BILL ANALYSIS �
SB 1335
Page 1
Date of Hearing: June 25, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 1335 (Leno) - As Amended: April 2, 2014
Majority vote.
SENATE VOTE : 22-13
SUBJECT : Income and corporation taxes: credits: information
SUMMARY : Applies performance measurement standards to any new
tax credit under either the Personal Income Tax (PIT) or
Corporation Tax (CT) Law if enacted by a bill introduced on or
after January 1, 2015. Specifically, this bill :
1)Requires a bill, introduced on or after January 1, 2015,
authorizing a new credit under either the PIT Law or the CT
Law, to state 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; and,
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, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
2)Makes legislative findings and declarations regarding the need
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for review of tax credit programs.
EXISTING LAW :
1)Provides various tax credits, deductions, exclusions, and
exemptions. Some of these tax expenditures are designed to
provide relief to taxpayers who incur specified expenses
(e.g., costs incurred in adopting a child). Other tax
expenditures are designed to encourage socially or
economically beneficial behavior.
2)Requires, under Government Code (GC) Section 13305, the
Department of Finance (DOF) to provide an annual report to the
Legislature on tax expenditures by no later than September 15
of each year. The report must contain each of the following:
a) A list of all tax expenditures exceeding $5 million in
annual cost;
b) The statutory authority for each tax expenditure;
c) A description of any legislative intent articulated for
each tax expenditure;
d) The sunset date of each tax expenditure, if applicable;
e) Identification of the beneficiaries of each tax
expenditure;
f) An estimate or range of estimates for the state and
local revenue loss for the current fiscal year (FY) and the
two subsequent FYs;
g) For PIT expenditures, the number of affected taxpayers;
h) For CT and sales and use tax (SUT) expenditures, the
number of returns filed or businesses affected;
i) Identification of any comparable federal tax
expenditure; and,
j) A description of any tax expenditure evaluation
completed by any state agency since the last report made.
3)Defines a tax expenditure as "a credit, deduction, exclusion,
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exemption, or any other tax benefit as provided for by the
state."
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Statement . The author has provided the following
statement in support of this bill:
Policymakers and the public need tools to measure the
performance of tax credits and evaluate their
effectiveness. California forgoes more than $47 billion in
revenue from tax preferences. Tax credits should be
evaluated alongside direct spending programs, as both are
public initiatives meant to accomplish specified goals.
For example, families in our state who receive child care,
health care, and other state supports are subject to strict
reporting and eligibility requirements. Businesses that
work with the state are subject to strict performance based
contracts to ensure they meet goals set out by the state.
Tax credits, however, do not include similarly stringent
accountability measures and face less oversight than many
activities on the direct spending side of the budget. The
lack of scrutiny makes it difficult for us to demonstrate
transparency and accountability when investing public
dollars in tax credits. SB 1335 provides the Legislature
with the tools to apply the same level of review and
performance measure to tax credits that it applies to
spending programs.
2)Arguments in Support . Supporters of this bill argue that
"[n]ational and state public finance experts recommend that
tax preferences be evaluated alongside direct spending
programs, as both are public initiatives meant to accomplish
specified goals. Tax expenditures do not include stringent
accountability measures and face less oversight than many
activities on the direct spending side of the budget. The
lack of scrutiny makes it difficult for government to
demonstrate transparency and accountability when investing
public dollars in economic incentives such as tax
preferences." Furthermore, supporters argue that this bill
provides the "Legislature and public with the necessary tools
to make transparent and hold accountable when investing public
dollars by requiring new tax credits ? to include specific
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goals, detailed performance indicators, and data collection
requirements."
3)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 Treasury officials
and some Congressional tax staff began arguing in the late
1960's 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 report by the Legislative Analyst's
Office (LAO) shows that tax expenditure programs cost the
state nearly $50 billion in fiscal year 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 evasion, given the relatively low
level of audits.
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 Assembly Concurrent Resolution 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 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 Franchise Tax Board is
required to prepare an annual report, California Income Tax
Expenditures, describing tax expenditures found in the PIT and
the CT laws.
5)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, this bill requires each bill enacting a new tax
credit to describe the goals, purposes, and objectives for
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authorizing such a credit, and to specify detailed performance
indicators intended to measure the effectiveness of the
credit. This bill applies only to tax credits, as opposed to
all tax expenditures. Furthermore, this bill would only apply
to tax credits enacted by bills introduced on or after January
1, 2015.
6)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 economic certainty,
but it can also result in tax expenditures remaining a part of
the tax code in perpetuity without demonstrating any public
benefit. Second, 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 slightly different.
While an appropriation requires a two-thirds vote, tax
expenditure measures 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 their efficacy,
without a supermajority vote.
7)How Effective Is This Bill ? Even if the performance standards
in this bill were enacted into statute, there would be nothing
to prevent a future legislature from introducing new tax
credit expenditures "notwithstanding" the statutory
requirements. [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 measure, and not a constitutional
measure, any subsequent legislature could easily dispense with
this requirement by simply including a provision in a statute
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that would override Revenue and Taxation Code Section 41.
8)Should a Tax Credit be Enacted ? Creating performance
indicators, assuming they are perfectly designed to assess the
performance of a tax credit, may aid the Legislature in
determining whether a subsidy is functioning as designed. For
tax credits aimed at increasing economic growth, this could be
done by specifying that a certain level of unemployment,
inflation rate, or unemployment claims be met within a certain
period of time. However, these indicators fail to address
whether the tax credit is even needed. For example, as noted
by the Tax Foundation when discussing job growth that result
from increasing available tax credits, "subsidizing anything
gets you more of that thing." The appropriate question,
therefore, is not whether employment rises to predetermined
level but "whether the benefits of a given amount of net new
job creation and the net new investment exceed the cost."
(Important Questions to Ask in Evaluating a Film Tax Incentive
Program, Tax Foundation, March 2012.)
As noted earlier, subsidies can be used as a way of promoting
economic growth. However, providing a subsidy in a perfectly
competitive market increases the supply of a good or service
beyond the point of equilibrium, creating inefficiencies in
the market because the additional consumer/supplier surplus
created by the credit is less than the cost of the subsidy.
This does not mean that all subsidies produce inefficiencies.
For example, subsidies created to take advantage of positive
externalities, which are third-party benefits resulting from
an economic activity, may be appropriate in order to maximize
society's well-being. Therefore, the question of whether a
tax credit is needed should probably be answered before
attempting to measure the credit's success.
However, even if such an analysis is undertaken, understanding
the economic implications of a subsidy is not always clear.
As noted by the Joint Committee on Taxation when discussing
additional subsidies for research and development, "[i]t is
difficult to determine whether, at the present levels and
allocation of government subsidies for research, further
government spending on research or additional tax benefits for
research would increase or decrease overall economic
efficiency." (Joint Committee on Taxation, Description of
Revenue Provisions Contained in the President's Fiscal Year
2010 Budget Proposal, Part Two: Business Tax Provisions.)
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Part of the reason why it is unclear if additional tax credits
properly increase research and development, assuming more is
warranted, is that not everyone agrees with extent to which
taxes influence research. (Id.) Likewise, determining the
influence tax credits have on other areas of the economy will
also be problematic.
9)Previous Legislation . This bill is very similar to SB 1272
(Wolk), of the 2009-10 Legislative Session, and SB 508 (Wolk),
of the 2011-12 Legislative Session. The only real difference
between SB 1272 and SB 508 and this bill is the elimination of
the mandatory seven-year sunset date for all new tax credits.
Both SB 1272 and SB 508 were vetoed by the Governor. SB 1272
was vetoed by Governor Arnold Schwarzenegger, stating:
While the sponsors seem intent on eliminating measures that
will generate jobs and stimulate the economy, the average
California taxpayer would probably be better served if the
Legislature were willing to automatically sunset every new
spending entitlement, program expansion and business
mandate after 7 years.
SB 508, which was almost identical to SB 1272, was vetoed by
Governor Brown, stating:
While I agree that we should consider sunset clauses for
personal income and corporate tax credits, one size does
not fit all. The legislature should examine all its bills
to determine how long they should exist or, indeed, whether
they should exist at all.
The Governor's veto message for SB 508 raised an issue with
the sunset clause. That sunset clause is not include in SB
1335 and may, therefore, address the concern raised by the
current Governor. However, the Legislature's inability to
bind a future legislature may also prevent this bill from
becoming law.
10) Proposed Amendment . The author wishes to add an
amendment ensuring that Revenue and Taxation Code (R&TC)
Section 19542, relating to the disclosure of taxpayer
information, applies to data collected by the Legislature
for purposes of this bill. Additionally, the amendment
states that no reimbursement is required because the only
costs that may be incurred by a local agency or school
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district will be incurred because this act creates a new
crime or infraction, eliminates a crime or infraction, or
changes the penalty for a crime or infraction.
11) Related Legislation . SB 365 (Wolk) requires that a new
tax credit be operative for a period of 10 years and shall
include specified goals, objectives, and purposes, as well
as other detailed information relating to the credit's
effectiveness. SB 365 was substantially amended, deleting
the tax provisions and, instead, made changes to jail
construction and juvenile facilities.
12)Prior Legislation :
a) SB 508 (Wolk), of the 2011-12 Legislative Session, would
have provided that a new tax credit shall be operative for
a period of seven years and shall include specified goals,
objectives, and purposes, as well as other detailed
information relating to the credit's effectiveness. SB 508
was vetoed by the Governor.
b) SB 1272 (Wolk), of the 2009-10 Legislative Session,
would have provided that a new tax credit, enacted by a
bill introduced on or after January 1, 2011, shall be
operative for a period of seven years and shall include
specified goals, objectives, and purposes, as well as other
detailed information relating to the credit's
effectiveness. SB 1272 was vetoed by the Governor.
c) AB 2171 (Charles Calderon), of the 2009-10 Legislative
Session, would have conditioned the allowance of a tax
benefit on the passage of a separate statute. AB 2171 was
held on the Assembly Committee on Appropriations' Suspense
File.
d) AB 2641 (Arambula), of the 2009-10 Legislative Session,
would have required the Legislature to review, before
January 1, 2014, and every fifth year thereafter, each tax
expenditure, as specified, and provides that every new tax
expenditure that is enacted after the effective date of AB
2641 shall be repealed automatically on January 1, 2015,
and on January 1 of every fifth year thereafter, unless a
later statute provides otherwise. AB 2641 was held on the
Assembly Committee on Appropriations' Suspense File.
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e) ACA 6 (Charles Calderon), of the 2009-10 Legislative
Session, would have amended the State's constitution to,
among other things, limit the operative period to seven
years from the date of the enactment of a new or amended
tax credit. ACA 6 was never taken up on the Assembly
Floor.
f) AB 831 (Parra), of 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 was not
heard by Senate Committee on Revenue and Taxation.
g) AB 1933 (Coto), of 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
passage in the Senate Committee on Revenue and Taxation.
h) AB 2199 (Brown), of 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.
i) AB 2884 (Villaraigosa), of the 1995-96 Legislative
Session, would have required the Legislative Analyst,
together with DOF, FTB, and the Board of Equalization, to
conduct an evaluation of all tax expenditures, as defined.
AB 2884 failed to pass out of this Committee.
j) SB 1233 (Hayden), of the 1993-94 Legislative Session,
would have required the Legislative Analyst 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 whether there is a less costly way of providing
the same benefits. Governor Wilson vetoed SB 1233.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Conference of the Amalgamated Transit Union
California Conference of Machinists
California Nurses Association
California School Employees Association
Engineers & Scientists, IFPTE Local 20
International Longshore and Warehouse Union, Coast Division
Professional & Technical Engineers IFPTE Local 21
UNITE HERE
Utility Workers Union of America, Local 132
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098