BILL ANALYSIS �
AB 2638
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Date of Hearing: April 23, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2638 (Eng) - As Amended: April 17, 2012
Majority vote. Fiscal committee.
SUBJECT : State government: fiscal affairs.
SUMMARY : 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 the DOF to do both of the following:
a) Include in its annual tax expenditure report:
i) The year of enactment for each credit, deduction,
exclusion, exemption, or any tax benefit exceeding $5
million in annual cost.
ii) Anticipated revenue loss, if available, pursuant to
the final fiscal committee analysis of the act that
established the tax expenditure, adjusted for inflation.
b) 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.
2)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
(PIT), and corporation tax (CT).
3)States that the BOE and FTB reports shall be limited to tax
expenditures with an annual revenue loss of at least $5
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million and shall include all of the following information:
a) The most recent data to characterize the economic, tax,
and demographic profile of claimants, including an estimate
for the state and local revenue loss for the current FY and
the two subsequent FYs.
b) Anticipated revenue loss, if available, pursuant to the
final fiscal committee analysis of the act that established
the tax expenditure, adjusted for inflation.
c) Citation of academic studies pertaining to the tax
expenditure or similar tax expenditures, where deemed
appropriate by the BOE or FTB, whichever is applicable.
d) Usage data, where available, for the same or similar tax
expenditures adopted by other states with similar
economics, business entity types, and tax laws, or the
federal government, if appropriate.
e) Any other distinguishing tax characteristic, including
other tax expenditures claimed.
4)Provides that, for SUT expenditures, the BOE report shall also
include:
a) At a minimum, the revenue loss for each expenditure for
the most recent tax year for which full year data is
available and estimated revenue loss for the current FY and
subsequent FY by industry code.
b) For the most recent taxable year for which a full year
of data is available, average, median, highest, and lowest
amounts claimed by taxpayer liability and the amounts
claimed and, as of the time report is prepared, amounts
disallowed.
5)Requires that, for PIT and corporate income and franchise tax
expenditures, the FTB report identify all of the following
information:
a) At a minimum, the revenue loss for each expenditure for
the most recent taxable year for which a full year of data
is available, the current FY, and the budget year, in the
following categories by:
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i) Adjusted gross income of the claimants.
ii) Tax liability of the taxpayer.
iii) Region.
iv) Industry code.
b) For the most recent taxable year for which a full year
of data is available, average, median, highest, and lowest
amounts claimed by taxpayer bracket, and amounts claimed
and, as of the time the report is prepared, amounts
disallowed.
6)Specifies that the BOE and FTB shall provide sufficient data
to support a subsequent analysis of the revenue loss of the
tax expenditure.
7)Defines "tax expenditure" as a credit, deduction, exclusion,
exemption, or any other tax benefit provided by the state.
EXISTING 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 expenditure provisions to include
specific goals, purposes, objectives, performance measures, or
a sunset date.
3)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.
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4)Provides that the Governor must submit to the Legislature,
within the first 10 days of each calendar year, a budget for
the ensuing FY (Article IV, Section 12 of the California
Constitution).
5)Specifies that the Governor's Budget must include a complete
plan and itemized statement of all proposed expenditures and
all estimated revenues for the ensuing FY. It must also
contain a comparison for those proposed "budget year"
expenditures and revenues with the actual revenue and
expenditure amounts for the previous completed FY and the
estimated revenue and expenditures for the current year.
6)Requires the DOF to submit to the Legislature, at the time of
the submission of the Governor's Budget, or as soon thereafter
as feasible, total recommended state General Fund (GF)
expenditures and estimated state GF revenues.
FISCAL EFFECT : The FTB and BOE staff estimates that this bill
will have no direct impact on state tax revenues.
COMMENTS :
1)Author's Statement. The author states that, "According to the
Department of Finance's (DOF) latest report on tax
expenditures, the State forgoes more than $43 billion annually
in personal income, corporation, and sales taxes - an amount
roughly equivalent to half of the State's General Fund budget.
Local agencies forgo an additional $9 billion a year from tax
expenditures. Statutes enacted in 2006 required the DOF to
substantially augment its tax expenditure reporting and added
new obligations for the BOE and FTB. Specifically, these
changes required DOF to begin including, for specified tax
expenditures, information on the original legislative intent,
beneficiaries, and future year costs. While improvements to
the quality of tax expenditure reporting have been made in
recent years, these reports are not timed 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, it is imperative that
the cost of tax expenditures be more transparent and relevant
to the budget process. AB 2638 would make the costs and
reporting of tax expenditures more transparent and relevant to
the budget process to determine the impact these tax
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expenditures have on state revenues and if they cost more or
less than originally expected when adopted."
2)Arguments in Support . The proponents 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 that, remarkably, "the interrelationship between the
State's $90 billion General Fund budget and the "off budget"
TEs �tax expenditures] is largely absent from budget
deliberations." The proponents argue that, while
"improvements to the quality of TE reporting have been made in
recent years, these reports are neither comprehensive nor
issued in time to influence budget deliberations." As an
example, an annual report prepared by the DOF "lacks key
information and receives little attention." 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" and many of which "are no
longer serving their intended purpose."
3)Arguments in Opposition . The opponents state that this bill
should be amended to require the DOF, the FTB and the 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," do not "take
into account the added economic benefit of a tax expenditure,"
and do not provide the Legislature with "comprehensive fiscal
data with which to make important decisions regarding the
state's finances."
4)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's Office (LAO) shows that tax expenditure programs
cost the state nearly $50 billion in FY 2008-09. The LAO
report noted that resources are allocated to a new tax
expenditure program automatically each year, with limited, if
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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.
3)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.
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 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.
4)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 ACR 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 Government Code 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. The BOE prepares a publication
listing various exemptions and exclusions from the SUT,
including a brief description and an estimate of the revenue
loss for the exemption or exclusion, if available. Finally,
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.
According to the DOF report for the FY 2011-12, the vast
majority of tax expenditures are included in the PIT Law. To
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this end, the DOF estimates that tax expenditures reduced PIT
revenues by roughly $31 billion in FY 2011-12. The SUT Law,
in turn, contains identifiable state tax expenditures worth
about $11 billion annually, and CT expenditures amounted to
roughly $5 billion.
1)How Would This Bill Improve a Legislative Review of Tax
Expenditures? As discussed, the DOF is required to compile
and submit to the Legislature its annual tax expenditure
report by September 15 of each year. This bill would expand
the scope of information required to be included in the DOF
annual report, such as, for example, a revenue loss amount
that was estimated to result from a tax expenditure by the
final fiscal committee analysis of the act that established
the expenditure, adjusted for inflation. According to the
2011 report issued by the Senate Office of Oversight and
Outcomes, some "tax breaks enacted by the state of California
over the past two decades have turned into blank checks, with
actual costs to state government surpassing initial estimates
of foregone revenue by billions of dollars." AB 2638 is
intended to inform decisions makers by highlighting the
difference, if any, between the estimated and actual revenue
loss attributable to a particular tax expenditure.
Currently, the DOF is also required to submit to the
Legislature, by January 10, the Governor's Budget, and with
it, total recommended state GF expenditures and estimated,
including any proposed, state GF revenues. AB 2638 would
request the DOF to include in the Governor's Budget an
estimated revenue loss in the upcoming FY for each tax
expenditure exceeding $5 million in annual costs. It would
also require state tax agencies - the FTB and BOE - to submit
their tax expenditure reports to the DOF and the Legislature
by January 10 of each year. These new requirements will
mirror the requirements for the President's Budget at the
federal level, where tax expenditures are separately listed,
explained, and estimated, and, most likely, will generate
discussion, as part of the budget process, about effectiveness
of certain tax expenditures.
The idea of spurring discussion on this important issue is a
good one. California is experiencing one of the worst
recessions in recent history. In an effort to balance the
state's budget, the Legislature has been forced to make cuts
to vital programs, including education, health and human
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services, and transportation. AB 2638 seeks to improve
transparency in California's budget process by informing
decision makers and the public regarding California's $43
billion in tax expenditures. Accurate information about all
of the state's expenditures, including the costs of state
departments, state programs and state tax expenditures, is
necessary to facilitate an honest debate on the budget. In
the past, some budget observers argued that including limited
tax expenditure data as part of the Governor's Budget would
not be helpful because it lacks the fiscal and policy
information contained in the Tax Expenditure Report. AB 2638
addresses this concern by requiring both the BOE and FTB to
report to the Legislature, at the time of the Budget
submission. Their reports will contain not only fiscal but
policy information, including data regarding the economic,
tax, and demographic profile of claimants and usage data for
similar tax expenditures adopted by other states.
In contrast to spending items, tax expenditures, for the most
part, do not require appropriation of funds and are not part
of the state budget. Having the information relating to the
costs of tax expenditures available while the budget
negotiations are taking place will ensure that the Legislature
has the information necessary to address California's fiscal
condition. In addition, it will allow the public and
interested parties to contrast spending programs with tax
expenditure programs with similar goals, i.e. programs that
require budgetary appropriations versus those that are
financed through foregone revenues.
1)Related Legislation.
a) AB 2564 (Swanson), introduced in the 2009-2010
Legislative Session, would have required the 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 831 (Parra), introduced in the 2007-08 Legislative
Session, would have required any legislation creating a new
tax expenditure, or extending the operation of an existing
tax expenditure, to include a sunset provision. AB 831
failed to pass out of the Senate Committee on Revenue and
Taxation.
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c) AB 1933 (Coto), introduced in the 2005-06 Legislative
Session, would have required any legislative measure
creating a new tax expenditure, or extending the operation
of an existing tax expenditure, to include legislative
findings regarding the purpose of the tax expenditure, an
estimate of the attributable revenue losses, a specific
methodology for measuring the anticipated benefits, and a
sunset date no later than five years in the future. AB
1933 failed to pass out of the Senate Committee on Revenue
and Taxation.
d) AB 2199 (Brown), introduced in the 1995-96 Legislative
Session, would have required all tax expenditures to be
authorized via an appropriation in the annual Budget Act.
AB 2199 failed to pass out of this Committee.
e) AB 2884 (Villaraigosa), introduced in the 1995-96
Legislative Session, would have required the Legislative
Analyst, together with DOF, FTB, and the BOE, to conduct an
evaluation of all tax expenditures, as defined. AB 2884
failed to pass out of this Committee.
f) SB 1233 (Hayden), introduced in the 1993-94 Legislative
Session, would have required the LAO to review each tax
expenditure program, as directed by this Committee and its
Senate counterpart, to determine if its objectives are
being realized, whether its benefits exceed its revenue
costs, and weather there is a less costly way of providing
the same benefits. Governor Wilson vetoed the bill.
REGISTERED SUPPORT / OPPOSITION :
Support
John Chiang, California State Controller (Sponsor)
California Federation of Teachers
California Labor Federation
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
California Tax Reform Association
The Service Employees International Union
The California School Employees Association
California Professional Firefighters
Opposition
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California Taxpayers Association
The California Manufacturers and Technology Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098