BILL ANALYSIS
SB 32 X8
Page 1
Date of Hearing: February 25, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
SB 32 X8 (Wolk) - As Amended: February 24, 2010
Policy Committee: Revenue and
Taxation Vote: 6-1
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill (1) excludes from state income taxes federal grants
that are made in-lieu of renewable energy tax credits, and (2)
conforms numerous provisions of California law to changes made
in federal income tax law from 2005 to 2008.
FISCAL EFFECT
As shown in the accompanying table, the bill will result in a
decrease in tax revenues and offsetting increases in interest
and penalties. The net impact is estimated by FTB to be revenue
losses of $20.0 million in 2009-10, $7.6 million in 2010-11, and
$5.3 million in 2011-12, and a gain of $5.5 million in 2012-13.
Summary of SB 32 X8 Fiscal Impact
(In millions of dollars)
------------------------------------------------------------------
| |2009-1| 2010-11| 2011-12| 2012-13|
| | 0| | | |
|----------------------+------+-----------+-----------+------------|
|Tax Provisions | -23.4| -20.6| -21.6| -12.6|
|----------------------+------+-----------+-----------+------------|
|Penalty & Interest | 3.4| 13.0| 16.3| 18.0|
|Provisions | | | | |
|----------------------+------+-----------+-----------+------------|
| Total, All | -20.0| -7.6| -5.3|5.5 |
|Provisions | | | | |
------------------------------------------------------------------
SUMMARY (Continued)
SB 32 X8
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Key provisions of this bill:
1)Exclude from income taxation receipts of federal grants
authorized by the American Recovery and Reinvestment Act
(ARRA) for qualified renewable energy investments in 2009 and
2010.
2)Conform California to the federal "erroneous claim for refund"
penalty, by imposing a 20% penalty on such claims unless the
taxpayer can show a reasonable basis for the refund claim. The
measure does not apply to taxpayers with adjusted gross income
of less than $250,000.
2)Extend through 2012 provisions allowing taxpayers to exclude
from their gross income indebtedness on their principal
residence that has been discharged by a lender (through, for
example, a "short sale"). The bill raises the amount of debt
that could be exempt from $250,000 to $500,000.
3)Increase penalties for failure to file partnership and
S-corporation returns.
4)Increase, from 14 years to 18 years, the age of minor children
whose unearned income (such as interest or dividends on
investment) is taxed based on their parents' tax rate.
5)Index to inflation the gross income limitations on certain
retirement savings incentives.
6)Lengthen, from 18 to 36 months, the period after taxes are due
in which the FTB may contact taxpayers regarding tax
deficiencies and still collect interest on unpaid balances.
7)Modify rules involving contributions to funds to cover nuclear
facility decommissioning costs.
8)Reduce the age for early withdrawal penalties for public
safety employees and exclude from gross income reimbursements
received by volunteer emergency personnel.
COMMENTS
1)Purpose . The energy grant exemption from state income taxes
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is intended to make qualified renewable projects more
economically viable in California. The remaining conformity
provisions are aimed at narrowing the significant differences
that have emerged between state and federal income tax law in
recent years, thereby simplifying the preparation of
California income tax returns. FTB indicates that conforming
to federal tax law is generally desirable because it makes the
state tax system less confusing for the taxpayer and easier
for the FTB to administer. In addition, increased conformity
makes it easier for FTB to use federal information and audit
results to verify that taxpayers are paying the proper amount
of tax, which eliminates the need for the taxpayer to submit
the same information to both the IRS and the FTB.
2 Background - renewable energy credits . Federal law allows an
income tax credit for renewable energy projects, such as
solar, wind, geothermal, and biomass (California has no
comparable credit). Given that the credit is not refundable,
it only has value to investors who are reasonably certain that
they will have future income and tax liabilities against which
to apply them, and the recent economic downturn has struck a
blow to that confidence. In response to this problem, ARRA -
signed by President Obama in February 2009, included a
provision authorizing the Secretary of Treasury to provide
grants in lieu of the credits to developers placing renewable
energy projects into service during 2009 or 2010. The value of
these grants is that, unlike income tax credits, they have
monetary value whether or not the owner of the project has tax
liabilities. Congress exempted the grants from income taxes
under federal law, though they did require the basis of the
property to be reduced by 50% of the grant value. There is
no comparable exemption for California taxes, however, and
proponents of this provision assert that the taxability of
these grants may jeopardize the economic viability of some
projects. This bill excludes these grants from income for
state tax purposes.
2 Background - federal conformity . Although there are many
exceptions, California's personal income tax and corporation
tax laws are generally patterned after federal law. The state
generally does not automatically conform to federal law.
Rather, in most cases, state legislation is needed to conform
to federal law changes.
In the 1980s through the early 1990s, the state enacted
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conformity legislation almost every year. However, since the
mid-1990s, state conformity has taken place less frequently -
in 1997, 1998, 2001, and 2005. Over the past five years,
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 measure would narrow differences
between state and federal law, although lack of conformity
would remain in certain areas, such as tax treatment of health
savings accounts and accelerated depreciation for various
business investments.
3)Background - erroneous refund claim penalty . One of the key
conformity items in this bill is the erroneous refund penalty,
a provision that the governor cited when he vetoed last year's
conformity bill, AB 1580 (Calderon). In 2007 President Bush
signed legislation that imposes a 20% penalty on taxpayers
filing erroneous claims for refunds, unless the taxpayer shows
a reasonable basis for the claim. The federal penalty, which
is applied to the amount of the erroneous claim, does not
apply to any refund claimed due to the Earned Income Tax
Credit.
The penalty is intended to close a loophole that had existed
with respect to understatement of income on tax returns,
whereby taxpayers could avoid accuracy penalties applying to
original returns, by filing a conservative original return and
then filing a more aggressive amended return and seeking a
refund. Since the federal law change in 2007, taxpayers have
been subject to the erroneous refund claim penalty for federal
income taxes, but not for California income tax purposes. This
is particularly significant in tax cases involving solely
state tax issues, such as income apportionment, where the
federal penalty is not relevant. This bill conforms state law
to the erroneous refund penalty, but additionally provides
that the penalty does not apply to individuals with income of
less than $250,000.
4)Previous legislation . The general conformity provisions (with
the exception of the energy grant income tax exemption) are
nearly identical to those contained in AB 1580 (Calderon) of
2009. That bill was vetoed by the governor, who stated he
could not support the erroneous refund penalty provision until
it reflected a consensus.
SB 32 X8
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Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081