BILL ANALYSIS �
Bill No: SB
357
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2011-2012 Regular Session
Bill Analysis
SB 357 Author: Dutton
Amended: April 4, 2011
Hearing Date: April 26, 2011
Consultant: Paul Donahue
SUBJECT : Regulations: Obsolete equipment
SUMMARY : Requires a state agency, in adopting a
regulation, to estimate the costs to the state in lost
revenues resulting from a regulation that would make
equipment obsolete that would otherwise have a remaining
depreciable life.
Existing law :
1) The Administrative Procedure Act governs the procedure
for the adoption, amendment, or repeal of regulations by
state agencies and for the review of those regulatory
actions by the Office of Administrative Law. (Govt. Code �
11340 et seq.)
2) Requires a state agency to estimate the cost or savings
to the agency that will result from the proposed
regulation, and include the estimate in the notice of
proposed action for a regulation.
This bill :
1) Requires the estimate of cost or savings submitted by a
state agency in a notice of proposed regulatory action to
include an estimate of the cost to the state in revenues
that are lost as a result of a regulation that makes
equipment obsolete, where that equipment would otherwise
have a remaining depreciable life.
2) Requires the Franchise Tax Board to provide to each
SB 357 (Dutton) continued
PageB
state agency, and update every 5 years, the average tax
rate to be applied to the amount of the estimated
accelerated deduction due to reduced asset life
attributable to the regulation for an increase in business
depreciation.
COMMENTS :
1) Purpose of the bill : The author states that this bill
would improve the state's economic analysis of regulations,
as well as draw attention to regulations that render
equipment obsolete before the equipment has been fully
depreciated. Additionally, the author notes that
California employers find it difficult to plan for the
future with the state's ever-changing regulatory
environment, and that this bill would simply require
greater acknowledgement that a regulation would force
businesses to make additional, unanticipated expenses. As
an example, the author cites the "drayage" regulation,
under which 2007 model-year trucks, a $30,000 investment,
cannot be used after 2013.
2) Depreciation : Depreciation is the annual tax deduction
allowed to recover the cost of business or income producing
property with a useful life of more than one year.
Generally, depreciation is used in connection with tangible
property.<1> The following are some types of depreciation
allowed under California law:<2>
a) Straight-line : Straight-line depreciation divides
the cost of property, less its estimated salvage
value, into equal amounts over its estimated useful
life.
b) Declining balance : Here, depreciation is greatest
in the first year and smaller in each succeeding year.
The property must have a useful life of at least three
years. Salvage value is not taken into account in
determining the basis of the property. The amount of
depreciation for each year is subtracted from the
basis of the property and a uniform rate of up to 200%
----------------------
<1> Amortization is an amount deducted to recover the cost
of certain capital expenses over a fixed period. Generally
amortization is used for intangible assets.
<2> Rev. & Tax. Code �� 24349 - 24354
SB 357 (Dutton) continued
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of the straight-line rate is applied to the remaining
balance.
c) Sum-of-the-years-digits method : This method may be
used whenever the declining balance method is allowed.
The depreciation deduction is calculated by
subtracting the salvage value from the cost of the
property and multiplying the result by a fraction.
3) Agency estimation might be difficult : Because there are
several alternative methods of calculating depreciation for
purposes of reducing tax liability, it may prove difficult
for a state agency to estimate the revenue lost to the
state due to this factor.
When faced with a regulatory burden affecting the useful
life of a piece of equipment, a business may change its
behavior to mitigate or avoid losses resulting from the
regulation. As one example, a business taxpayer might
switch from straight-line to declining balance depreciation
for the equipment in question so as to capture the greatest
depreciation on an accelerated basis.
The author and the committee may wish to consider whether
requiring an agency to estimate the revenue loss to the
state due to accelerated depreciation is preferable to
requiring the agency to estimate the financial impact on
businesses resulting from an inability to fully depreciate
equipment made obsolete by the regulation.
4) Support : Supporters write that state agencies don't
routinely assess whether their regulations will result in
lost revenues to the state. Requiring this estimate will
not only help to ensure that policymakers know the true
cost of a regulation, but it will also help to ensure that
state revenue estimates are more accurate. Supporters also
note that the bill would provide important financial
information when making significant purchases for use in a
business.
Supporters note that California employers find it difficult
to plan for the future with California's unpredictable and
onerous regulatory environment. In most circumstances,
manufacturers are not allowed to claim the entire cost of a
capital asset (any asset with a useful life of more than
one year) as an expense in the year acquired. Instead,
SB 357 (Dutton) continued
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manufacturers attempt to recover the cost of the asset over
the asset's useful life. This bill would simply require
greater acknowledgement that a regulation will force
businesses to make additional and unanticipated
expenditures.
5) Note : This bill is double referred to the Senate Rules
Committee
6) Related legislation :
SB 400 (Dutton, 2011) . Requires that an economic impact
assessment on a proposed regulation include additional
criteria, and that agencies submit economic assessments for
certain regulations to OAL for it to determine whether the
assessment is based upon sound economic knowledge, methods,
and practices. Requires OAL to reject a regulation if the
economic assessment is invalid. (Senate Environmental
Quality Committee)
SB 553 (Fuller, 2011) specifies that a regulation that has
or is likely to have an adverse economic impact of $10
million or more becomes effective 180 days after adoption.
(Hearing cancelled at the request of the author)
SB 688 (Wright, 2011) specifies that an economic impact
statement for a proposed regulation must include a detailed
estimate of the total actual costs of compliance for
affected businesses and individuals. Requires the adopting
agency to (1) notify appropriate committees of the
Legislature if the estimated total costs of compliance
exceed $10 million and (2) delay the effective date of the
regulation by one year. (On calendar today in this
Committee)
SB 356 (Wright, 2010) would have required an agency
considering a regulation to inform the Department of
Finance and the Small Business Advocate if it had not
consulted with interested persons before initiating
regulatory action, and specify its reasons for not
consulting affected businesses. It required a state agency
to describe the agency's reasons for rejecting each
specific alternative to the adoption of a proposed
regulation, and submit an economic impact statement
containing specified information. (Held in Assembly Rules
Committee)
SB 357 (Dutton) continued
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SB 954 (Harman, 2010) would have required the Joint
Committee to move a bill estimated to generate a fiscal
impact of $10,000 or more on small business, or $50,000 or
more on any other business, to the suspense file of the
committee for further consideration. (Dropped)
SUPPORT:
American Fence Association, California Chapter
California Association of Bed and Breakfast Inns
California Building Industry Association
California Fence Contractors' Association
California Hotel & Lodging Association
California Manufacturers & Technology Association
California Retailers Association
Engineering and Utility Contractors Association
Engineering Contractors' Association
Flasher Barricade Association
Marin Builders' Association
Western Growers
OPPOSE: None on file
FISCAL COMMITTEE: Yes
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