BILL ANALYSIS �
AB 2048
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Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2048 (Donnelly) - As Amended: April 9, 2012
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : State Board of Equalization: administration:
interest
SUMMARY : Applies the same interest rate, for all tax and fee
programs that the State Board of Equalization (BOE) administers,
to both late tax payments and overpayment refunds.
Specifically, this bill :
1)Amends Revenue and Taxation Code Section 6591.5 to provide a
uniform definition of "modified adjusted rate per annum."
2)Provides that the rate shall be determined by adding three
percentage points to the rate specified in Internal Revenue
Code (IRC) Section 6621(a)(2), which establishes the IRC
underpayment rate.
3)Results in interest on overpayments being determined in the
same manner as interest on underpayments is now determined.
EXISTING LAW :
1)Requires those who are late in paying their BOE-administered
taxes to pay a penalty equal to 10% of the tax, plus interest
on the unpaid tax from the date the tax became due to the date
of payment. The underpayment interest rate is established by
adding three percentage points to the rate specified in IRC
Section 6621, and is adjusted semiannually. The underpayment
rate is currently 7%.
2)Grants credit interest to those who have overpaid their
BOE-administered taxes, as long as the overpayment was not
intentional or a result of carelessness. The overpayment
interest rate is based on 13-week treasury bills auctioned,
adjusted semiannually, and rounded to the nearest full
percent. Since, July 2009, that rate has been 0%.
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FISCAL EFFECT : The BOE estimates that this bill would result in
a revenue loss of $4.3 million for the second half of fiscal
year (FY) 2012-13, $31 million in FY 2013-14, and $51 million in
FY 2014-15.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
AB 2048 simply allows the BOE to pay taxpayers interest on
their overpayments at the same rate as the interest rate
these taxpayers are charged when they are late in paying
their taxes. From 1937 through 1991, the interest rates
for overpayments and underpayments for the BOE programs
were the same. But, in 1991, the Legislature reduced the
rate paid on overpayments dramatically because of an
unfavorable court decision which required the state to
refund significant amounts with interest. All those
refunds have been paid for years now, and it is time to end
this significant disparity that has been going on for over
two decades.
2)Supporters of this bill note:
AB 2048 simply conforms the interest rate for tax
overpayments to tax underpayments. Prior to 1991, there
was no difference in how the interest was calculated. In
response to increasing General Fund budget difficulties,
the interest rate on overpayments was changed to be based
on the interest rate of 13 week treasury bills, which today
is nearly zero.
While we understand that the passage of this bill will
place more strain on the General Fund, the issue here is
fairness to taxpayers. Often, appeals that arise before
the Board of Equalization can take years to resolve.
Taxpayers are often required to pay what they owe before
entering litigation. In the event that they win their
case, they should receive a fair interest rate for the time
the government has been holding their money. The BOE has
indicated there could be as high as a six point disparity
in the interest rate that's received. Taxpayers willing to
expend the time, energy, and resources to contest their
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taxes deserve nothing less than just treatment by tax
agencies.
3)Opponents of this bill note:
We believe that overpayment and underpayment of taxes are
two different situations and should not necessarily be
treated equally. The higher interest payment on
underpayments is intended to serve as a deterrent from
underpaying one's taxes. The same rationale does not exist
for overpayments. Furthermore, such an application would
put the state in the position of providing high-interest
returns to taxpayers who may overpay their taxes.
4)The BOE notes that:
a) Prior to July, 1, 1991, the interest rate paid on
overpayments was always the same as the interest rate
assessed on late payments. "In 1991, the credit interest
rate on overpayments was significantly reduced to avoid
substantial interest payments on refunds owed to the
federal government and defense contractors as a result of
an unfavorable court decision that entitled many United
States government contractors to refunds of overpayments on
taxes paid to the BOE. These refunds were paid years ago,
yet the inequity in the interest rates remains. This bill
is intended to eliminate the disparity that often becomes
the subject of controversy between taxpayers and the BOE,
and there is simply no justification now to have the
7-point discrepancy in the credit interest rate. This bill
would put an end to this unfairness by amending the law so
that the same rate of interest is applied to both late
payments as well as overpayments in all the BOE's tax and
fee programs.
b) The IRS and the FTB have no disparity in interest rates
for non-corporate overpayments and underpayments. The IRS
has only a one percent disparity for corporate overpayments
(the disparity is higher if the corporate underpayment is
over $100,000 or the corporate overpayment � ] exceeds
$10,000). For corporate overpayments, the FTB has a four
percent disparity.
c) In the tax, fee, and surcharge programs the BOE
administers, current law specifies that if the BOE
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determines that any overpayment has been made intentionally
or by reason of carelessness, it shall not allow any
interest on the overpayment (see, for example, Revenue and
Taxation Code Section 6908). This serves as a disincentive
for taxpayers to purposefully overpay their taxes in order
to gain interest on the overpayment.
5)Committee staff recognizes the potential unfairness posed by a
seven point interest rate disparity between overpayments and
underpayments, and appreciates this bill's effort to eliminate
controversy between taxpayers and the BOE. Despite this
laudable purpose, critics contend that it would be fiscally
detrimental to our state to adopt such a proposal at this
time. Since 1992, 14 prior bills have sought to equalize the
interest rates on overpayments and underpayments. Only one
made it to the Governor's desk, and was subsequently vetoed by
Governor Wilson.
6)Related legislation : Since 1992, several bills have been
introduced to address the interest rate disparity between
underpayments and overpayments. The four most recent bills
are listed below.
SB 421 (Correa), introduced in the 2011-12 legislative
session, would have reduced the interest rate on
underpayments by 3%. SB 421 was held in the Senate
Appropriations Committee.
AB 1926 (Horton), introduced in the 2007-08 legislative
session, would have equalized the underpayment and
overpayment interest rates. AB 1926 was held in this
Committee.
AB 1589 (Villines), introduced in the 2005-06 legislative
session, would have equalized the underpayment and
overpayment interest rates. AB 1589 was held in the
Assembly Appropriations Committee.
SB 825 (Poochigian), introduced in the 2001-02 legislative
session, would have equalized the underpayment and
overpayment interest rates. SB 825 was held in the Senate
Revenue and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION :
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Support
State Board of Equalization (Sponsor)
California Taxpayers Association
Howard Jarvis Taxpayers Association
State Board of Equalization Member George Runner
Opposition
American Federation of State, County and Municipal Employees
California Federation of Teachers
California School Employees Association
California Tax Reform Association
Service Employees International Union
Analysis Prepared by : Rosailda Perez / M. David Ruff / REV. &
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