BILL ANALYSIS
SB 1272
Page 1
Date of Hearing: June 28, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
SB 1272 (Wolk) - As Amended: April 21, 2010
Majority vote. Fiscal committee.
SENATE VOTE : 21-15
SUBJECT : Tax expenditures: information and operative
limitations.
SUMMARY : Provides that a new tax credit, enacted by a bill
introduced on or after January 1, 2011, shall be operative for a
period of seven years and shall include specified goals,
objectives, and purposes, as well as other detailed information
relating to the credit's effectiveness. Specifically, this
bill :
1)Requires that any bill, introduced on or after January 1,
2011, that would authorize a new credit under either the
Personal Income Tax (PIT) Law or the Corporation Tax (CT) Law
state all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve.
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill.
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators.
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
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d) A requirement that the tax credit shall cease to be
operative seven years after its enactment date.
2)Makes legislative findings and declarations regarding the need
for review of tax preference programs, including tax credits.
EXISTING LAW :
1)Provides various tax credits, deductions, exclusions, and
exemptions. Some of these tax expenditures are designed to
provide relief to taxpayers who incur specified expenses
(e.g., costs incurred in adopting a child). Other tax
expenditures are designed to encourage socially or
economically beneficial behavior.
2)Requires, under Government Code (GC) Section 13305, the
Department of Finance (DOF) to provide an annual report to the
Legislature on tax expenditures by no later than September 15
of each year. The report must contain each of the following:
a) A list of all tax expenditures exceeding $5 million in
annual cost;
b) The statutory authority for each tax expenditure;
c) A description of any legislative intent articulated for
each tax expenditure;
d) The sunset date of each tax expenditure, if applicable;
e) Identification of the beneficiaries of each tax
expenditure;
f) An estimate or range of estimates for the state and
local revenue loss for the current fiscal year (FY) and the
two subsequent FYs;
g) For PIT expenditures, the number of affected taxpayers;
h) For CT and sales and use tax (SUT) expenditures, the
number of returns filed or businesses affected;
i) Identification of any comparable federal tax
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expenditure; and,
j) A description of any tax expenditure evaluation
completed by any state agency since the last report made.
3)Defines a tax expenditure as "a credit, deduction, exclusion,
exemption, or any other tax benefit as provided for by the
state."
FISCAL EFFECT : Unknown. The Franchise Tax Board (FTB) staff
estimates that this bill would not have an impact on revenue,
but the enactment of this bill may lead to the adoption of
future legislation that will result in smaller revenue losses.
COMMENTS :
1)Author's Statement . The author states, "Today's public
finance system in California requires major reform. While I
have pursued changing our budgeting system to apply
performance measurements for spending programs, I am trying to
do the same with SB 1272, which applies a performance-based
methodology to future tax expenditures enacted by the state.
There is no good reason not to evaluate tax expenditure
programs with the same rigor that we use when judging spending
decisions, especially when California's tax preference
portfolio now exceeds $41 billion, equal to half of our total
revenue. While we cannot change existing tax preferences, we
can at least start keeping better track of future tax
preferences."
2)Arguments in Support . The proponents of this bill state that,
while California "gives tax expenditures to corporations as an
incentive ? to do business and create jobs," the "state lacks
reporting and evaluation requirements necessary to assess the
effectiveness of tax expenditures." The proponents cite the
Legislative Analyst's Office (LAO) report that notes several
problems with tax expenditure programs in California,
including limited legislative review, a lack of cap on the
amount of money spent and a vote requirement of a simple
majority to create, but a supermajority to eliminate, a tax
credit. The proponents argue that SB 1272 brings much needed
performance review and oversight to tax expenditure programs
in order to make them more transparent and effective.
3)Arguments in Opposition . The opponents, in contrast, argue
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that this bill would create uncertainty regarding long-term
tax planning. The opponents state that, when "businesses
choose to locate in a state, apart from factors such as
availability of a skilled workforce, infrastructure,
regulatory environment, and tax structure, businesses evaluate
whether they can rely on these factors to remain relatively
stable and consistent in the long term. For example, if a
state currently has a skilled workforce, but high school
drop-out rates are escalating, it is unlikely that a skilled
workforce will be available in the future. Similarly,
businesses evaluate whether they can rely on the existence of
current tax incentives ten years from now." The opponents
assert that, while there is no question that the state should
consider the effectiveness of tax policies, "a 7-year sunset
on all tax credits will have the adverse effect of creating
uncertainty with respect to the future of the state's tax
structure." Finally, the opponents maintain that the "current
practice of constant suspensions of various tax credits by the
Legislature create a difficult environment for? companies
operate [in California], but [it] pales in comparison to the
uncertainty that would be generated by a legislative renewal
being required every seven years."
4)What is a "Tax Expenditure "? Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. According to legislative analyses prepared
for prior related measures, United States Treasury officials
and some Congressional tax staff began arguing in the late
1960's that these features of the tax law should be referred
to as "expenditures," since they are generally enacted to
accomplish some governmental purpose and there is a
determinable cost associated with each (in the form of
foregone revenues). A recent report by the LAO shows that tax
expenditure programs cost the state nearly $50 billion in FY
2008-09. The LAO report noted that resources are allocated to
a new tax expenditure program automatically each year, with
limited, if any, legislative review, and there is no limit or
control over the amount of money forgone since the Legislature
does not appropriate funds for tax expenditure programs. The
LAO report also stated that the tax expenditure programs offer
many opportunities for tax evasion, given the relatively low
level of audits.
5)Current Review of Tax Expenditures . Although there is no
requirement for the Legislature itself to review existing tax
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expenditures, several state agencies are required to issue
annual tax expenditures reports. In 1985, the Legislature
passed Assembly Concurrent Resolution 17 (Bates), which called
upon the LAO to prepare a biennial "tax expenditure" report.
Additionally, the DOF currently publishes an annual report on
tax expenditures, pursuant to GC Section 13305, and provides
it to the Legislature by no later than September 15 of each
year. The DOF report includes a list of tax expenditures
exceeding $5 million in annual cost. Finally, since 2007, the
Franchise Tax Board is required to prepare an annual report,
"California Income Tax Expenditures," describing tax
expenditures found in the PIT and the CT laws.
6)How is a Tax Expenditure Different from a Direct Expenditure?
As the DOF notes in its annual Tax Expenditure Report, there
are several key differences between tax expenditures and
direct expenditures. First, tax expenditures are reviewed
less frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it can
also result in tax expenditures remaining a part of the tax
code in perpetuity without demonstrating any public benefit.
Second, there is generally no control over the amount of
revenue losses associated with any given tax expenditure.
Finally, the vote requirements for direct expenditures and tax
expenditures are different. While it takes a two-thirds vote
to make a budgetary appropriation, a tax expenditure measure
can be enacted by a simple majority vote. It should also be
noted that, once enacted, it generally takes a two-thirds vote
to rescind an existing tax expenditure. This effectively
results in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority vote.
7)How much do tax expenditures "cost" the state ? According to
DOF, the vast majority of tax expenditures are included in the
PIT Law. To this end, DOF estimates that tax expenditures
reduced PIT revenues by roughly $36 billion in FY 2008-09.
The SUT Law, in turn, contains identifiable state tax
expenditures worth about $9 billion annually. For FY 2008-09,
corporate tax expenditures amounted to roughly $4 billion.
8)What Does this Bill Do? SB 1272 is intended to create a
mechanism for the legislative review of certain tax
expenditures for the purpose of evaluating their effectiveness
and compatibility with present day state policy objectives.
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Specifically, it requires each bill enacting a new tax credit
to describe the goals, purposes, and objectives for
authorizing such a credit, to specify detailed performance
indicators intended to measure the effectiveness of the
credit, and to mandate an automatic seven-year sunset for the
operation of the credit. This bill is narrowly tailored to
apply only to tax credits, as opposed to all tax expenditures.
Furthermore, it would only apply to new tax credits, i.e. tax
credits that are enacted by bills introduced on or after
January 1, 2011.
9)The seven-year Sunset . This bill limits the operation of
every new tax credit to a seven-year period, as long as it is
enacted by a bill introduced on or after January 1, 2011.
Business representatives often argue that companies need
predictability, and that a short-term business tax credit
would not be of any particular benefit to a taxpayer whose
business projections span over decades. However, as discussed
above and stated in this bill, this sunset date may be easily
extended by a subsequent statute enacting or re-enacting a tax
expenditure.
10)How Effective Is This Bill ? Both this Committee and its
Senate counterpart already require the vast majority of tax
expenditure measures they pass out to contain a built-in
repeal date. However, while the Committee routinely requires
sunset dates be added to tax expenditure measures, there is
nothing in existing law that would require them to do so in
the future. Moreover, in the past few years, some of the most
dramatic changes to our tax code have been enacted as part of
the budgetary process beyond the review of this Committee.
However, even if a general sunset requirement were included in
statute, there would be nothing to prevent a future
Legislature from enacting an open-ended tax expenditure
"notwithstanding" the statutory prohibition. Indeed, there is
considerable question as to whether such a prohibition would
have any binding effect. [See e.g., United Milk Producers of
California v. Cecil (1941) 47 Cal.App.2d 758, 764-65, noting
that the Legislature cannot declare in advance the intent of a
future Legislature]. Courts have long held that one
legislative body may not limit or restrict its own power or
that of subsequent legislatures, and the act of one
Legislature may not bind its successors [County of Los Angeles
v. State of California (1984) 153 Cal.App.3d 568, 573]. In
practical terms, it means that subsequent legislatures are
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under no legal obligation to comply with the provisions of
this bill. Furthermore, since this bill is a statutory, and
not a constitutional, measure, any subsequent legislature
could easily dispense with this requirement by simply
including a provision in a statute that would override Revenue
and Taxation Code Section 40.
11)Related legislation :
a) AB 2171 (Charles Calderon), introduced in the current
legislative session, conditions the allowance of a tax
benefit on the passage of a separate statute. AB 2171 was
held under submission by the Assembly Committee on
Appropriations.
b) AB 2641 (Arambula), introduced in the current
legislative session, requires the Legislature to review,
before January 1, 2014, and every fifth year thereafter,
each tax expenditure, as specified, and provides that every
new tax expenditure that is enacted after the effective
date of AB 2641 shall be repealed automatically on January
1, 2015, and on January 1 of every fifth year thereafter,
unless a later statute provides otherwise. AB 2641 was
held under submission by the Assembly Committee on
Appropriations.
c) ACA 6 (Charles Calderon), introduced in the current
legislative session, would amend the State's constitution
to, among other things, limit the operative period to seven
years from the date of the enactment of a new or amended
tax credit. ACA 6 is currently pending before the
Assembly.
d) AB 831 (Parra), introduced in the 2007-08 Legislative
Session, would have required any legislation creating a new
tax expenditure, or extending the operation of an existing
tax expenditure, to include a sunset provision. AB 831
failed to pass out of the Senate Committee on Revenue and
Taxation.
e) AB 1933 (Coto), introduced in the 2005-06 Legislative
Session, would have required any legislative measure
creating a new tax expenditure, or extending the operation
of an existing tax expenditure, to include legislative
findings regarding the purpose of the tax expenditure, an
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estimate of the attributable revenue losses, a specific
methodology for measuring the anticipated benefits, and a
sunset date no later than five years in the future. AB
1933 failed to pass out of the Senate Committee on Revenue
and Taxation.
f) AB 2199 (Brown), introduced in the 1995-96 Legislative
Session, would have required all tax expenditures to be
authorized via an appropriation in the annual Budget Act.
AB 2199 failed to pass out of this Committee.
g) AB 2884 (Villaraigosa), introduced in the 1995-96
Legislative Session, would have required the Legislative
Analyst, together with DOF, FTB, and the Board of
Equalization, to conduct an evaluation of all tax
expenditures, as defined. AB 2884 failed to pass out of
this Committee.
h) SB 1233 (Hayden), introduced in the 1993-94 Legislative
Session, would have required the Legislative Analyst to
review each tax expenditure program, as directed by this
Committee and its Senate counterpart, to determine if its
objectives are being realized, whether its benefits exceed
its revenue costs, and whether there is a less costly way
of providing the same benefits. Governor Wilson vetoed the
bill.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation (sponsor)
The American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
California Federation of Teachers
California Nurses Association
State Building and Construction Trades Council of California,
AFL-CIO
Western Center on Law and Poverty
Opposition
BIOCOM
California Aerospace Technology Association
California Bankers Association
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California Business Properties Association
California Chamber of Commerce
California Manufacturers and Technology Association
California Retailers Association
California Taxpayers' Association
TechAmerica
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098