BILL ANALYSIS                                                                                                                                                                                                    �



                                                                  AB 1276
                                                                  Page  1

          Date of Hearing:   May 27, 2011

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                    AB 1276 (Feuer) - As Amended:  March 31, 2011 

          Policy Committee:                              Revenue and 
          Taxation     Vote:                            5-3

          Urgency:     No                   State Mandated Local Program: 
          No     Reimbursable:              

           SUMMARY  

          This bill bars taxpayers from claiming a deduction for amounts 
          paid for punitive damages.  Specifically, this bill:

          1)Provides that no deduction shall be allowed for any amount 
            paid or incurred for punitive damages in connection with any 
            judgment, or settlement. 

          2)Applies to taxable years beginning on or after January 1, 
            2012.   

          3)Takes immediate effect as a tax levy.

           FISCAL EFFECT  

          The Franchise Tax Board estimates no revenue impact in fiscal 
          year (FY) 2011-12, and revenue gains of $1.8 million in FY 
          2012-13, and $1.3 million in FY 2013-14.    

           COMMENTS  

           1)Purpose  .  Supporters argue that tax deductions are intended to 
            reward or incentivize good behavior, based upon bona fide 
            business expenses incurred in the production of income.  
            Punitive damages, however, are by definition expenses incurred 
            not in the production of income.  In the employment context, 
            that could be racism, sexism, homophobia or any number of 
            other civil rights violations.  Supporters state that in other 
            contexts it could be the calculated decision to put corporate 
            profits ahead of public health and safety or a widespread 
            Ponzi scheme directed at the elderly.  Punitive damages exist 








                                                                  AB 1276
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            to punish and deter wrongdoing, and reflect the opposite of a 
            bona fide business expense.


           2)Background.   As the name implies, compensatory damages are 
            awarded to compensate a plaintiff for a loss or injury 
            suffered as a result of another's breach of duty.  Punitive or 
            exemplary damages, by contrast, are generally not designed to 
            compensate the plaintiff for actual losses, but rather to 
            deter the defendant (and other similarly situated persons) 
            from engaging in the underlying behavior that caused harm.  
            Thus, juries typically assess punitive damages in an amount 
            they believe will be sufficient to punish the defendant and 
            deter future wrongdoing.  Defendants, however, are not always 
            punished to the degree sought.  This is because punitive 
            damages paid by business defendants are tax deductible.  As a 
            result, these businesses often pay far less (in real dollars) 
            than the jury intended.
                

          3)There is no registered opposition to this bill. 
           
           Analysis Prepared by  :    Roger Dunstan / APPR. / (916) 319-2081