BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1185 HEARING: 4/11/12
AUTHOR: Price FISCAL: Yes
VERSION: 4/9/12 TAX LEVY: No
CONSULTANT: Grinnell
CENTRALIZED INTELLIGENCE PARTNERSHIP
Enacts the Centralized Intelligence Partnership Act
Background and Existing Law
I. Underground Economy. The California Constitution
establishes the Board of Equalization (BOE) as a
five-member board composed of four members elected by each
district plus the State Controller. Currently, BOE
administers sales and use taxes, excise taxes, special
taxes, and the state's fee programs. Retailers collect
sales taxes from customers when they purchase tangible
personal property, and remit those taxes quarterly to BOE.
The Franchise Tax Board (FTB) is a three-person board
comprised of the State Controller, Director of the
Department of Finance, and Chair of the BOE. FTB
administers the Personal Income Tax and Corporation Tax
Law, and collects debts on behalf of state and local
agencies. FTB may issue forms necessary to administer the
taxes. Employees and others receiving payments reconcile
amounts previously withheld with actual tax due when filing
their annual tax returns with FTB.
State law additionally directs:
The California Employment Development Department
(EDD) to administer the Unemployment Insurance Fund,
the Disability Insurance Fund, and the Employment
Training Fund, and collect deposits from employers for
these funds as well as personal income tax
withholding.
The Department of Insurance (DOI) to administer and
collect the Gross Premiums Tax, assessed on insurance
companies.
The Department of Motor Vehicles (DMV) to
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administer and collect vehicle license and
registration fees, regulate the sale of vehicles, and
protect consumers purchasing vehicles.
The Department of Industrial Relations (DIR) to
regulate workforce safety, administer the worker's
compensation program, and enforce most labor laws.
The Department of Justice (DOJ) to adequately and
uniformly enforce the state's laws, and represent the
people of the State of California in legal matters.
The Department of Consumer Affairs (DCA) and its
member bureaus, boards, and commissions generally
serve to protect California consumers, regulating more
than 100 business and 200 professional categories,
including barbers and cosmetologists, dentists, and
contractors, among others.
The Health and Human Services Agency (HHS) oversees
departments that provide Medi-Cal and In-Home
Supportive Services, among others.
In 1994, Governor Pete Wilson signed executive order
W-66-93, creating the Joint Economic Strike Force (JESF) to
address the problem of the underground economy. The JESF
is led by the Employment Development Department (EDD) and
housed within its Underground Economy Operations, and also
consists of the Labor Commissioner's Office, the Department
of Consumer Affairs, the Office of Criminal Justice
Planning, the Franchise Tax Board, the Board of
Equalization, and the Department of Justice, and was
codified by the Legislature (SB 1490, Johnston, 1994). The
JESF publishes an annual report documenting its efforts.
In 2005, Governor Arnold Schwarzenegger's 2005-06 Budget
established the Economic and Employment Enforcement
Coalition (EEEC), housed in DIR, and comprised of
investigators and auditors from DIR's Division of Labor
Standards Enforcement and Occupational Safety and Health,
together with EDD, DCA, and the Contractors' State License
Board. The United States Department of Labor also
participates in the coalition, which states that it is
"collaborating for vigorous and targeted enforcement
against unscrupulous businesses. EEEC aids in leveling
the playing field while restoring competitive advantage to
law abiding businesses and their employees." Governor
Brown renamed the EEEC the DIR Labor Enforcement Task Force
(LETF), effective January 1, 2012. DIR launched a new
collaborative effort between state agencies to combat
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illegal business practices and improve California's
business environment. LETF's primary partners are EDD, the
Contractors' State License Board, BOE, and the Bureau of
Automotive Repair, with collaboration by the Department of
Insurance, the Attorney General, and local district
attorneys.
Additionally, EDD operates the Questionable Employment Tax
Practices Program, initiated in 2007, which is a
collaborative effort between EDD and the Internal Revenue
Service (IRS). A memorandum of understanding between IRS
and EDD provides for information exchange.
II. Confidential Information. State law generally
prohibits unlawful disclosure or inspection of any income
tax return information except as specified in law.
Criminal sanctions, including possible imprisonment for
violation of income tax confidentiality, apply to BOE
personnel convicted of unlawful disclosure or inspection of
tax records. Other state agencies also have statutes
restricting use of information for administrative purposes,
and apply criminal misdemeanor or felony for unauthorized
uses.
Proposed Law
Senate Bill 1185 enacts the Centralized Intelligence
Partnership Act, and requires it to:
Provide a central intake process and organizational
structure to document, review, and evaluate data and
complaints.
Establish a processing center to receive and
analyze data, share complaints, and research leads
from the input of each impacted agency.
Provide participating and nonparticipating agencies
with value-added investigative leads where
collaboration opportunities exist for felony-level
criminal and civil investigations.
Provide that each participating and
nonparticipating agency retain jurisdictional
authority over whether to pursue partnership
strategies or collaborative investigative leads.
Document and provide data analysis, analytic data
findings, referrals, collaborative opportunities,
outcomes, emerging evasion trends, lessons learned, as
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well as additional enforcement, administrative, and
legislative opportunities.
The Partnership includes:
The California Health and Human Services Agency,
The Department of Consumer Affairs,
The Department of Industrial Relations,
The Department of Insurance,
The Department of Justice,
The Department of Motor Vehicles,
The Employment Development Department,
The Franchise Tax Board, and
The State Board of Equalization.
The measure establishes an advisory committee comprised of
one representative from each of the above-listed entities,
appointed by and serving at the pleasure of the entity's
head. The committee shall meet as needed, but at least
quarterly. The committee shall decide which agency shall
house the partnership's processing center.
SB 1185 allows duly authorized representatives of members
of the partnership to exchange intelligence, data,
documents, information, complaints, or lead referrals for
the purpose of investigating illegal, underground
operations. Any member or ex-member of the partnership, or
any agent employed by the partnership, or any person who
has obtained such knowledge from any of the above, shall
not divulge or make known any information in a manner not
allowed by law. Information shall retain its confidential
status and shall remain subject to specifically enumerated
confidentiality statutes guiding each agency.
The Partnership shall report to the Legislature on or
before January 1, 2018 specifying:
The number of leads or complaints the Partnership
receives,
The number of cases investigated and prosecuted
through criminal or civil action, and
Recommendations for modifying, eliminating, or
continuing the operation of the Partnership
The bill sunsets the partnership on January 1, 2020, and is
of that date repealed.
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State Revenue Impact
According to BOE, revenue increases of $15 million will be
associated with cooperative enforcement activities that
allow BOE to expand its capabilities to larger cases that
provide higher cost recovery per investigative hour.
However, BOE estimates between $250,000 and $1 million in
costs to provide its pro-rata share of investigators and
for the intake center.
According to FTB, the measure results in $1 million in
direct revenue gains and $11 million in deterrence.
However, FTB cannot currently identify implementation
costs.
Comments
1. Purpose of the bill . According to the Author, "I
authored Senate Bill 118 at the request of Board of
Equalization Chairman Jerome Horton to combat the
underground economy. According to the California Chamber
of Commerce the "underground economy" is a term that refers
to individuals and businesses that deal in cash and/or use
other schemes to conceal their business activities. In
doing so, they escape their true tax liability,
responsibilities to employees, government licensing,
regulatory and taxing agencies. The underground economy
hurts legitimate businesses, creates an enormous tax gap
and hurts all California due to the loss of revenue. The
Board of Equalization (BOE) estimates that the State of
California losses about $8 billion dollars annually in tax
revenue due to the underground economy. This revenue is
needed to fund critical programs such as education, public
safety, infrastructure and social services. Given the need
to eliminate the underground economy in order to support
legitimate businesses and fund critical programs to improve
the quality of life for Californians this bill must be
immediately approved by the Legislature and Governor.
SB 1185 will establish a Centralized Intelligence
Partnership among nine state entities in order to share
information, resources and best practices to reign in on
the underground economy. While there have been numerous
efforts and attempts to reign in on the underground economy
they have not been successful because of the lack of
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coordination and collaboration among state agencies.
Combating the underground economy is a difficult task and
it takes teamwork and the elimination state agencies
working only in functional silos.
The Centralized Intelligence Partnership would include the
following state entities: Board of Equalization, Franchise
Tax Board, Health and Human Services Agency, Department of
Consumer Affairs, Department of Industrial Relations,
Department of Insurance, Department of Justice, Department
of Motor Vehicles, and the Employment Development
Department. According to the Board of Equalization's
revenue estimate with the enactment of SB 1185 the
Centralized Intelligence Partnership will increase the BOE
investigations of underground economy activities by 120% of
its 2010-2011 figures. In its first year the Centralized
Intelligence Partnership is estimated to yield $15 million
dollars in tax revenues for the state.
SB 1185 is a win-win for California. This legislation
addresses the underground economy by establishing a
multi-agency partnership among state agencies. Given
chronic budgets deficits the state faces on an annual basis
we must reign in on the underground economy that robs our
state if the vital resources needed to fund programs so
that our residents can thrive and prosper."
2. Great expectations . SB 1185 creates the Centralized
Intelligence Partnership as a clearinghouse for various
agencies to come together to exchange information necessary
to prosecute violators engaged in illegal activity as part
of the underground economy. Prosecuting illegal activity
in the underground economy is notoriously difficult:
violators don't file for businesses licenses or pay taxes,
and compensate their employees in cash, leaving little to
no paper trail. Often times when authorities find
violators, the taxes avoided don't justify the costs of
deploying more auditors and prosecutors.
The problem of the underground economy is well-documented.
However, SB 1185's Partnership is the first such effort
focused on it, having been preceded by the JESF and the
EEEC, both of which have documented successes in bringing
together state agencies to focus efforts on the issue.
The Governor has also taken recent action, renaming the
EEEC into the LETC, building on EDD's expertise and
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previous work to address the underground economy through
the EDD. Should policymakers create another effort to
address a problem that is already the focus of existing,
successful efforts? What is it about this effort that will
bring success that justifies the cost and the effort? The
sponsor states that the information sharing enabled by the
bill will make the Partnership's work much more successful,
a tool that the previous efforts may lack. The Committee
may wish to consider adding the Partnership on top of
existing programs is the correct approach.
3. Being careful . Almost any multiagency effort can be
initiated and accomplished by interagency agreements
without a legislative bill. However, SB 1185 is necessary
to allow the agencies to "share intelligence, data,
documents, information, complaints, or lead referrals for
the purpose of investigating illegal, underground
operations." Recent amendments to the bill bar any member
or ex-member of the partnership, including any agent of the
partnership, who at any time has obtained knowledge, from
divulging the information or making it known in any way not
allowed by law. The amendments also import each agency's
information confidentiality statutes into the Partnership's
statute.
4. Going forward . SB 1185 does not define the term
"underground economy" undefined, creating uncertainty for
participating agencies, and delegates to the Partnership's
advisory board the power to decide which agency will house
the Partnership's processing center. Future Partnership
Multiagency meetings will seek to address these issues.
5. Sunset and Performance Measures . Recent amendments
sunset the program on January 1, 2020, and require the
Partnership to report on:
The number of leads or complaints received by the
partnership.
The number of cases investigated or prosecuted
through civil action or criminal prosecution.
Recommendations for modifying, eliminating, or
continuing the Partnership.
Support and Opposition (04/05/11)
Support : State Board of Equalization (Sponsor), California
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Taxpayers Association, California Chamber of Commerce,
California Spa and Pool Industry Association, California
Building Industry Association, California Healthcare
Institute, City of Southgate.
Opposition : None received.