BILL ANALYSIS �
AB 2638
Page 1
Date of Hearing: May 2, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2638 (Eng) - As Amended: April 17, 2012
Policy Committee: Revenue and
Taxation Vote: 6-2
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires the Department of Finance (DOF) to include
additional information in its annual tax expenditure report and
to provide to the Legislature certain specified information, in
cooperation with the Franchise Tax Board (FTB) and the State
Board of Equalization (BOE), regarding tax expenditures at the
time of the submission of the Governor's Budget to the
Legislature. Specifically, this bill:
1)Requires DOF to include the following in its annual tax
expenditure report:
a) Information about each credit, deduction, exclusion,
exemption or any tax benefit exceeding $5 million in annual
cost.
b) Anticipated revenue loss, if available, pursuant to the
final fiscal committee analysis of the act that established
the tax expenditure, adjusted for inflation.
2)Provide to the Legislature, at the time of the submission of
the Governor's Budget, an estimate of the revenue loss in the
upcoming fiscal year (FY) for each tax expenditure exceeding
$5 million in annual cost. Defines "tax expenditure" as a
credit, deduction, exclusion, exemption, or any other tax
benefit provided by the state.
3)Requires the FTB and the BOE, at the time of the submission of
the Governor's Budget to the Legislature, to report to the DOF
and the Legislature on the fiscal and tax effect of tax
expenditures from sales and use tax (SUT), personal income tax
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(PIT), and corporation tax (CT). States that the BOE and FTB
reports shall be limited to tax expenditures with an annual
revenue loss of at least $5
4)Requires the DOF to provide an annual report to the
Legislature on tax expenditures by no later than September 15
of each year. Provides that the report must include, among
other information, a comprehensive list of tax expenditures
exceeding $5 million in annual cost, a brief description of
each expenditure and its beneficiaries, and estimates for the
state and local revenue loss for the current FY and the two
subsequent FYs.
FISCAL EFFECT
Preparation of the required reports and additional information
for the Governor's Budget is estimated to cost approximately
$250,000 in total, with approximately $150,000 for the work
required of DOF. The costs for FTB and BOE are smaller,
approximately $50,000 each.
COMMENTS
1)Author's Statement. The author notes that according to DOF's
tax expenditure report, the State forgoes more than $43
billion annually in personal income, corporation and sales
taxes, an amount roughly equal to half of the State's General
Fund budget. The author states local agencies forgo an
additional $9 billion a year from tax expenditures. According
to the author, while improvements to the quality of tax
expenditure reporting have been made in recent years, these
reports are not timed to, and have not influenced, budget
deliberations. Given the enormity of the State's investment
in tax expenditures, coupled with its persistent, long-term
budget challenges, the author states it is imperative that the
cost of tax expenditures be more transparent and relevant to
the budget process.
2)Arguments in Support . The proponents, primarily labor
organizations, state that, in light of California's perennial
budget crisis and economic malaise, it is imperative that
elected leaders have the most complete information possible to
make informed decisions. They observe the relationship
between the State's $90 billion General Fund budget and the
tax expenditures, which are not included in the budget, are
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largely absent from budget deliberations. The proponents
assert that AB 2638 is needed to shed increased light and
scrutiny to state tax expenditures which cost the state
billions of dollars every year, many of which no longer serve
their intended purpose.
3)Arguments in Opposition . The California Taxpayers Association
and the California Manufacturers and Technology Association
state that this bill should be amended to require DOF, FTB and
BOE to use dynamic revenue modeling. They argue that existing
static revenue estimates do not reflect realistic revenue
impacts that result from changes in taxpayer behavior and do
not take into account the added economic benefit of a tax
expenditure. They conclude that static revenue estimates do
not provide the Legislature with comprehensive fiscal data
with which to make important decisions regarding the state's
finances.
4)Tax Expenditures. U.S. Treasury officials and some
Congressional tax staff began arguing in the late 1960s that
various credits, deductions, exclusions and exemptions for
particular taxpayer groups should be referred to as
"expenditures," since they are generally enacted to accomplish
some governmental purpose and there is a cost associated with
each in the form of foregone revenues.
5)Legislative Analyst's Office (LAO) report. LAO estimates
there are several hundred tax expenditure programs costing the
state nearly $50 billion in FY 2008-09, the vast majority are
in the personal income tax law. The LAO report noted that
resources are allocated to a new tax expenditure program
automatically each year, with limited, if any, legislative
review, and 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)Review of Tax Expenditures . DOF is required to publish an
annual report on tax expenditures and provides it to the
Legislature no later than September 15 of each year. The DOF
report includes a list of tax expenditures exceeding $5
million in annual cost. The BOE prepares a publication
listing various exemptions and exclusions from the SUT,
including a brief description and an estimate of the revenue
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loss for the exemption or exclusion, if available. Since
2007, the FTB has been publishing an annual report,
"California Income Tax Expenditures," describing tax
expenditures found in the PIT and the CT Tax Laws.
7)Previous Legislation. There have been a number of similar
bills, dating back to 1994. Among the more recent are the
following:
a) AB 2564 (Swanson, 2010) required DOF to submit its
annual tax expenditure report to the Legislature by
February 1 instead of September 15. AB 2564 was vetoed by
Governor Schwarzenegger.
b) AB 1933 (Coto, 2006) required any legislative measure
creating a new tax expenditure, or extending the operation
of an existing tax expenditure, to include specific
legislative findings and information and a sunset date no
later than five years. AB 1933 was held in the Senate
Committee on Revenue and Taxation.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081