BILL ANALYSIS �
SB 508
Page 1
SENATE THIRD READING
SB 508 (Wolk)
As Amended June 20, 2011
Majority vote
SENATE VOTE :23-17
REVENUE & TAXATION 6-2 APPROPRIATIONS 10-5
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|Ayes:|Perea, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, Cedillo, | |Bradford, Charles |
| |Fuentes, Gordon | |Calderon, Gatto, Hall, |
| | | |Hill, Lara, Mitchell, |
| | | |Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly, Nestande |Nays:|Harkey, Donnelly, |
| | | |Nielsen, Norby, Wagner |
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SUMMARY : Provides that a new tax credit, enacted by a bill
introduced on or after January 1, 2012, shall be operative for a
period not to exceed 10 years and shall include specified goals,
objectives, and purposes, as well as other detailed information
relating to the credit's effectiveness. Specifically, this
bill :
1)Requires any bill that would authorize a new credit under
either the Personal Income Tax (PIT) Law or the Corporation
Tax (CT) Law to contain all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve;
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill;
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives; and,
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d) A requirement that the tax credit shall cease to be
operative no later than 10 years after its enactment date.
1)Makes legislative findings and declarations regarding the need
for review of tax preference programs, including tax credits.
2)Applies to bills introduced on or after January 1, 2012.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill would not impact General Fund revenue.
COMMENTS :
Author's statement . The author states, "Today's public finance
system in California requires major reform. While I have pushed
changing our budgeting system to apply performance measurements
for spending programs, I am trying to do the same with SB 508,
which applies a performance-based methodology to future tax
expenditures enacted by the state. There is no good reason not
to evaluate tax expenditure programs with the same rigor that we
use when judging spending decisions, especially when
California's tax preference portfolio now exceeds $47 billion,
equal to half of our total revenue. While we cannot change
existing tax preferences, we can at least start keeping better
track of future ones."
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 State 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 fiscal year (FY) 2008-09. The LAO report noted that
resources are allocated to a new tax expenditure program
automatically each year, with limited, if 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
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evasion, given the relatively low level of audits.
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 Department
of Finance (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. Finally, since 2007, the
FTB is required to prepare an annual report, "California Income
Tax Expenditures," describing tax expenditures found in the PIT
and the CT Laws.
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 then direct expenditures once they are put in place.
While infrequent legislative review offers taxpayers greater
certainty, it also results 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. While it takes
a two-thirds vote to make a budgetary appropriation, a tax
expenditure measure can be enacted by a simple majority vote.
It should also be noted that, once enacted, it generally takes a
two-thirds vote to rescind an existing tax expenditure. This
effectively results in a "one-way ratchet" whereby tax
expenditures can be conferred by majority vote, but cannot be
rescinded, irrespective of the efficacy, without a supermajority
vote.
How much do tax expenditures "cost" the state ? According to the
DOF, the vast majority of tax expenditures are included in the
PIT Law. To this end, the DOF estimates that tax expenditures
reduced PIT revenues by roughly $31 billion in FY 2010-11. The
sales and use tax (SUT) Law, in turn, contains identifiable
state tax expenditures worth about $11 billion annually. For FY
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2010-11, corporate tax expenditures amounted to roughly $5
billion.
What does this bill do ? This bill is intended to create a
mechanism for the legislative review of certain tax expenditures
for the purpose of evaluating their effectiveness and
compatibility with present day state policy objectives.
Specifically, it requires each bill enacting a new tax credit to
describe the goals, purposes, and objectives for authorizing
such a credit, to specify detailed performance indicators
intended to measure the effectiveness of the credit, and to
mandate an automatic 10-year sunset for the operation of the
credit. This bill is narrowly tailored to apply only to tax
credits, as opposed to all tax expenditures. Furthermore, it
would only apply to new tax credits, i.e., tax credits that are
enacted by bills introduced on or after January 1, 2012.
How effective is this bill ? Both the Assembly Revenue and
Taxation Committee and its Senate counterpart already require
the vast majority of tax expenditure measures they pass out to
contain a built-in repeal date. However, while the Assembly
Revenue and Taxation Committee routinely requires sunset dates
to be added to tax expenditure measures, there is nothing in
existing law that would require them to do so in the future.
Moreover, in the past few years, some of the most dramatic
changes to our tax code have been enacted as part of the
budgetary process beyond the review of this Committee. However,
even if a general sunset requirement were included in statute,
there would be nothing to prevent a future Legislature from
enacting an open-ended tax expenditure "notwithstanding" the
statutory prohibition. Indeed, there is considerable question
as to whether such a prohibition would have any binding effect.
�See e.g., United Milk Producers of California v. Cecil (1941)
47 Cal.App.2d 758, 764-65, noting that the Legislature cannot
declare in advance the intent of a future Legislature]. Courts
have long held that one legislative body may not limit or
restrict its own power or that of subsequent legislatures, and
the act of one Legislature may not bind its successors �County
of Los Angeles v. State of California (1984) 153 Cal.App.3d 568,
573]. In practical terms, it means that subsequent Legislatures
are under no legal obligation to comply with the provisions of
this bill. Furthermore, since this bill is a statutory, and not
a constitutional, measure, any subsequent Legislature could
easily dispense with this requirement by simply including a
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provision in a statute that would override Revenue and Taxation
Code Section 40.
Analysis Prepared by : Jeremy Ghassemi and Oksana Jaffe / REV. &
TAX. / (916) 319-2098
FN: 0001514