BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
425 (Simitian)
Hearing Date: 07/23/2009 Amended: 07/15/2009
Consultant: Mark McKenzie Policy Vote: T&H 8-1; Rev&Tax
7-0
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BILL SUMMARY: SB 425 would authorize a new tax credit of up to
80 percent of costs incurred by small businesses for qualified
commute reduction expenditures, as specified. This bill would
also prohibit taxpayers from claiming a business expense
deduction for parking subsidies unless employees provided with a
parking subsidy are offered a cash allowance in lieu of a
parking space (parking cash-out program).
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
New tax credit (revenue loss) $3,170 $3,400
$3,650General
Taxable parking cash-out ($40) ($150)
($300)General
payments (revenue gain)
Disallow subsidy deductions ($3,100) ($3,200)
($3,300)General
(revenue gain)
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Net estimated revenue loss: $30 $50
$50General
Staff notes that the revenue impact of each of these provisions
has a potential error that may be significant when compared to
the estimated net revenue impact of the bill. FTB notes that
the potential error of the estimate is significantly greater
than the net revenue loss noted above. Depending on taxpayer
behavior, the actual net impact could be a revenue loss or gain
in the millions of dollars (see staff comments).
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Commute Reduction Expenditures Tax Credit
Existing law allows taxpayers to deduct from income ordinary and
necessary business expenses, as specified, which would generally
include providing commuter benefits to employees. 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 form 1989 to 2005 [AB 1463 (Klehs), Chapter 1227 or
1989]. That measure also allowed a tax credit for vanpool and
third party ridesharing expenses through 1995.
Beginning January 1, 2009, SB 425 would allow specified
taxpayers to claim a tax credit equal to 80 percent of costs
paid or incurred for qualified commute reduction expenditures.
This credit could be claimed by business taxpayers that employ a
maximum of 20 employees for the following qualified
expenditures: (1) subsidizing
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SB 425 (Simitian)
employees that commute in carpools, vanpools, ferries,
subscription taxi pools, and private commuter buses or bus
pools; (2) subsidizing the use of transit by employees; (3)
providing free or subsidized parking for specified ridesharing
vehicles; (4) making facility improvements to encourage
employees to use alternative transportation methods, participate
in ridesharing agreements, or to bicycle or walk to work; and
(5) subsidizing employees who already use alternative
transportation methods or travel to or from a telecommuting
facility. The maximum credit would be $163 for the 2009 tax
year, $168 for the 2010 tax year, $173 for the 2011 tax year,
and $183 for subsequent years. This bill would also allow the
credit to be carried forward to future tax years until exhausted
and would require the credit to be in lieu of any deduction
otherwise allowable for the same costs.
Based on a review of federal estimates for employer related
transportation fringe benefits and data from the California
Employment Development Department, the Franchise Tax Board (FTB)
estimates that taxpayers would claim $3.17 million in credits
for the 2009 tax year. Adjusting for an assumed five percent
carry forward of unused credits, and annual increases in maximum
credits, FTB estimates taxpayers would claim $3.4 million in
credits in 2010, and $3.65 million in credits in 2011. Staff
notes that amendments to the bill on June 11 established the
schedule for maximum allowable credits, as specified. These
limits appear to have been placed in the bill in an attempt to
achieve revenue neutrality, when comparing the estimated revenue
losses associated with the new commute reduction expenditure tax
credit with the estimated revenue gains associated with the
provisions that disallow a tax deduction for parking subsidies
for taxpayers that do not comply with the requirements of the
Parking Cash-Out Law (see below). It is not clear that the
maximum limits placed on this new tax credit will sufficiently
limit the revenue losses to fully offset the revenue gains
associated with disallowing the parking subsidies deductions.
Staff notes that the bill does not include a sunset date for the
new tax credit provisions, which would provide an opportunity
for the Legislature to review the effectiveness of the credit.
Absent a sunset date, if it was determined at a later date that
the credit was not achieving the desired results, repealing it
with a future statute would require a vote of 2/3 of the
Legislature because it would result in a tax revenue gain.
Staff recommends an amendment to sunset the tax credit
provisions after five years of applicability.
Disallow Parking Subsidy Deductions
Existing law allows taxpayers to deduct ordinary and necessary
business expenses from taxable income, which generally includes
the costs of commuter benefits and parking subsidies provided to
employees. Under the Parking Cash-Out Law, specified businesses
that employ 50 or more persons and provide a parking subsidy to
employees are required to offer employees a cash allowance that
is equal to the amount of the parking subsidy that the employer
would otherwise pay to provide the employee with a parking
space. The program is administered by the California Air
Resources Board (ARB), which is authorized to assess civil
penalties of $500 on employers that fail to comply. Enforcement
of parking cash-out program requirements has been problematic as
ARB is not required to enforce or monitor the program, and
employers are not required to report on measurable outcomes of
the program.
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SB 425 (Simitian)
Beginning on January 1, 2009, SB 425 would prohibit the
allowance of tax deductions for costs incurred by an employer
for providing parking subsidies unless the employees who are
offered a parking subsidy are offered a cash payment in lieu of
a parking space, which is required under the parking cash-out
program.
FTB notes that employer behavioral response to this provision is
unknown, but anticipates that an employer would either: (1)
offer other transportation commuter benefits; (2) comply with
the parking cash-out program by offering cash to employees in
lieu of a parking space; or (3) decide not to comply with the
requirements of the parking cash-out program and forego related
tax deductions. The revenue impacts of this provision would
depend upon the number of employers that choose each of these
responses. For purposes of estimation, FTB assumes that 40
percent of the parking spaces that are subsidized by employers
would represent employers that offer alternative transportation
benefits, and that 30 percent of the qualified parking spaces
would represent employers that offer cash in lieu of a parking
space. The remaining 30 percent of parking spaces represent
employers that would fail to offer cash in lieu of a parking
space and forego related parking subsidy deductions.
There would be no revenue impact related to employers offering
alternative commuter benefits. Based upon assumptions about
employee behavior, FTB estimates that the revenue impact of
increased cash payments to employees in lieu of a parking space
would be a General Fund revenue gain of approximately $40,000 in
2009-10, increasing to $150,000 in 2010-11 and $300,000 in
2011-12. This impact would be a result of employees claiming
the cash payments as taxable income. FTB assumes that
disallowing a deduction related to parking subsidies for
employers that decide not to comply with the requirements of the
parking cash-out program would result in a denial of
approximately $76 million in deductions. Assuming an average
marginal tax rate of 4 percent, this provision would result in a
revenue gain from avoided tax deductions of approximately $3.1
million in 2009-10, $3.2 million in 2010-11, and $3.3 million in
2011-12.
FTB notes a concern that they don't have the expertise to easily
determine if an employer is subject to, but not in compliance
with, the parking cash-out program. Without reliable data on
compliance with the program, it will be difficult to determine
whether a taxpayer is fraudulently claiming parking subsidy
deductions. Staff notes that, in addition to the three employer
behavioral responses noted by FTB, some employers could also
decide not to comply with the requirements of SB 425 and
continue to claim parking subsidy deductions without offering
all employees a parking cash-out program. If an employer
decided that compliance is difficult to enforce, it may decide
that the benefits of continuing claims for deductions of parking
subsidies outweigh the risks of being caught. If five percent
of taxpayers ignore the provisions of SB 425, the estimated
revenue gains from this bill would be reduced by $157,000 in
2009-10, $168,000 in 2010-11, and $180,000 in 2011-12.