BILL ANALYSIS
SB 1272
Page 1
SENATE THIRD READING
SB 1272 (Wolk)
As Amended August 16, 2010
Majority vote
SENATE VOTE :21-15
REVENUE & TAXATION 6-3 APPROPRIATIONS 12-5
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|Ayes:|Portantino, Beall, |Ayes:|Fuentes, Bradford, |
| |Charles Calderon, Coto, | |Huffman, Coto, Davis, De |
| |Fuentes, Gatto | |Leon, Gatto, Hall, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Nestande |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Norby |
| | | | |
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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
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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; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
d) A requirement that the tax credit shall cease to be
operative seven taxable years after its effective date, and
as of January 1 of the year following the end of the
operative period is repealed.
2)Makes legislative findings and declarations regarding the need
for review of tax preference programs, including tax credits.
FISCAL EFFECT : No direct impact on state revenues or costs to
the General Fund, because the bill only applies prospectively,
and future legislation could be drafted to include
"notwithstanding" language. However, to the extent future
Legislatures were to abide by the sunset requirement, the bill
could result in an unknown, but potentially significant
increases in revenues due to the expiration of tax credits
enacted after the effective date of this bill.
COMMENTS : 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."
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
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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.
Arguments in opposition. The opponents, in contrast, argue 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."
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 fiscal year (FY) 2008-09.
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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.
Current review of tax expenditures. Although there is no
requirement for the Legislature itself to review existing tax
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.
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.
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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.
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.
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.
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.
How effective is this bill? Both Revenue and Taxation 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"
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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 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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0005972