or all of each grant is subject to recapture if the
grant eligible property is disposed of by the grant
recipient within five years of being placed in service.
The provision also permits taxpayers to claim the credit
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with respect to otherwise eligible property that is not
placed in service in 2009 and 2010 so long as
construction begins in either of those years and is
completed prior to 2013 (in the case of wind facility
property), 2014 (in the case of other renewable power
facility property eligible for credit under IRC section
45), or 2017 (in the case of any specified energy
property described in IRC section 48). Under the
provision, if a grant is paid, no renewable electricity
credit or energy credit may be claimed with respect to
the grant eligible property. However, in absence of an
authorized statute, taxpayers must include the grant
proceeds as income for state purposes. This bill
excludes these grants from income because an unexpected
tax could cause project developers to terminate or delay
the projects, causing job losses and less renewable power
for the state. This bill additionally conforms to
federal law by excluding these grants from state income
and requiring the 50 percent basis adjustment.
Prior Legislation
AB 115 (Klehs), Chapter 691, Statutes of 2005, was
California's last federal conformity bill.
AB 1561 (Calderon), which would have conformed state law to
federal income tax law changes up through December 31,
2007, failed passage on the Senate Floor in 2008 on a vote
of 24-16. That bill would have resulted in an increase in
state tax revenue, triggering the 2/3 vote requirement in
Article XIIIA of the State Constitution.
AB 1580 (Calderon), which was vetoed by the Governor last
year, was the most recent attempt to ease the hardship on
taxpayers and practitioners by bringing the federal and
state tax codes closer together. The Governor's veto
message indicated an unwillingness to sign a conformity
bill that does not reflect consensus, while noting a
specific objection to a conformity provision related to
penalties on erroneously claimed tax refunds. Apart from
this bill's inclusion of a federal conformity provision
related to renewable energy grants (described below), this
bill is nearly identical to AB 1580.
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FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
See Senate Revenue and Taxation Committee analysis for a
fiscal breakdown of the items indicated in the bill.
SUPPORT : (Verified 2/12/10)
California Society of Enrolled Agent
The following testified in Senate Appropriations Committee
concerning the energy credit only:
Large Scale Solar Association
California Solar Alliance
California Wind Energy
Various other energy groups
OPPOSITION : (Verified 2/10/10)
California Bankers Association
California Chamber of Commerce
California Taxpayers' Association
California Manufacturers and Technology Association
Tech America
Western States Petroleum Association
ARGUMENTS IN SUPPORT : According to the author's office,
"SBx8 32 is a vital measure conforming state tax law to
federal tax, and includes provisions that provide needed
relief to struggling homeowners, ensure that renewable
energy projects are not unduly taxed on federal grants, and
provides needed conformity to federal tax law, easing tax
preparation for taxpayers and tax preparers alike. This
measure works to prevent onerous taxation of distressed
Californians who are already struggling to protect their
homes, their largest investment, as many Californians face
foreclosure and are forced to walk away from their homes,
the last thing they should have to think about is paying
taxes on debt they couldn't repay. This measure puts an
end to this onerous application of tax law. Additionally,
since tax credits are never considered income, taxing
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renewable energy production grants would treat the
renewable energy production industry inequitably and would
add additional costs onto these projects need for job
creation and energy sustainability. It is important that
we avoid this kind of unnecessary roadblock to economic
growth as our state works to rebuild its financial
prosperity."
ARGUMENTS IN OPPOSITION : The opponents are concerned
with the erroneous refund penalty, asserting that the terms
of the penalty, such as "reasonable basis' and "excessive
amount" are undefined, that the penalty disproportionately
punishes taxpayers compared to the amount of noncompliance,
and that no reasonable caused exception exists, among other
arguments.
DLW:do 2/12/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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