BILL ANALYSIS �
SB 1335
Page 1
SENATE THIRD READING
SB 1335 (Leno)
As Amended June 30, 2014
Majority vote
SENATE VOTE :22-13
REVENUE & TAXATION 6-3 APPROPRIATIONS 11-6
-----------------------------------------------------------------
|Ayes:|Bocanegra, Gordon, Bloom, |Ayes |Bocanegra, Bradford, Ian |
| |Pan, | |Calderon, Campos, Eggman, |
| |V. Manuel P�rez, Ting | |Gomez, Holden, Pan, |
| | | |Quirk, Ridley-Thomas, |
| | | |Weber |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Harkey, Beth Gaines, |Nays:|Gatto, Bigelow, Donnelly, |
| |Dahle | |Jones, Linder, Wagner |
| | | | |
-----------------------------------------------------------------
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
SB 1335
Page 2
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
for review of tax credit programs.
3)Provides that Revenue and Taxation Code (R&TC) Section 19542,
relating to the disclosure of taxpayer information, applies to
performance data collected by the Legislature.
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;
SB 1335
Page 3
g) For PIT expenditures, the number of affected taxpayers;
h) For CT and sales and use tax 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, exemption, or any other tax benefit as provided for
by the state."
FISCAL EFFECT : According to the Assembly Appropriations
Committee, no immediate fiscal impact; potentially significant
costs to the Franchise Tax Board and other state departments to
implement the data collection and performance evaluation
requirements for future tax credit bills.
COMMENTS : 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
SB 1335
Page 4
performance measure to tax credits that it applies to
spending programs.
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 goals, detailed performance indicators, and
data collection requirements."
Assembly Revenue and Taxation Committee comments:
1)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.
2)Current Review of Tax Expenditures: Although there is no
requirement for the Legislature itself to review existing tax
SB 1335
Page 5
expenditures, several state agencies are required to issue
annual tax expenditures reports. In 1985, the Legislature
passed ACR 17 (Bates), Resolution Chapter 70, 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.
3)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
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.
4)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,
SB 1335
Page 6
but cannot be rescinded, irrespective of their efficacy,
without a supermajority vote.
5)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
that would override R&TC Section 41.
6)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
SB 1335
Page 7
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.)
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.
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098
FN: 0004460