Existing law imposes various taxes, including taxes on the privilege of engaging in certain activities. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill, for the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services to provide a state prison with goods, services, or both, would impose a tax on specified taxpayers vendors, as defined, at the rate equal to 10% of the final contract price price, as defined, for contracts entered into on or after January 1, 2018. The bill would require all amounts paid, less refunds, to be deposited into the State Incarceration Prevention Fund, which this bill would establish in the State Treasury, and would continuously appropriate those moneys to the State Department of Education for preschool and after school programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs, less the amount needed to reimburse the State Board of Equalization and the Attorney General for costs incurred in administering these provisions. The bill would prohibit this tax from being passed through to the state by way of higher prices for the goods or services in the contract, and would require the taxpayer a vendor to certify under penalty of perjury that this tax was not passed through to the state. The bill would require the taxpayer a vendor to pay a penalty if it fails to comply with these provisions. The bill would require the Attorney General to enforce this prohibition and would authorize the Attorney General to monitor and investigate taxpayers to ensure that they are not passing this tax through to the state, and monitor and, if necessary, investigate any instance where a vendor has passed or attempted to pass the tax through to the state. The bill would require the State Board of Equalization to administer assess and collect the tax imposed by this part pursuant to the Fee Collection Procedures Law. Law and would provide an appeals process for a person from whom the state incarceration prevention tax is determined to be due, as provided.

By expanding the application of the Fee Collection Procedures Law, the violation of which is a crime, and by expanding the scope of the crime of perjury, this bill imposes a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

This bill would declare that it is to take effect immediately as an urgency statute.

Existing law imposes various taxes, including taxes on the privilege of engaging in certain activities. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill, for the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services to provide a state prison with goods, services, or both, would impose a tax on specified taxpayers in the amount of at the rate equal to 10% of the final contract price for contracts entered into on or after January 1, 2018. The bill would require all amounts paid, less refunds, to be deposited into the State Incarceration Prevention Fund, which this bill would establish in the State Treasury, and would continuously appropriate those moneys to the State Department of Education for preschool and after school programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs, less the amount needed to reimburse the State Board of Equalization and the Attorney General for costs incurred in administering these provisions. The bill would prohibit this tax from being passed through to the state by way of higher prices for the goods or services in the contract, and would require the taxpayer to certify under penalty of perjury that this tax was not passed through to the state. The bill would require the taxpayer to pay a penalty if it fails to comply with these provisions. The bill would authorize the Attorney General to monitor and investigate taxpayers to ensure that they are not passing this tax through to the state, and would require the State Board of Equalization to administer the tax imposed by this part pursuant to the Fee Collection Procedures Law.

By expanding the application of the Fee Collection Procedures Law, the violation of which is a crime, and by expanding the scope of the crime of perjury, this bill imposes a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law imposes various taxes, including taxes on the privilege of engaging in certain activities. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax on bill, for the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services to provide a state prison with goods and services goods, services, or both, would impose a tax on specified taxpayers in the amount of __ percent 10% of the final contract price for contracts entered into on or after January 1, 2018. The bill would require all amounts paid, less refunds, to be deposited into the State Incarceration Prevention Fund, which this bill would establish in the State Treasury, and would continuously appropriate those moneys to the State Department of Education for preschool and after school programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs, less the amount needed to reimburse the State Board of Equalization and the Attorney General for costs incurred in administering these provisions. The bill would prohibit these taxes this tax from being passed through to the state by way of higher prices for the goods or services in the contract, and would require the taxpayer to certify under penalty of perjury that they have not passed on this tax was not passed through to the state. The bill would require the taxpayer to pay a penalty if it fails to comply with these provisions. The bill would authorize the Attorney General to monitor and investigate taxpayers to ensure that they are not passing this tax through to the state, and would require the State Board of Equalization to administer the tax imposed by this part pursuant to the Fee Collection Procedures Law.

By expanding the application of the Fee Collection Procedures Law, the violation of which is a crime, and by expanding the scope of the crime of perjury, this bill imposes a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Existing law imposes various taxes, including taxes on the privilege of engaging in certain activities. The Fee Collection Procedures Law, the violation of which is a crime, provides procedures for the collection of certain fees and surcharges.

This bill would impose a tax on the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation, or the Department of General Services to provide a state prison with goods and services in the amount of __ percent of the final contract price for contracts entered into on or after January 1, 2018. The bill would require all amounts paid, less refunds, to be deposited into the State Incarceration Prevention Fund, which this bill would establish in the State Treasury, and would continuously appropriate those moneys for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs, less the amount needed to reimburse the State Board of Equalization and the Attorney General for costs incurred in administering these provisions. The bill would prohibit these taxes from being passed through to the state by way of higher prices for the goods or services in the contract, and would require the taxpayer to certify under penalty of perjury that they have not passed on this tax to the state. The bill would require the taxpayer to pay a penalty if it fails to comply with these provisions. The bill would authorize the Attorney General to monitor and investigate taxpayers to ensure that they are not passing this tax through to the state, and would require the State Board of Equalization to administer the tax imposed by this part pursuant to the Fee Collection Procedures Law.

By expanding the application of the Fee Collection Procedures Law, the violation of which is a crime, and by expanding the scope of the crime of perjury, this bill imposes a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Date of Hearing: May 17, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 43

Author:(Thurmond) – As Amended Ver:May 10, 2017

Urgency: Yes State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill imposes a 10% tax on the privilege of contracting with a state prison to provide a state prison with goods or services, and establishes the State Incarceration Prevention Fund (SIPF) for preschool and afterschool programs for purposes of providing services to prevent incarceration. Specifically, this bill:

1. Imposes a tax worth 10% of the final contract price on contracts entered into with a state prison, the California Department of Corrections and Rehabilitation (CDCR), or the Department of General Services (DGS). This tax is to be paid by the contractor and applies to contracts entered into or after January 1, 2018.
2. Prohibits contractors from passing the costs of the tax onto the state and requires the Attorney General (DOJ) to enforce this provision.
3. Requires CDCR and DGS to transmit to the Board of Equalization (BOE) specified information on receipts and contact information of contractors, and requires BOE to assess and collect the tax. BOE must then remit the tax into the SIPF.
4. Establishes guidelines for appeals and refunds.

FISCAL EFFECT:

1. Increased revenue in the range of $150 million (SIPF) per year as a result of a 10% tax on contacts with a total value of approximately $1.5 billion.
2. Significant one-time costs in excess of $200,000 and ongoing costs in excess of $1.1 million for the administration and enforcement of the proposed tax program, including:
3. One-time administrative costs of $100,000 and ongoing administrative costs in excess of $250,000 for BOE to develop and operate the proposed tax collection program. Initial years of administration may require a GF loan, but in subsequent years the BOE would be reimbursed from the SIPF.
4. One-time administrative costs of $100,000 and ongoing administrative costs of $700,000 for DGS to develop and implement new regulations and to maintain and audit contractor certifications for each contract awarded.
5. Unknown one-time administrative costs and ongoing costs in excess of $150,000 for CDCR to develop and implement new processes and to maintain and audit contractor certifications.
6. Unknown costs for DOJ to enforce the provision that prohibits vendors from passing the tax onto the state. DOJ would be reimbursed from the SIPF for its enforcement costs.
7. Unknown impact on contract prices for CDCR and DGS. While the bill prohibits contractors from passing the tax on to customers, it is unclear how this will be enforced. It can be assumed that there would be some impact on the prices faced by DGS and CDCR, though the extent of those price increases is unknown.

COMMENTS:

1. Background. Current law authorizes DGS to contract for various services on behalf of most state agencies. CDCR is authorized to contract for provisions, clothing, medicines, forage, fuel, and all other staple supplies needed for the support of the prisons for any period of time, not exceeding one year. In total, the value of contracts related to state prisons last year was approximately $1.5 billion.
2. Purpose. According to the author, AB 43 will tax those who profit off incarceration and therefore provide a reliable revenue stream to support critical programs that can help reduce future incarceration rates. The author notes that while California’s corrections budget is set to increase to $11.3 billion this year, support for pre-school has been insufficient and funding is vulnerable to budget volatility.
3. Recent Amendments. This bill proposes a new type of tax program to fund preschool and afterschool programs. As the Assembly Committee on Revenue and Taxation’s analysis notes, this new tax would be the first time in California that a tax is imposed on standalone services, and since the bill’s introduction additional amendments have added clarity and scope. AB 43’s most recent amendments address some core concerns around implementation and enforcement by clarifying that BOE is responsible for the collection of the tax and that DGS and CDCR are responsible for sending relevant information to BOE. Thus, rather than DGS and CDCR becoming, in effect, tax collection agencies, the latest version of this bill aligns tax collection processes with other BOE-run programs.
4. Impact on contract prices. One unresolved issue is the extent to which AB 43 will increase prices for state agencies. AB 43’s provision that prohibits contractors from passing costs down onto the state will be difficult to enforced, and it can be assumed that the state will incur some additional costs through increased prices. Therefore, this new tax program may transfer some moneys budgeted for CDCR and DGS to preschool and after-school programs.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 24, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 43 (

Author:Thurmond) – As Amended Ver:April 17, 2017

2/3 vote. Fiscal committee.

SUBJECT: Taxation: prison contracts: goods and services

SUMMARY: Imposes a 10% tax on the privilege of contracting with a state prison to provide a state prison with goods or services, and establishes the State Incarceration Prevention Fund (SIPF) for preschool and after school programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs. Specifically, this bill:

1. Imposes a 10% tax, on or after January 1, 2018, for the privilege of contracting with a state prison, the Department of Corrections and Rehabilitation (DCR), or the Department of General Services (DGS), to provide a state prison with goods, services, or both.
2. Establishes the SIPF in the State Treasury.
3. Requires a state prison, DCR, or DGS to collect the tax on a contract for goods and services for a state prison at the time a payment is made. The prison, DCR, or DGS shall remit the amount collected to the State Board of Equalization (BOE), and each entity shall file a return with the BOE on or before the last day of the month following each quarterly calendar period. The BOE shall transmit the payments, less refunds to the Treasury to be deposited into the SIPF.
4. Requires that all amounts deposited into the SIPF be continuously appropriated to reimburse the administrative costs of the BOE and the Attorney General. Any remaining funds shall be continuously appropriated to the State Department of Education to administer grants for preschool and after school programs to provide services that prevent people from being incarcerated and for providing early intervention programs.
5. Requires the BOE to administer this tax pursuant to the Fee Collection Procedure Law.
6. Provides that the tax imposed on contracts shall not be passed on to the state by way of higher prices for the goods or services in the contract. Requires the taxpayer to certify in the contract, under penalty of perjury, that the tax imposed has not been passed through to the state by way of higher prices for the goods and services in the contract.
7. Authorizes the attorney general to monitor and, if necessary, investigate any instance where a taxpayer has passed or attempted to pass the tax through to the state. A penalty of 1% of the final contract price shall be imposed for every instance that the taxpayer fails to comply with the provisions of this bill.
8. Defines a “taxpayer” as a person that contracts with a state prison, DCR, or DGS to provide a state prison with goods, services, or both. Exempts state and local agencies, and nonprofit organizations from the 10% tax.

EXISTING LAW:

1. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in California. Sales tax does apply to a very limited number of services that are closely connected to sales of TPP, such as mandatory service charges at a restaurant.
2. Imposes a complementary use tax on the storage, use, or other consumption in this state of TPP purchased from any retailer. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to a retailer registered to collect the California use tax, the purchaser remains liable for the tax, unless the use is exempted. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE.

FISCAL EFFECT: Unknown.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California spends a lot of money to incarcerate prisoners. Indeed the proposed corrections budget this year increases to $11.3 billion which is up from last year’s $10.6 billion. CDCR has approximately $4.5 billion in outstanding contracts with for-profit companies. In comparison, we spend very little on preschool and after-school programs known to decrease incarceration rates. Indeed if we are serious as a state about decreasing our prison population and educating our children, taxing those who profit off their incarceration and reinvesting those funds in educational opportunities is a sensible policy. Finally, this bill has the added benefit of providing a revenue stream for these critical programs that is immune from budget volatility. The proposed pause on the increase in preschool slots shows the importance of a non-budgetary funding source. While we may have paused the preschool slot increase, life did not pause for the more than 3,000 children who will not attend preschool this year and suffer the associated consequences.

1. Supporters of this bill state that “California spends large amounts to incarcerate prisoners. In comparison, the state spends relatively little on programs to prevent incarceration. Attempts at heavy investment in these programs have traditionally fallen victim to annual budget concerns. This year alone, a promised increase of over 3,000 preschool slots was cancelled due to budgetary volatility.” Supporters of this bill further state that “AB 43 would re-direct money generated by private companies that profit from the prison industry into a newly-created state fund for the purpose of keeping individuals from being incarcerated in the first place.”
2. Opponents state that “agencies rely upon small businesses to provide critical goods and services. In fact, using a small business as a contractor is an often much more cost effective means of conducting state business while creating much-needed jobs. It is in the public interest to spend taxpayer dollars most efficiently, and small businesses provide that benefit. In fact, the Governor has issued an executive order requiring 25% of all state contracts to be awarded to small businesses.” This tax is counterproductive to that goal.
3. Committee Staff Comments:
   1. Who pays the tax? This bill requires that none of the tax imposed on prison contracts be passed on to the state, DCR, or DGS. Unfortunately, the economic incidence of the tax does not depend on who is legally obligated to pay the tax but instead depends on the price elasticity of demand and the price elasticity of supply. “Elasticity” refers to the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to the changes in price or income. Theoretically, the incidence of a tax would fall only on the consumer (i.e., state, DCR, or DGS) if the demand for services and goods was perfectly inelastic meaning that, irrespective of the price, the quantity of services or goods purchased would be exactly the same. However, there is no such thing as a perfectly inelastic or elastic product; all markets fall between these two extremes, and ultimately the economic incidence of the tax is shared by both producers and consumers. It is, therefore, impossible to ensure that the 10% tax imposed by this bill will not be passed on to the state. Assuming that the provisions of this bill become law, some taxpayers that supply services to prisons might cease providing those services for fear of being investigated by the Attorney General. Alternatively, certain taxpayers may choose to pass on the tax to the state and pay the 1% penalty, which would also be shared by the state.
   2. Future savings: The fact that the tax will inevitably be shared by both the state and the supplier may be an acceptable consequence when one considers the possibility of reducing future incarceration rates. Studies have shown that a number of adult and juvenile justice and prevention programs have resulted in statistically significant reductions in crime and some of those programs may also render significant financial savings^[1]. As an example, functional family therapy (FFT)^[2] costs, on average, $2,380 per juvenile participant and can be expected to reduce recidivism rates by 18.1%, generating about $52,156 in life-cycle benefits^[3]. The net present value of this juvenile justice program is expected to be $49,776 per youth. As another example, cognitive-behavioral programs^[4] cost about $107 per offender, are expected to reduce recidivism rates by 6.9%, and generate about $15,469 in life-cycle benefits. The author states that similar results have been founds with preschool and afterschool programs.
   3. Taxing services: California charges a sales and use tax on a very small set of services - those that are essentially inseparable from sales of TPP or that are closely connected to sales of TPP, such as mandatory service charges at a restaurant. The 10% tax imposed by this bill functions as a sales tax; although the bill does not outline the number of services that are covered by the tax, this could potentially be the first time a tax is imposed on standalone services.
   4. Earmarked taxes: Revenues generated by this tax are used to pay for preschool and after school programs that prevent people from being incarcerated and providing early intervention programs. If this tax were to work as envisioned, funding for preschool and prevention programs would reduce future incarceration and recidivism rates which, in turn, would further reduce funding for these programs. In a way, this tax functions almost as a Pigouvian tax although it is unclear if the tax is meant to reduce crime, the rate of incarceration, or profits generated by private companies contracting with state prisons. As noted earlier, the penalty provision in this bill may unintentionally prevent all contracts from being executed and prevent revenue from being generated to fund preschool and after school programs.

The modern criteria for tax design are guided by efficiency, equity, and simplicity. These principles tend to favor broad-based taxes in order to minimize economic efficiency costs and maximize simplicity^[5]. Narrowly based taxes like the one proposed in this bill are not used very often; but if one is to be enacted, a direct link between the tax source and the expenditure should exist. It is true that private companies profit from contracting with state prisons, but these entities are not necessarily responsible for incarcerating individuals. These private companies do not enact sentencing guidelines nor do they necessarily engage in criminal justice policy. This bill also allocates funds to “preschool and afterschool programs for the purposes of providing services to prevent people from being incarcerated and providing early intervention programs,” but most preschools and afterschool programs are not specifically designed as early intervention programs or to prevent people from being incarcerated. It may be, as the author contends, that individuals who participate in preschool and afterschool programs are less likely to be incarcerated but these programs are not specifically designed with that goal in mind. It is therefore unclear if a nexus exists between the wide range of industries that provide goods and services to prisons and preschool and afterschool programs, whose primary goal is to educate the public.

• 1. Author’s amendment: The author has received approval from the Rules Committee to add an urgency clause to this bill.

REGISTERED SUPPORT / OPPOSITION:

Support

Advancement Project

Alliance for Boys and Men of Color

Anti-Recidivism Coalition

California Alternative Payment Program Association

California Federation of Teachers

California Legislative Black Caucus

California Nurses Association

California Teachers Association (Co-Sponsor)

Californians for Justice

First Five Association of California

Los Angeles Universal Preschool

National Nurses United

Partnership for Children & Youth

Service Employees International Union

Opposition

California Chamber of Commerce

California New Car Dealers Association

National Federation of Independent Business

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Drake, E.K., Aos, S., & Miller, M.G. Evidence-based public policy options to reduce crime and criminal justice costs: Implications in Washington State. Victims and Offenders, (2009)., Reynolds, A.J., & Temple, J.A., Prevention and cost-effectiveness in early intervention: A 20-year follow-up of a Child-Parent

   Center cohort. Minneapolis, McEvoy Lecture Series on Early Childhood and Public Policy, Humphrey Institute of Public Affairs, University of Minnesota. (2006)., Cohen, M.A., & Piquero, A.R. New evidence on the monetary value of saving a high risk youth. Journal of Quantitative Criminology, (2009). ↑

2. FFT programs involve an FFT-trained therapist working for about three months with a youth in the juvenile justice system and his or her family with the goal of increasing the likelihood that the youth will stay out of future trouble. ↑

3. Life-cycle benefits are measure in terms of the taxpayer and crime victim costs that are avoided because of the reduced long-run level of criminal activity. ↑

4. Cognitive behavior programs are a short-term, goal-oriented psychotherapy treatment that takes a hands-on, practical approach to problem-solving with the goal of changing patterns of thinking or behavior that are behind people’s difficulties, and so changing the way they feel. ↑

5. Rober Carling. Tax Earmarking: Is It Good Practice? The Center for Independent Studies, (2007). ↑