BILL ANALYSIS
Bill No: SB
1160
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
SB 1160 Author: Dutton
As Amended: April 5, 2010
Hearing Date: April 13, 2010
Consultant: Chris Lindstrom
SUBJECT
State fiscal analysis.
DESCRIPTION
SB 1160 restores and expands a law that sunset in 2000 to
require the Department of Finance (DOF) and the Legislative
Analyst's Office (LAO) to perform dynamic analyses of tax
bills that have significant fiscal effects, as defined, and
further, to require state agencies to perform a dynamic
analysis of proposed regulations on jobs and businesses.
Specifically, the bill:
1)States legislative intent to ensure that, to the extent
reasonable, dynamic estimating techniques are used in
predicting the fiscal impact of proposals to enact laws
and promulgate regulations.
2)Restores Section 9143.5 to the Government Code to require
the LAO, when preparing any fiscal estimate in the annual
state budget that involves one or more proposed changes
in state tax law, except where it is unreasonable to do
so, to take into account the probable behavioral
responses of taxpayers, businesses, and other citizens to
those proposed changes, and to include a statement
identifying those assumptions in the fiscal estimate.
Limits this requirement to proposed changes in state tax
law that, pursuant to a static fiscal estimate performed
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by LAO, have a fiscal impact in excess of ten million
dollars ($10,000,000) in any one fiscal year.
3)Amends Section 11346.3 of the Government Code to require
state agencies proposing to adopt, amend, or repeal any
administrative regulation to assess the potential for
adverse economic impact on California business
enterprises and individuals if the static estimate first
shows that a regulation will have an annual cost to the
private sector of one hundred million dollars
($100,000,000) or more when fully operational, as
specified.
4)Restores Section 13305.5 of the Government Code to
require DOF, when preparing any fiscal estimate that
involves one or more proposed changes in state tax law,
except where it is unreasonable to do so, to take into
account the probable behavioral responses of taxpayers,
businesses, and other citizens to those proposed changes,
and to include a statement identifying those assumptions
in the fiscal estimate. Limits this requirement to a
proposed changes in state tax law that, pursuant to a
static fiscal estimate performed by DOF, have a fiscal
impact in excess of ten million dollars ($10,000,000) in
any one fiscal year.
EXISTING LAW
Existing law requires LAO, operating under the authority of
the Joint Legislative Budget Committee, to provide the
Legislature with specified fiscal analyses of matters
affecting state finances.
Existing law requires a state agency proposing to adopt,
amend, or repeal any administrative regulation to assess
the effect of the proposed regulation on jobs and
businesses within the state.
Existing law requires the DOF to perform various duties
pertaining to the preparation and analysis of the annual
state budget, and the fiscal analysis of legislative
proposals before the Legislature.
Prior law, which sunset on January 1, 2000, required both
the LAO and DOF to prepare "dynamic" estimates of the
revenue effect of tax incentive measures.
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BACKGROUND
Purpose of the bill. According to the author's office, SB
1160 "would require a dynamic fiscal analysis of proposed
regulations and legislation that impact taxes so that
California policymakers and the public know the true
economic impact of these measures.
"California continues to struggle to recover from a deep
recession and record unemployment. It is imperative that
policymakers have every tool possible at their disposal to
ensure that proposed regulatory and tax law changes help
rather than hinder economic growth.
"Dynamic revenue analysis allows policymakers to consider
the macroeconomic impact of their decisions, including the
direct and indirect behavioral changes brought about by
those decisions.
"Static analyses cannot account for behavioral changes that
are caused by new regulations and taxes."
Background. SB 1837 (Chapter 383, Statutes of 1994), which
sunset on January 1, 2000, required both the LAO and DOF to
prepare "dynamic" estimates of the revenue effect of tax
incentive measures. "Dynamic" estimates are intended to
reflect the totality of economic effects of a tax reduction
or enhancement, as opposed to the "traditional" revenue
estimates which do not take into account the effects of a
change in taxes (either positive or negative) on
employment, investment, income and other broad measures of
economic activity.
LAO Report. In September 2006, Jon David Vasch?, Director
of Economics and Taxation, Legislative Analyst's Office,
prepared a report entitled, What ever happened to Dynamic
Revenue Analysis in California? The report was prepared
for the Annual Revenue Estimation & Tax Research Conference
hosted by the Federation of Tax Administrators in September
2006. Here are some findings of the report:
1)Dynamic Revenue Feedback Effects are Generally Relatively
Modest.
DOF's various analyses using the Dynamic Revenue Analysis
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Model (DRAM) seem to suggest that the dynamic revenue
feedback effects for California tax changes, while
definitely present and visible, are generally relatively
modest.
It should also be noted that experiments with the model
have shown that its results are very sensitive to the
values used for many of the various elasticities
contained in it, especially those relating to such things
as population migration and trade flows. Because the
true values of these elasticities are often not know with
certainty, especially at the state level, educated
guesses and assumptions about them often have to be made,
and errors in this regard can significantly reduce the
model's reliability.
2)How Dynamic Revenue Estimates Have Been Used.
a) Reporting. Once the DOF developed its dynamic
revenues analyses for a given tax change proposal, a
brief write-up of the findings was typically prepared.
Such write-ups usually included a comparison of the
static and dynamic long-run revenue estimates for the
measure and the percentage size of the dynamic revenue
effect, a description of the source of the dynamic
revenue effect, and an estimate of the induced change
expected in investment and employment. The extent to
which the dynamic information was discussed in
legislative committee hearings once the bills were
heard varied.
b) Budgetary Scoring. The dynamic revenue effects,
although estimated and reported, were not incorporated
into the budget.
1)Current Status of Dynamic Analysis in California.
a) No Requirement Currently Exists. When January 1,
2000 arrived, the state's dynamic revenue analysis
requirement went out of effect as it had not been
renewed. Although DOF did continue to routinely
produce dynamic revenue analyses for several years,
this has since ceased. And, while proposals have been
introduced to continue or reimpose the dynamic revenue
estimating requirement, none ever become law. Thus,
at present, California has no requirement that dynamic
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revenue analysis be conducted.
b) But Various Behavioral Effects Nevertheless Are
Considered. Despite the lack of a current requirement
that California conduct dynamic revenue analyses, the
state does currently consider various direct and
indirect behavioral effects when doing its revenue
estimates, depending on their nature and the proposal
- just as it did prior to the adoption of the dynamic
estimating requirement. For example, when cigarette
tax changes are evaluated, the state's revenue
estimates do incorporate assumptions regarding changes
in cigarette consumption, based on price elasticity of
demand assumptions. What is not incorporated,
however, are the effects on revenues of the various
economic feedback effects that tax changes cause and
that characterize dynamic analyses.
c) Is the Dynamic Revenue Analysis Model (DRAM) Still
In Use? California's [DRAM] still does exist, is
periodically updated, and gets some use for purposes
other than revenue estimating. For example, both the
California Air Resources Board and Energy Commission
utilize the model to varying degrees in analyzing
various policy proposals and changes in the
environmental area.
2)Current and Future Issues Regarding Dynamic Analysis.
a) Reliability and Acceptability. Despite the best
efforts of economists to develop dynamic estimates
that are as accurate as possible, limitations in terms
of regional data and reliable assumptions about
exactly how different types of tax provisions affect
state economies do exist. This tends to inherently
limit the acceptance and usefulness of dynamic
estimates. Thus, making improvements in these areas
is an important requirement if dynamic modeling is to
become more reliable and widely accepted.
b) Use of the Results. The big issue here is whether
the results of dynamic revenue analyses should find
their way into state budget calculations through the
adoption of dynamic scoring.
Although dynamic scoring is not a new issue, it
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continues to be much debated, not only at the state
level, but nationally as well. A variety of opinions
exist regarding dynamic scoring, and arguments can be
made on both sides of the fence. For example:
On the pro side, arguments include that dynamic
scoring makes use of all possible information, failure
to do so is at odds with empirical evidence, and
advances in technology and understanding of economic
relationships makes scoring more defensible.
On the con side, the arguments include that dynamic
scoring must rely on many assumptions and can be
subject to political pressures, expenditure-side
changes would have to be included, computing a budget
baseline is difficult when many policy changes must be
integrated, and assumptions are needed about how tax
and expenditure changes are financed.
Regardless of one's own views on the subject of dynamic
scoring and how the topic is ultimately dealt with, it
seems likely that, given the various challenges
associated with it, the issue will remain unresolved
in the near term and continue to be debated for some
time.
c) Benefit-Cost Considerations. This issue involves
the extent to which it makes sense from a
dollars-and-cents standpoint to devote scarce state
resources to developing, maintaining, and utilizing
comprehensive dynamic revenue estimating models. Well
specified models that use good data and reliable
parameters and coefficients are not cheap, and require
ongoing updating and modifications. One key question
is whether the added value of such comprehensive
models is justified by their revenue-estimating
benefits - especially given their apparent relatively
modest dynamic feedback effects in California's case -
compared to simply using various rule-of-thumb
approaches and other less-costly methodologies, or
simply sticking with static estimates adjusted for the
effects of major direct and indirect behavioral
responses that can be specifically researched.
3)So, What's the Bottom Line?
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California's experience with dynamic revenue estimating
yields a mixed picture. Dynamic estimating has provided
California with new and useful insights and qualitative
information regarding how tax changes affect the state's
economy and the revenues that it produces. On the other
hand, dynamic state revenue models inherently face many
data and specification problems which make their
quantitative outputs subject to limitation, some debate,
and very sensitive to their underlying assumptions.
Given this, it is unclear at this point whether
California's policymakers will at some point in the
future reestablish a formal dynamic revenue estimating
requirement. Regardless, however, it does make sense for
revenue estimators in California and other states to
continue strive to more fully understand exactly how tax
changes affect revenues.
In approaching this task, it seems this should, at a
minimum, include arriving at more reliable understandings
of the direct and indirect behavioral effects that tax
changes induce and that strongly influence whatever
dynamic feedback effects eventually materialize. This
would include improving the data available on such
behavioral effects. In contrast, the priority given to
full-blown dynamic modeling will likely end up depending
on the significance of the associated feedback effects
and the extent to which the current shortcomings and
limitations of dynamic modeling can be addressed.
It should also be noted that one alternative to imposing a
broad-based dynamic revenue estimating requirement is
using a more targeted or case-study approach, where such
analyses are requested only for those specific tax
measures for which behavioral and dynamic effects are of
particular interest to policymakers and/or can
realistically be identified, at least to some degree.
This more targeted approach may prove to be more fruitful
from a practical standpoint in approaching the dynamic
issue, especially given that, in light of the current
state of the discipline, much is still unknown regarding
the exact impacts that individual state tax policies have
on taxpayer behavior and state economies, generally.
Arguments in support . Proponents support SB 1160 to
require that analysis of tax proposals, state budgets, and
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agency regulations be dynamic, to take into account the
likely behavior changes of taxpayers and regulated parties.
A non-dynamic, or "static" analysis is insufficient to
identify the true costs and benefits of a tax or
regulation. Changes in California taxes and regulations
are factors in decisions being made every day by investors,
employers and consumers. These decisions will impact
general fund revenues, employment, and ultimately determine
the outcome of the policy being analyzed.
An understanding of the dynamic revenue potential of
proposed regulations and tax policies before they go into
effect will improve decision-making and provide
opportunities to adopt complementary policies to address
negative outcomes.
The Howard Jarvis Taxpayers Association supports a dynamic
fiscal analysis of proposed regulations and legislation
that impact taxes so that California policymakers and the
public know the true economic impact of these measures.
While there are requirements in current law to analyze
fiscal legislation, it does not need to occur dynamically.
Dynamic revenue analysis allows policymakers to consider
various influences including behavior, and how future
policy changes may alter revenues.
Especially in light of last year's $12.6 billion tax
increase, the largest in the history of any state, it is
imperative to employ sound policy when analyzing our tax
system. It should be noted that the last time taxes were
increased, under Governor Pete Wilson, the static revenue
projection was more than $1 billion off what was actually
collected. We have no doubt that the figure will be larger
this time around. Dynamic revenue projections will help
provide more consistent budget analysis and lead to an
easier time bringing spending in line with revenues.
PRIOR/RELATED LEGISLATION
SB 388 (Peace), 1999-2000 Legislative Session . Would have
continued the requirement that the LAO prepare dynamic
revenue estimates beyond the January 1, 2000 sunset date.
Would not have extended the requirement that DOF continue
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its current dynamic revenue estimating model. (Passed
Senate Revenue and Taxation 6 - 0. Never heard in Senate
Budget & Fiscal Review.)
SB 1837 (Campbell), Chapter 383, Statutes of 1994 .
Required DOF to develop dynamic revenue analyses for tax
bills with significant fiscal effects, and LAO to do the
same for any such measures that were included in the
Governor's annual budget proposal. Included a statement of
intent that these fiscal estimates take into account the
probable behavioral responses of taxpayers and businesses,
and that dynamic techniques be used in estimating the state
fiscal impact of proposals to the extent that data are
available. Defined "significant" fiscal effects and thus
requiring a dynamic analysis as those tax proposals whose
static revenue impact was greater than $10 million,
annually. Sunset the law after five years on January 1,
2000.
SUPPORT: As of April 9, 2010:
American Council of Engineering Companies of California
Associated Builders and Contractors of California
Automotive Aftermarket Industry Association
California Aerospace Technology Association
California Automotive Wholesalers' Association
California Building Industry Association
California Business Properties Association
California Construction and Industrial Materials
Association
California Forestry Association
California Framing Contractors Association
California Grocers Association
California League of Food Processors
California Manufacturers & Technology Association
California Restaurant Association
California Retailers Association
California Taxpayers Association
Chemical Industry Council of California
Howard Jarvis Taxpayers Association
Industrial Environmental Association
National Federation of Independent Business
Western Growers
OPPOSE: None on file as of April 9, 2010:
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FISCAL COMMITTEE: Senate Appropriations Committee
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