BILL ANALYSIS
FOR VOTE ONLY
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 425 - Simitian
Amended: June 11, 2009
Hearing: June 24, 2009 Tax Levy Fiscal: Yes
SUMMARY: Disallows Deduction for Parking Expenses for
Employers Failing to Comply with Parking Cash-Out
Law;
Enacts Tax Credit for Commute Reduction
Expenditures
I. Disallowing Deductions
EXISTING LAW allows businesses to deduct from income
ordinary and necessary business expenses, including the
costs of commuter benefits and payments to employees for
parking. The employees may exclude from their income the
value of those benefits, but cannot deduct their own
commuting expenses. Additionally, employees may exclude
from income the amount of compensation or the fair market
value of the benefit for participating in a ride sharing
program.
EXISTING LAW, known as the Parking Cash-Out Law,
requires employers of 50 or more in a federal
non-attainment area who provide subsidized parking for
their employees to also offer cash to non-driving employees
(AB 2109, Katz, 1992). The California Air Resources Board
(CARB) may assess civil penalties of $500 for employers
failing to comply.
THIS BILL precludes employers subject to the Parking
Cash-Out Law from claiming a deduction for expenses of
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subsidies to employees for parking unless all employees are
offered a parking cash-out program that complies with the
Parking Cash-Out Law, commencing in the 2009 tax year.
II. Commute Reduction Expenditures Tax Credit
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
encourage taxpayers to do something but for the tax credit,
they would otherwise not do. California allowed a tax
credit for employers to purchase commuter vehicles as part
of an employer-sponsored rideshare incentive program, and
for providing transit passes for employees, in lieu of
other expenses from 1989 to 2005 (AB 1463, Klehs). That
measure also allowed a tax credit for employees' vanpool
expenses.
THIS BILL allows employers to claim a tax credit up to
80% of the costs incurred during the taxable year for
commute reduction expenditures, whichever is less, subject
to the following limits:
For the 2009 tax year, $163
For the 2010 tax year, $168
For the 2011 tax year, $173
For the 2012 tax year, $183
Commute reduction expenditures include employer
subsidies for employees to use:
Private commuter buses or vanpools
Transit passes, including transit passes
for the employees' dependants (not including
primary and secondary school students).
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Subscription taxipools, carpools, and
ferries
The credit may also be applied for costs of:
Providing free or subsidized parking to
carpools, vanpools, or other vehicles used in
rideshare agreements
Making facility improvements to encourage
employees to use, or subsidizing employees who
already use, alternative transportation methods
that reduce the use by a single occupant of a
motor vehicle.
Making facility improvements to encourage
employees to participate in rideshare agreements,
bicycle, or walk, such as bus shelters, bicycle
racks, and modifying parking lots.
THIS BILL provides that employers may only claim the
credit in lieu of other deductions; grants the Franchise
Tax Board (FTB) authority to issue rules, guidelines, and
regulations to implement the measure, and allows credits to
be carried forward to succeeding taxable years. The
measure limits the credit to firms employing fewer than 20
employees as of June 30, 2009, among other definitions of
its terms.
FISCAL EFFECT:
According to FTB:
-------------------------------------------
| | 2009/10 | 2010/11 | 2011/12 |
| | | | |
|-----------+-----------+---------+---------|
|Taxable | $40,000 |$150,000 |$300,000 |
|Compensatio| | | |
|n | | | |
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| | | | |
|-----------+-----------+---------+---------|
|Denied |$3,100,000 |$3,200,00|$3,300,00|
|Deductions | | 0 | 0 |
| | | | |
|-----------+-----------+---------+---------|
|New Tax |-$3,170,000|-$3,400,0|-$3,650,0|
|Credit | | 00 | 00 |
| | | | |
|-----------+-----------+---------+---------|
|Net Impact | ($30,000) |($50,000)|($50,000)|
| | | | |
| | | | |
-------------------------------------------
COMMENTS:
A. Purpose of the Bill
According to the Author, "SB 425 is a narrowly crafted
bill to increase compliance with existing state law
regarding parking cash out and help provide incentives to
California's small businesses to reduce their employee's
commutes. Parking cash out is a program where an employer
must offer cash to all employees in lieu of subsidized
parking if the employer can do so without facing penalty or
cost. The Parking Cash Out statute has been in effect
since 1992 when it was signed into law by Governor Pete
Wilson. "Free" parking has significant social, economic
and environmental costs, and parking cash out is one of the
least onerous and most equitable methods by which the true
cost of subsidized parking can be seen. Unfortunately, the
parking cash out statute is not well known and its
enforcement has also been limited. SB 425 corrects a
loophole whereby some companies were deducting parking as a
business expense when they were not complying with state
parking law. This bill requires the Franchise Tax Board to
disallow a deduction of parking expenses for businesses
that are not compliant with state parking cash out
requirements. Any funds gained from disallowed deductions
are given as tax credits to small businesses in order to
help them implement and maintain commute trip reduction
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programs. Authorizing the FTB to enforce this law through
their audits and investigations procedure also helps
increase awareness of the parking cash out statute since
the FTB widely publicizes any changes in tax law. "
B. If You Can't Drive It, Park It
SB 425 takes two steps to change incentives for
employers who provide parking to employees. First, the
measure offers a tax credit as an incentive for employers
that want to reduce the number of its employees who drive
alone to and from work. Reducing air pollution incurred by
commuting is necessary for the state to end its persistent
non-attainment of federal ambient air quality standards and
reduce carbon emissions from cars. Shot of direct
regulation of mobile sources of emissions, the tax credit
will reduce taxes for employers that provide alternative
means for getting to and from one's job. Additionally, the
measure steps up enforcement of the Parking Cash-Out Law by
denying deductions authorized in the tax code to supplement
CARB's civil penalty enforcement authority.
C. Realigning the Steering
SB 425 realigns employers' incentives when deciding
how to subsidize employee transportation. Instead of
expensing costs incurred to subsidize alternative
transportation methods, employers may instead claim a tax
credit up to $1,500 and reduce its tax by that amount,
which could lead to increased efforts by profitable firms
(the only entities that benefit from non-refundable tax
credits) to subsidize less polluting means of
transportation for its workers. Also, firms who do not
provide cash benefits to employees in lieu of paid parking
cannot take expenses paid to provide parking as a normal
and usual business expense, further changing firm's
cost-benefit analyses.
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D. Like a Monkey Shot into Space
SB 425 attempts a delicate, and yet untested,
balancing act by increasing taxes due to the measure's
disallowance of a currently allowed business expense
deduction, and decreasing taxes by granting a new credit.
Article XIIIA of the California Constitution requires that
measures that increase the net proceeds of taxes be
approved by 2/3 vote of each house of the Legislature.
While Legislators have offered bills that contain both tax
reductions and tax increases in an attempt to circumvent
the 2/3 vote rule, none of these bills have yet been
challenged, so no court has yet opined whether the tax
increase within bills with neutral or negative revenue
effects are lawfully enacted by majority vote. Many
observers of California tax law have long awaited a
definitive view on the question, and should SB 425 be
enacted, it may be the test case that could offer
policymakers a wider array of options to reevaluate tax
expenditure programs and further realign incentives within
California's tax system.
E. Freedom Isn't Free
The Senate Committee on Transportation and Housing's
analysis points to a 2002 Legislative Analysts' Office
Report on the Parking Cash-Out Law which estimated that
employers that provide free parking to employees encourage
single occupancy car trips to work; removing free parking
reduces these trips by 41%, consistent with a subsequent
survey of Bay Area commuters that found that 77% of
commuters drive alone when parking is paid for as opposed
to 39% who drive alone but pay for parking. The analysis
also indicates that subsidized parking distorts the market,
causes traffic congestion, and worsens air quality and
carbon emissions. CARB found that the Parking Cash-Out Law
reduced solo driving, and increased the likelihood that
employees would carpool; take transit, bike, or ride to
work, thereby reducing vehicle miles traveled. SB 425
penalizes firms that do not comply with parking cash out,
and would change an employers cost-benefit when considering
free parking for its employees.
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F. Of Slippery Slopes
State and Federal Law allows businesses to deduct from
income ordinary and necessary business expenses from
income, under the basic theory of business taxation that
tax should only be applied to net income, or gross income
less expenses. This theory gives rise to Net Operating
Loss deductions that allows business to reduce income by
past net losses, recognizing that annual tax filings only
show an annual time series picture of a business's true
profitability. State and federal law rarely discriminate
about the nature of business expense deductions; the costs
of employee wages and health care benefits are expensed
just as costs for marketing or hiring mercenaries; the only
deduction denial in California law is for expenses paid for
clubs that restrict membership based on race, gender, and
ancestry, among others (the federal government continues to
allow deductions for payments to these clubs).
Anti-tobacco groups have advocated in the past for revoking
the ability for tobacco companies to deduct marketing
expenses. However, once the Legislature starts denying
certain deductions, it may choose to apply value decisions
to other business expense decisions, departing from
long-standing tax policy and more closely applying its
judgment to business practices. The Author responds by
stating that the measure is intended to help enforce
existing law, not to provide legislative input on business
decisions.
G. What's New?
At its May 13, 2009 hearing, the Committee held SB 425
on its suspense file due to its net revenue loss of
approximately $20 million per year. Since that time, the
Author amended the measure to reduce the value of the tax
credit which reduces revenue to equal the revenue gain
attributable to the denied deduction, resulting in no
revenue effect.
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Support and Opposition
Support:Natural Resources Defense Council
San Mateo County Transit District
Los Angeles Chamber of Commerce
Oppose:None received.
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Consultant: Colin Grinnell