BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2638 HEARING: 6/20/12
AUTHOR: Eng FISCAL: Yes
VERSION: 6/11/12 TAX LEVY: No
CONSULTANT: Grinnell
TAX EXPENDITURE REPORTS
Amends current tax expenditure report and budget
disclosure; requires new information.
Background and Existing Law
Current law requires the Department of Finance (DOF) to
submit a tax expenditure report to the Legislature each
year by September 15th. Tax expenditures are defined to be
"a credit, deduction, exclusion, exemption, or any other
tax benefit as provided by the state." The report must
include:
A comprehensive list of all tax expenditures
exceeding five million dollars in annual cost.
The statutory authority, sunset date, and estimate
of the revenue loss attributable to each credit,
deduction, exemption, exclusion, or tax benefit.
A description of the legislative intent of each tax
expenditure and its sunset date if the bill enacting
the tax benefit includes intent sections or a sunset
date.
A brief description of the credit's beneficiaries,
including the number of taxpayers affected and returns
filed in the most recent year available.
A listing of any comparable federal tax benefit.
A description of any evaluation or compilation of
information by any state agency since the last report
was made.
As part of the Budget, DOF must provide to the Legislature
total recommended state general fund expenditures and
estimated, including any proposed, state general fund
revenues, including:
A five-year infrastructure plan,
An estimate of total general fund resources
recommended for the budget year and three following
AB 2638 - 6/11/12 -- Page 2
fiscal years, and
A projection of anticipated general fund
expenditures for the budget year and three following
fiscal years.
Proposed Law
Assembly Bill 2638 requires Board of Equalization (BOE),
and the Franchise Tax Board (FTB) to submit a new report to
the Legislature and DOF within the first ten days of the
year on the tax effect of tax expenditures with an annual
revenue loss of more than $5 million. BOE and FTB shall
include the most recent data to characterize the economic,
tax, and demographic profile of claimants of tax
expenditures over $5 million, including:
An estimate or range of estimates for the state and
local revenue loss for the current and two subsequent
fiscal years, including partial sales tax exemptions
when BOE has obtained the information.
Anticipated revenue loss from the final fiscal
committee analysis of the act that established the tax
expenditure, adjusted for inflation, if available.
For sales and use tax expenditures, the report shall
identify to the extent possible, at a minimum, revenue loss
for the most recent tax year for which the full tax year
data is available and estimated revenue loss for the
current state fiscal year and subsequent fiscal year by
industry code. The report shall also include the following
information for each expenditure:
For the most recent fiscal year for which a full
year of data is available, Average, median, highest,
and lowest amounts claimed by taxpayer gross sales,
and amounts claimed, rejected, and disallowed,
Citations of academic studies pertaining to that or
a similar tax expenditure, where deemed appropriate by
BOE,
Usage data for the same or similar tax expenditure
adopted by other states with similar economics,
business entity types, and tax laws,
Any other distinguishing tax characteristics,
including other expenditures claimed.
BOE shall report the information required only to the
AB 2638 - 6/11/12 -- Page 3
extent that it has the information, and may reflect BOE
staff estimates or taxpayers' self-reported data.
For personal income and corporation income and franchise
tax expenditures, the report shall identify the revenue
loss for each expenditure for the most recent taxable year
for which a full year of data is available, the current
fiscal year, and the budget year, in the following
categories:
The claimant's adjusted gross income
The taxpayer's tax liability
By region and industry code
Average, median, highest, and lowest amounts
claimed by taxpayer bracket,
Amounts claimed and disallowed,
Citations of academic studies pertaining to that or
a similar tax expenditure, when deemed appropriate by
FTB,
Usage data for the same or similar tax expenditure
adopted by other states with similar economics,
business entity types, and tax laws,
Any other distinguishing tax characteristics,
including other expenditures claimed.
AB 2638 requires DOF's tax expenditure report to
additionally include the year of enactment of the tax
expenditure, and the anticipated revenue loss included in
the final fiscal committee analysis of the act that
established the tax expenditure, adjusted for inflation.
The measure also specifies that partial tax exemptions
instead of partial year exemptions be included as part of
sales and use tax expenditures.
The measure also requires in the information that DOF must
submit to the Legislature with the budget an estimate of
the loss of revenue dues to the expenditure in the upcoming
fiscal year.
State Revenue Impact
No estimate.
Comments
AB 2638 - 6/11/12 -- Page 4
1. Purpose of the bill . According to the author,
"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 expenditures have
on state revenues and if they cost more or less than
originally expected when adopted."
2. Shame in the game ? AB 2638 would both revise the
existing DOF tax expenditure report, and compel FTB and BOE
to produce a new report further breaking down specific data
points for each tax expenditure. The measure won't repeal,
limit, or change any tax expenditure, instead hoping that
additional data will show some shaming piece of data, such
as a disproportionate benefit for wealthy taxpayers, a
waste of fiscal resources, or that a tax expenditure
primarily benefits a single industry, that will
subsequently spur legislative change. However, this
strategy will likely be ineffective because:
The Legislature currently has sufficient
information. California has three very good existing
tax expenditure reports: DOF's, FTB's "California
Income Tax Expenditures, Compendium of Individual
Provisions," and BOE's Publication 61 "Sales and Use
Taxes: Exemptions and Exclusions." The Center on
Budget Policy and Priorities evaluated California's
tax expenditure reporting in a 2011 study, including
only one explicit critique: the state's tax
expenditure reports don't list items with a fiscal
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impact of less than $5 million. FTB also publishes
additional data on the state's two main business
incentive credits, Geographically Targeted Economic
Development Areas, and the Research and Development
Credit. Revenue estimates for legislation adding
expenditures can usually be found on-line, or can be
sent upon request.
Further information likely won't result in policy
change. A bill that limits or repeals a tax
expenditure requires a 2/3 vote in each house of the
Legislature due to Section III of Article XIIIA of the
California Constitution, unlike a bill that limits or
repeals a direct spending program. The Legislature
did not act to repeal two of California's least
justified tax expenditures when the governor proposed
to in his 2011-12 Budget: Geographically Targeted
Economic Development Areas and the ability of firms to
choose to apportion income according to the
three-factor, double-weighted formula (known as
"mandatory single sales factor).
For sales and use tax expenditures, little data is
available because retailers usually don't collect much
information when individuals purchase fully or
partially exempt items. Unlike personal income and
corporation tax expenditures, no one submits a return
claiming a benefit.
The bill's study will likely require additional
expenditures of state funds to complete the study in a time
of fiscal crisis, or distract FTB, BOE, and DOF staff from
more useful pursuits. Furthermore, the Senate Rules
Committee has a long standing practice of not referring
bills that require state agencies to perform studies
because these agencies and departments will conduct studies
upon request and do not require legislation to compel them
to do so. The Committee may wish to consider not only
whether the increment of information compelled by the bill
is worth the required time, money, and effort but also
deleting all the study requirements consistent with the
practice.
3. Revenue estimate accountability . AB 2638 requires as
part of its new report the inclusion of the estimate
revenue loss from the final fiscal committee analysis of
the act that established the tax expenditure, adjusted for
inflation, if available. California revenue estimators
AB 2638 - 6/11/12 -- Page 6
include some of the world's most intelligent economists,
but their estimates are always uncertain because they seek
to predict the future change in behavior resulting from a
change in tax policy. Their guesses will inevitably be
incorrect, yet they're the most intelligent, qualified,
educated, and experienced guessers on state payroll. While
corporation tax amounts paid fell below estimates during a
time of record national corporate profits, there isn't
enough information currently available to know whether any
of the four significant tax benefits enacted by the
Legislature in recent years, credit sharing (AB 1452,
Committee on Budget, 2008), elective apportionment formulas
and enhanced net operating loss treatment (ABx3 15,
Krekorian, and SBx3 15, Calderon, 2009) or allowing firms
using three-factor apportionment formulas to use the cost
of performance method to source the sales of intangibles
(SB 585, Committee on Budget, 2010), or some interaction
thereof, explains the shortfall. The Committee may wish to
consider whether including this information has significant
value.
Assembly Actions
Assembly Revenue and Taxation Committee: 6-2
Assembly Appropriations Committee:12-5
Assembly Floor: 50-27
Support and Opposition (6/14/12)
Support : John Chiang, California State Controller
(Sponsor); American Federation of State, County and
Municipal Employees, California Federation of Teachers;
California Labor Federation; California School Employees
Association, California Tax Reform Association; California
Professional Firefighters.
Opposition : California Manufacturers and Technology
Association; California Taxpayers Association.