BILL ANALYSIS �
AB 318
Page 1
Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 318 (Skinner) - As Introduced: February 9, 2011
Majority vote. Fiscal committee.
SUBJECT : Administration of income taxes: corporate tax credits:
transparency.
SUMMARY : Requires the Franchise Tax Board (FTB) to compile
information on any tax expenditure claimed and reported by a
taxpayer that is a publicly traded company and submit it to the
California Technology Agency for publication on the Reporting
Transparency in Government Internet Website (RTG Website).
Specifically, this bill :
1)Requires FTB to compile annually information on any tax
expenditure, authorized under Revenue and Taxation Code (R&TC)
Part 11 (commencing with Section 23001), that is claimed and
reported by a publicly traded company on its annual return
required to be filed under Part 10.2 (commencing with Section
18401), commencing with information based on the 2011 taxable
year.
2)Defines "publicly traded company" as a company with securities
that are either listed or admitted to trading on a national or
foreign exchange, or are the subject of two-way quotations,
such as both bid and ask prices, that are regularly published
by one or more broker-dealers in the National Daily Quotation
Service or a similar service.
3)Defines "tax expenditure" as a credit against the tax imposed
under R&TC Part 11 (commencing with Section 23001).
4)Requires FTB, beginning on March 30, 2013, and each March 30th
thereafter, to submit this compiled information to the
California Technology Agency for publication on the RGT
Website.
5)Requires the RGT Website to include a database searchable by
company name and amount of tax expenditures claimed to
increase public awareness of the amount and scope of tax
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expenditures for businesses in this state.
EXISTING STATE LAW:
1)Allows various tax credits and other tax benefits designed to
provide tax relief for taxpayers who incur certain expenses
(e.g., child adoption) or to influence behavior, including
business practices and decisions �e.g., research and
development (R&D) credit or economic development area hiring
credits]. These benefits, generally, are designed to provide
incentives for taxpayers to perform various actions or
activities that they may not otherwise undertake.
2)Does not require tax credit provisions to include specific
goals, purposes, and objectives, performance measures, or a
sunset date.
3)Requires tax agencies to keep taxpayer information
confidential. Consistent with federal law, it is a
misdemeanor for FTB to disclose or make known in any manner
information as to the amount of income or any other
particulars of taxpayer information, unless expressly
provided. Similarly, the State Board of Equalization (BOE) is
not allowed to divulge taxpayer information.
4)Requires FTB to make available as public record a list of the
250 largest tax delinquencies in excess of $100,000 for each
calendar year.
EXISTING FEDERAL LAW requires all publicly held corporations to
file annual reports with the Securities and Exchange Commission
(SEC), disclosing the amount of corporate profits, amounts of
federal taxes paid, and, in some instances, information on
specific tax expenditures claimed by each corporation.
FISCAL EFFECT : According to the FTB staff, this bill will not
impact state income tax revenues. It is estimated, however,
that FTB will incur one-time costs in the range of $111,000 for
programming and testing the system needed to compile tax
expenditure information. Ongoing costs for collecting data
would likely be minor, approximately $46,000.
COMMENTS :
1)Author's Statement . The author states that, "In this era of
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perennial budget deficits, lawmakers need accountability for
any tax revenue that is dispersed to corporations to determine
if they are using the money to create or retain jobs. In
2009, nearly $14.5 billion in tax expenditures went to
corporations as an incentive for them to do business and
create jobs in the state. There is no oversight or
accountability of that money to assess its effectiveness at
creating or retaining jobs."
2)The Purpose of this Bill . According to the author, this bill
is intended to bring needed transparency and accountability to
corporate tax expenditures and to ensure that taxpayers that
receive corporate tax credits use the taxpayer dollars
prudently to create or retain jobs.
3)Arguments in Support . The proponents of this bill argue that
a publicly accessible database that displays all the
recipients of tax subsidies will provide policymakers as well
as the public with the transparency needed to hold the
recipients of tax expenditures accountable to taxpayer goals.
The proponents also note that, since the Legislature does not
appropriate funds for tax expenditure programs, it is
important to ensure that public dollars are used effectively.
They point out that, in 2009, "$14,5 billion in tax
expenditures went to corporation as an incentive for them to
do business and create jobs in this state. Yet, the state
does not release information on what corporations receive tax
subsidies or how much they receive annually, nor do tax
expenditures have review for effectiveness or accountability
mechanisms." Finally, the proponents assert that this bill
limits the disclosure requirement to public traded
corporations since "the SEC already requires publicly traded
corporations to submit detailed public disclosures of their
current finances and the aggregate amount of state corporate
income taxes."
4)Arguments in Opposition . The opponents argue that AB 318
"erodes important taxpayer confidentiality and would only
perpetuate the commonly held belief that California has an
exceedingly poor business climate." They further note that
"it doesn't serve the interest of the state economy to cast
aspersions on the business community for lawfully applying the
existing California Revenue and Taxation Code provisions -
many of which are linked to providing jobs here in
California." The opponents also contend that California
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already produces more than one annual tax expenditure report,
which are available to the public. They cite the Center on
Budget and Policy Priorities (CBPP) report addressing the
issue of accountability via state tax expenditure reporting
and point out that nowhere does the CBPP report suggest that
states need to include individual taxpayer information to
allow for an effective analysis of tax expenditures.
Finally, the opponents assert that this bill would place
"additional reporting mandates and burdens" upon public
companies and it would violate taxpayer privacy "selectively
and unnecessarily."
5)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 (U.S.) Treasury
officials and some Congressional tax staff began arguing in
the late 1960s 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 Legislative
Analyst Office (LAO) shows that tax expenditure programs cost
the state nearly $50 billion in fiscal year 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.
6)How is a Tax Expenditure Different from a Direct Expenditure?
As the Department of Finance 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. Secondly, 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
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different. Once enacted, it generally takes a two-thirds vote
to rescind an existing tax expenditure, which 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)Public disclosure of corporate tax information. Disclosure of
corporate tax information has been debated for a long time.
The advocates of public disclosure have argued that making
corporate income tax returns public would shed light on the
effectiveness of tax policies designed to promote economic
development, would improve tax compliance, and would increase
political pressure for a more fair and efficient tax system.
While the federal lawmakers have access, albeit limited,
through the SEC filings, to some information on corporate
profits and the amount of federal corporate taxes paid, almost
no public information is available to state legislators in
evaluating the "state" of the state corporate income tax laws.
Thus, when a state enacts a corporate tax incentive for the
purpose of creating jobs or encouraging investment in the
state, unless the incentive itself is expressly contingent
upon a determinable number of jobs created, it is difficult,
if not impossible, to ascertain the effectiveness of such
policies without the information provided by company-specific
tax disclosure.
The opponents of corporate disclosure, generally, argue that
public disclosure is unconstitutional; it also violates
corporate privacy, jeopardizes corporate trade secrets and
encourages businesses to move to other states. In 1911, the
U.S. Supreme Court dismissed the claim that the 1909 corporate
excise tax was unconstitutional and concluded that the
publicity of corporate tax returns violated neither the Fourth
nor the Fifth Amendment to the U.S. Constitution. Flint v.
Tracy Co. (1911) 220 U.S. 107, 174. Thus, it appears that the
legislative policy of permitting limited disclosure of
corporate tax returns would, most likely, be upheld as
constitutional. The opponents also believe that corporate tax
disclosure would violate corporate privacy and would reveal
valuable proprietary business information. As far as the
privacy rights are concerned, publicly traded corporations
cede any privacy rights to keep their affairs private when
they issue stock traded on public stock exchanges. These
corporations must file with the SEC detailed public
disclosures of their current finances and the aggregate amount
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of state corporate income taxes, among other items of
information. The right to privacy argument is much more
compelling in the case of a privately held company than in the
case of a publicly traded corporation.
The loss of proprietary information was a primary objection in
the 1930s to the original mandated financial disclosures for
publicly traded companies and has been raised for every new
financial disclosure. (See, e.g., Disclosure of corporate tax
return information: accounting, economics, and legal
perspectives, p. 20). While full disclosure of corporate tax
returns, most likely, would result in a loss of some
proprietary business information, the extent to which
companies would be disadvantaged is uncertain. To reduce the
potential utility of tax-related information to out-of-state
competitors not subject to the disclosure requirement, it is
advisable to delay the disclosure of a corporation's tax
return information for a particular tax year for at least two
calendar years following the end of the tax year. (See, e.g.,
State Corporate Disclosure Report, Center for Budget and
Policy Priorities, p. 21). Finally, some business
representatives argue that corporate tax disclosure would
raise the cost of doing business and would create, or
exacerbate, an anti-business climate in the state adopting
this policy. It is possible, however, that some corporations
may welcome disclosure of tax information to "dispel the
negative image that corporations are somehow tax freeloaders."
(Richard D. Pomp, Corporate Tax Policy and the Right to Know,
p. 49). The publication of corporate tax information may also
reveal that some businesses pay more than their competitors
and are at an economic disadvantage.
8)Corporate Tax Disclosure in Other States . Several states have
some sort of public disclosure of state income tax
information. The State of Wisconsin was the first to provide
for public disclosure of income tax returns in 1923,
authorizing a release of state income tax, franchise tax, or
gift tax information reported by an individual or corporation
if the person requesting information is a Wisconsin resident.
In the early 1990s, Massachusetts, West Virginia, and Arkansas
enacted public disclosure rules as well. The Massachusetts
law, which was enacted in 1993, is broad and requires a bank,
an insurance company, and a publicly traded company doing
business in Massachusetts to file annual reports stating its
name, address, the amount of state taxable income, total
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excise tax due, gross receipts or sales, either gross profit
or credit carryovers to future years, income subject to
apportionment, and the amount of each credit taken against the
excise tax due. �Massachusetts General Law, Chapter 62C,
Section 83(n)]. These reports are available for public
inspection but only after the names and addresses on the
companies have been expunged. Twelve states mandate
disclosure of economic development tax incentives claimed by
companies. (Company-Specific Subsidy Disclosure in the
States, www.goodjobsfirst.org ). Seven of these 12 states -
Connecticut, Illinois, Maine, Minnesota, North Carolina, North
Dakota, and West Virginia - require disclosure of state
corporate income tax incentives received by companies,
including the value of those incentives.
9)Disclosure of Tax Information in California . The State of
California, as well as other states, readily publishes
information on unpaid taxes and delinquent taxpayers with
respect to property taxes. An unpaid property tax becomes a
lien against the real property and dissemination of
information on such liabilities is important for protecting
potential buyers, lenders, etc. In the area of income tax
liabilities, however, the state law generally prohibits
disclosure or inspection of any income tax return information,
except as specified in law. In fact, the FTB is required to
notify taxpayers if criminal charges have been filed for
willful unauthorized inspection or disclosure of their tax
data. However, FTB may release tax return information to
certain other agencies, including legislative committees, the
Attorney General, the California Parent Locator Service, the
Commissioner of the Internal Revenue Service, and others, for
certain statutorily enumerated purposes. The BOE is similarly
restricted from divulging taxpayer information. Furthermore,
since 2007, both FTB and BOE are required to make as a matter
of public record a list of the largest 250 tax delinquencies
over $100,000.
10)What Kind of Disclosure Does This Bill Require ? Under this
bill, the FTB will have to compile information relating to the
tax credits claimed by publicly traded companies on their
California income tax returns, beginning with the 2011 tax
year. This information will be revealed to the public, once
posted on the RTG Website. The scope of the corporate tax
disclosure proposed by this bill is very limited - it does not
require a disclosure of the amount of gross receipts or sales,
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gross profit, the amount of credit carryovers, or income
subject to apportionment. Further, there is no requirement to
describe the source of any non-business income reported on the
return and the state to which the income was assigned for
taxation; nor is there an obligation to include the tax
information related to the corporation's affiliated companies
or to disclose the corporation's total employment in the
state.
This bill delays the disclosure of the submitted information
for a particular tax year for at least two calendar years
following the end of the tax year. The delay would reduce the
potential utility of the information to out-of-state
competitors not subject to the disclosure requirement.
Furthermore, the type of information required to be revealed
under this bill is unlikely to be strategically useful to
competitors. As pointed out by the Center for Budget and
Policy Priorities in its 2007 report on corporate tax
disclosure, even if, for example, it were possible for a
competitor to calculate how much research and development
(R&D) spending a corporation had done in a particular year,
there is very little real practical benefit, if any, in
knowing the amount without knowing what the money was spent
on. (See, e.g., State Corporate Disclosure Report, Center for
Budget and Policy Priorities, p. 22). Thus, it seems unlikely
that a taxpayer "would be compelled to increase its R&D
spending merely because it learned that one of its competitors
was spending more on R&D than the �taxpayer] thought." Id.
Finally, companies operating in California already provide a
lot of information to the state in order to do business here.
11)Taxpayers Subject to the Disclosure Requirement. The FTB
currently receives over 700,000 corporate income tax returns a
year, and, while the majority of those returns contain no
claims of business tax credits, many of them do. According to
www.smallcapreview.com , approximately 1,400 publicly traded
companies are doing business, or organized, in California.
However, it is unclear to the Committee staff how many
corporate taxpayers will be affected by the disclosure
requirements proposed by AB 318.
12)Suggested Technical Amendment . The FTB staff suggested the
following technical amendment to AB 318:
On page 2, line 13, delete "asked" and insert "ask"
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13)Related Legislation.
AB 2666 (Skinner), introduced in the 2009-10 legislative
session, is almost identical to this bill. AB 2666 was vetoed
by Governor Schwarzenegger.
AB 2230 (Charles Calderon), introduced in 2009-10 legislative
session, would have required FTB to post on its website, by
March 31, 2011, and annually thereafter, a list of the 100
largest publicly traded corporations disclosing certain
tax-related information reported by those corporations, as
specified. AB 2230 was placed on the Assembly inactive file.
SBx6 19 (Florez), introduced in the 2009-10 legislative
session, would have required corporate tax credits of $20,000
or more to be reported on the RTG Website. SBx6 19 failed
passage in the Senate Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
CALPIRG (Sponsor)
American Federation of State, County and Municipal Employees,
AFL-CIO
Asian Health Services
California Common Cause
California Conference board of the Amalgamated Transit Union
California Conference of Machinists
California Federation of Teachers
California Labor Federation
California Nurses' Association
California Official Court Reporters Association
California Professional Firefighters
California Tax Reform Association
California Teamsters Public Affairs Council
Congress of California Seniors
Engineers and Scientists of California
International Longshore and Warehouse Union
Professional and Technical Engineers, Local 21
Service Employees International Union, Local 1000
Sierra Club California
UNITE HERE!
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United Food and Commercial Workers - Western States Conference
Utility Workers Union of America, Local 132
Opposition
BIOCOM
CalChamber
California Aerospace and Technology Association
California Bankers Association
California Business Properties Association
California Grocers Association
California Manufacturers and Technology Association
California Taxpayers Association
Council on State Taxation
TechAmerica
The Greater Corona Valley Chamber of Commerce
The Long Beach Area Chamber of Commerce
The Redondo Chamber of Commerce and Visitors Bureau
Southwest California Legislative Council
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098