The Personal Income Tax Law and the Corporation Tax Law impose taxes on, or measured by, income and allow various credits against the taxes imposed by those laws. Existing law requires the Franchise Tax Board to make available as a matter of public record each calendar year a list of the 500 largest tax delinquencies in excess of $100,000, and requires the list to include specified information with respect to each delinquency.

This bill would require the board to publish on its Internet Web site a document listing every taxpayer that has been allowed a credit in an amount of $1,000 or more under the Personal Income Tax Law or the Corporation Tax Law organized by tax credit, as specified. The bill would require the list to include certain information, including the dollar amount of tax credit and the taxable year for which it was allowed, and would require the board to update the list within 30 days of a taxpayer being allowed a credit under the Personal Income Tax Law or the Corporation Tax Law. Franchise Tax Board to provide a report to the Legislature, as provided, that includes the total amount of credits, as defined, allowed under the Personal Income Tax Law and the Corporation Tax Law for the previous taxable year.

The Personal Income Tax Law and the Corporation Tax Law impose taxes on, or measured by, income and allow various credits against the taxes imposed by those laws. Existing law requires the Franchise Tax Board to make available as a matter of public record each calendar year a list of the 500 largest tax delinquencies in excess of $100,000, and requires the list to include specified information with respect to each delinquency.

This bill would require the board to publish on its Internet Web site a document listing every taxpayer that has been allowed a credit in an amount of $1,000 or more under the Personal Income Tax Law or the Corporation Tax Law organized by tax credit, as specified. The bill would require the list to include certain information, including the dollar amount of tax credit and the taxable year for which it was allowed, and would require the board to update the list within 30 days of a taxpayer being allowed a credit under the Personal Income Tax Law or the Corporation Tax Law.

The Personal Income Tax Law and the Corporation Tax Law impose taxes on, or measured by, income and allow various credits against the taxes imposed by those laws. Existing law requires the Franchise Tax Board to make available as a matter of public record each calendar year a list of the 500 largest tax delinquencies in excess of $100,000, and requires the list to include specified information with respect to each delinquency.

This bill would require the board to publish on its Internet Web site a document listing every taxpayer that has been allowed a credit under the Personal Income Tax Law or the Corporation Tax Law organized by tax credit, as specified. The bill would require the list to include certain information, including the dollar amount of tax credit and the taxable year for which it was allowed, and would require the board to update the list within 30 days of a taxpayer being allowed a credit under the Personal Income Tax Law or the Corporation Tax Law.

Date of Hearing: June 27, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 1395

Author:(Moorlach) – As Amended Ver:May 2, 2018

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

SUMMARY:

This bill requires the Franchise Tax Board (FTB) to annually report the amounts of specified tax credit programs allowed for each industry, as defined. The report must include this required data for the Research and Development Credit, California’s Film and Television Tax Credit Program, the Low-income Housing Tax Credit, the California Competes Tax Credit, and the New Advanced Strategic Aircraft Hiring Credit.

FISCAL EFFECT:

Minor and absorbable costs for FTB to develop the report each year.

COMMENTS:

1. Background and purpose. Tax expenditures are tax provisions that reduce tax revenues in order to provide benefits to certain groups of taxpayers or to encourage certain types of behavior. Existing law requires the Department of Finance (DOF) to provide an annual report to the Legislature on tax expenditure programs and their costs. The estimated 2017-18 General Fund revenue loss associated with tax expenditures is $45 billion for those expenditures allowed under the Personal Income Tax Law, $9.3 billion for those allowed under the Sales and Use Tax Law, and $7 billion for those allowed under the Corporation Tax Law.

According to the author, SB 1395 will increase transparency around the use of tax credits and help ensure fairness and transparency within the California budget.

1. Staff comments. SB 1395 directly references tax expenditures authorized in the Revenue and Taxation Code, but some references may be outdated following the 2018-19 budget agreement. For example, SB 871 (Committee on Budget and Fiscal Review), which is awaiting the governor’s signature, adds a new code section to modify extend California’s Film and Television Tax Credit Program. As of the writing of this analysis, SB 871 has not been chaptered. However, if it is chaptered, SB 1395 should be amended to ensure that the proposed reporting requirement applies to the new version of the Film and Television Tax Credit.

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

Date of Hearing: June 18, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 1395

Author:(Moorlach) – As Amended Ver:May 2, 2018

Majority vote. Fiscal Committee.

SENATE VOTE: 34-0

SUBJECT: Personal Income Tax Law: Corporation Tax Law: credits

SUMMARY: Requires the Franchise Tax Board (FTB) to annually report the total amounts of specified credits allowed under the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law to the Legislature. Specifically, this bill:

1. Requires the FTB to provide a report to the Legislature by November 1, 2019, and each November 1st thereafter, which includes the total amount of specified credits allowed under the PIT Law and CT Law for the previous taxable year. The report must be submitted in compliance with Government Code Section 9795.
2. Provides that the total amount of credits shall be aggregated by lines of business described in codes of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget, 2012 edition.
3. Requires the report to include the following programs:
   1. Research and Development credit;
   2. Qualified motion picture credit;
   3. Low-income housing credit;
   4. California Competes Tax Credit; and,
   5. New Advanced Strategic Aircraft Hiring Credit.

EXISTING LAW:

1. Prohibits the disclosure of any taxpayer information, except as specifically authorized by statute. Generally, disclosure is authorized to other state tax agencies, federal tax agencies, and the Multistate Tax Commission solely for tax administration purposes.
2. Authorizes the FTB to publish statistical data related to taxpayer information so long as no individually identifiable information is revealed. Unauthorized disclosure of state tax information is a misdemeanor and unauthorized disclosure of federal tax information is a felony.
3. Requires the FTB to compile and make publically available an annual list that identifies the largest 500 tax debtors whose delinquencies exceed $100,000. The debtors are selected from both the PIT and CT records.
4. Requires the Department of Finance (DOF) to provide an annual report to the Legislature on tax expenditures providing details on individual categories of the expenditures and historical information on the enactment and repeal of the expenditures.

FISCAL EFFECT: The FTB states that "[t]his bill would not impact the state's income tax revenue."

COMMENTS:

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

Tax credits in California generally grant businesses and private individuals a no-strings-attached sum of money for a preferred activity or status through an income tax reduction. To date, the effectiveness of California taxpayer funded credits is questionable, with little discernable return back into the economy. Senate Bill 1395 seeks to increase transparency for these credits and keep taxpayers accountable for their businesses and spending habits with publicly subsidized dollars. SB 1395 will require the Franchise Tax Board to publish the total amount of credits given out in aggregate using the [NAICS]. The intent of this bill is to ensure fairness and transparency within the California budget. The credits will be published online and in a searchable format with sections for each tax credit. California taxpayers will then know exactly how their tax funds are being used.

1. Committee Staff Comments:
   1. Background: Tax expenditure programs are special tax provisions that reduce the amount of revenues the tax system would otherwise collect in order to provide benefits to certain groups of taxpayers and/or to encourage certain types of behavior and activities. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax.

State law generally prohibits the unlawful disclosure or inspection of any income tax return information, except as specifically authorized in statute. Generally, disclosure is authorized to other state agencies, federal tax agencies, and the Multistate Tax Commission solely for tax administration purposes. FTB may also publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed. Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 250 tax delinquencies over $100,000. This list was later expanded to the top 500.

Additionally, the State publishes two related reports. First, DOF is required to report tax expenditures on an annual basis. DOF's "Tax Expenditure Report" is a list of all tax expenditures, with revenue estimates. Second, FTB's "California Income Tax Expenditures: Compendium of Individual Provisions" describes and discusses each item in addition to providing foregone revenue totals and number of tax returns affected.

• 1. What does this bill do? This bill would require FTB to provide a report to the Legislature by November 1, 2019, and by November 1 each year thereafter, that includes the total amount of credits allowed for the previous taxable year for the following five tax credits: the Research and Development Credit, the Low-Income Housing Tax Credit, the California Competes Tax Credit, the Television and Motion Picture Production Credit, and the New Advanced Strategic Aircraft Hiring Credit. The total amount of credits shall be aggregated by lines of business described in NAICS codes, 2012 edition. As an example, the report would show that all California medical laboratories (NAICS 621511) claimed $22.3 million in research and development credits, and testing laboratories (NAICS 541380) claimed $7.8 million. However, as noted in FTB's analysis, taxpayers file using the Principal Business Activity Code (PBAC) that most closely matches their business operation. Combined reports use the PBAC, which may not be the same for all of the businesses included in the combined report. As such, self-identified returns may not be completely accurate.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

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

 THIRD READING  

Bill No: SB 1395

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 5-1, 4/25/18

AYES: McGuire, Beall, Hertzberg, Lara, Moorlach

NOES: Nguyen

NO VOTE RECORDED: Hernandez

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/18

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: Author

DIGEST:

This bill requires the Franchise Tax Board (FTB) to annually report to the Legislature the total amounts of specified credits allowed under the Personal Income Tax Law and the Corporation Tax Law.

ANALYSIS:

Existing law:

1. Allows various income tax credits and deductions, as well as sales and use tax exemptions.
2. Requires the Department of Finance to report annually regarding tax expenditures, which lists all tax expenditures above a certain revenue impact threshold, with revenue estimates and other information for each.
3. Prohibits unlawful disclosure or inspection of any income tax return information except as specified in law.
4. Applies criminal sanctions, including imprisonment, to FTB personnel convicted of unlawful disclosure or inspection of tax records.
5. Requires FTB to notify a taxpayer if criminal charges have been filed for willful unauthorized inspection or disclosure of their tax data.
6. Instead allows FTB to publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed.
7. Directs FTB to publish a list of the top 250 tax delinquencies over $100,000 (AB 1418, Horton, Chapter 716, Statutes of 2006), which was subsequently expanded to the top 500 (AB 1424, Perea, Chapter 455, Statutes of 2011), notwithstanding the above provisions.

This bill:

1. Requires FTB to provide a report to the Legislature by November 1, 2019, and by November 1 each year thereafter, that includes the total amount of the following credits claimed against the Personal Income or Corporation Tax:
   1. Research and development.
   2. Qualified motion picture production.
   3. Low-income housing.
   4. The GO-Biz California Competes Credit.
   5. Qualified wages for qualified employees paid in connection with the new advanced strategic aircraft for the United States Air Force.
2. Directs FTB to aggregate credit claims by lines of business described in codes of the North American Industry Classification System published by the United States Office of Management and Budget, 2012 edition.
3. States that the report must be submitted in compliance with provisions in existing law.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, FTB indicates that its costs to administer this bill have yet to be determined. Thus, costs of this bill are unknown, potentially over $50,000 in any given year (General Fund). This bill would have no revenue impact.

SUPPORT: (Verified 5/25/18)

None received

OPPOSITION: (Verified 5/25/18)

None received

ARGUMENTS IN SUPPORT: According to the author, “Tax credits in California generally grant businesses and private individuals a no-strings-attached sum of money for a preferred activity or status through an income tax reduction. To date, the effectiveness of California taxpayer funded credits is questionable, with little discernable return back into the economy. Senate Bill 1395 seeks to increase transparency for these credits and keep taxpayers accountable for their businesses and spending habits with publicly subsidized dollars. SB 1395 will require the Franchise Tax Board to publish the total amount of credits given out in aggregate using the North American Industrial Classification System Codes format (NAICS). The intent of this bill is to ensure fairness and transparency within the California budget. The credits will be published online and in a searchable format with sections for each tax credit. California taxpayers will then know exactly how their tax funds are being used.”

Prepared by:

5/26/18 15:14:43

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1395 (Moorlach) - Personal Income Tax Law: Corporation Tax Law: credits

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1395 would require the Franchise Tax Board (FTB) to annually report to the Legislature the total amounts of specified credits allowed under the Personal Income Tax Law and the Corporation Tax Law.

Fiscal Impact:

FTB indicates that its costs to administer the bill have yet to be determined. Thus, costs of the bill are unknown, potentially over $50,000 in any given year (General Fund). The bill would have no revenue impact.

Background:

Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently $61 billion annually.

State law generally prohibits unlawful disclosure or inspection of any income tax return information, except as specifically authorized in statute. Generally, disclosure is authorized to other state agencies, federal tax agencies, and the Multistate Tax Commission solely for tax administration purposes. Criminal sanctions, including imprisonment, apply to FTB personnel convicted of unlawful disclosure or inspection of tax records. FTB must notify a taxpayer if criminal charges have been filed for willful unauthorized inspection or disclosure of their tax data. However, FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed. Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 250 tax delinquencies over $100,000. This list was later expanded to the top 500.

Additionally, unlike the federal government, California does not include tax expenditures as part of the state budget. Instead, the State publishes two related reports. First, as noted above, the Government Code requires the Department of Finance (DOF) to report annually regarding tax expenditures. DOF’s “Tax Expenditure Report” is a list of all tax expenditures, with revenue estimates and other information for each. Second, FTB’s “California Income Tax Expenditures: Compendium of Individual Provisions” describes and discusses each item in addition to providing foregone revenue totals and number of tax returns affected.

Proposed Law:

This bill would require FTB to provide a report to the Legislature by November 1, 2019, and by November 1 each year thereafter, that includes the total amount of credits allowed for the previous taxable year, for the following five tax credits: the Research and Development Credit, the Low-Income Housing Tax Credit, the California Competes Tax Credit, the Television and Motion Picture Production Credit, and the New Advanced Strategic Aircraft Hiring Credit. The total amount of credits shall be aggregated by lines of business described in codes of the North American Industry Classification System, 2012 edition.

Related Legislation:

SB 1424 (Perea, Chapter 455, Statutes of 2011) among other things, increased the listing of the top 250 tax debtors to the top 500 tax debtors.

Staff Comments:

The previous version of this bill (March 22, 2018) would have required FTB to publish and maintain on its Internet site a document listing every taxpayer that has been allowed a tax credit in an amount exceeding $1,000 for any of the five preceding taxable years, as specified. This workload would have required a significant by FTB to (1) collect and assemble the required information from various sources throughout the department, and (2) post the information to its Internet site.

Thus, the scope of the current version of the bill has been significantly narrowed. FTB has yet to identify costs; however, staff and related expenses could exceed $50,000 in a future year.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal Income Tax Law: Corporation Tax Law: credits

Requires FTB to publish and maintain on its Internet Web site a document listing every taxpayer that has been allowed a tax credit in an amount exceeding $1,000 for any of the five preceding taxable years.

Background

California law allows various income tax credits and deductions, as well as sales and use tax exemptions. The Legislature enacts such tax incentives to either compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61.3 billion per year.

State law generally prohibits unlawful disclosure or inspection of any income tax return information except as specified in law. Criminal sanctions, including imprisonment, apply to FTB personnel convicted of unlawful disclosure or inspection of tax records. The Franchise Tax Board (FTB) must notify a taxpayer if criminal charges have been filed for willful unauthorized inspection or disclosure of their tax data. However, FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed. Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 250 tax delinquencies over $100,000 (AB 1418, Horton, 2006), which was subsequently expanded to the top 500 (AB 1424, Perea, 2011).

Additionally, unlike the federal government, California does not include tax expenditures as part of the budget. Instead, the state publishes two reports:

• First, the Government Code requires the Department of Finance (DOF) to report annually regarding tax expenditures. DOF’s “Tax Expenditure Report” is a list of all tax expenditures, with revenue estimates and other information for each: http://www.dof.ca.gov/research/economic-financial/#anchorTaxExpenditureReports
• Second, Franchise Tax Board’s “California Income Tax Expenditures: Compendium of Individual Provisions” http://ftb.ca.gov/aboutftb/plans_reports.shtml describes and discusses each item in addition to providing foregone revenue totals and number of returns affected.

Seeking additional transparency, the author wants FTB to publish an annual list of all taxpayers claiming more than a specified amount of tax credits.

Proposed Law

Senate Bill 1395 requires FTB to publish and maintain on its Internet Web site a document listing every taxpayer that has been allowed a tax credit in an amount exceeding $1,000 for any of the five preceding taxable years. The measure applies both to taxpayers under the Personal Income and Corporation Taxes. The document must contain:

• A separate section for each credit,
• The name of each taxpayer that has been allowed a credit, the dollar value of the credit, and the taxable year in which the credit was allowed in each section, and
• The person to whom a credit was assigned or transferred, if the credit has been assigned or transferred.

FTB must update the document within 30 days of a taxpayer being allowed a credit. SB 1395 states that its provisions apply notwithstanding any other law, including residence addresses of any person contained in the records of the Department of Motor Vehicles or the Department of Housing and Community Development.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “Tax credits in California generally grant businesses and private individuals a no-strings-attached sum of money for a preferred activity or status through an income tax reduction. To date, the effectiveness of California taxpayer funded credits is questionable, with little discernable return back into the economy. Senate Bill 1395 seeks to increase transparency for these credits and keep taxpayers accountable for their businesses and spending habits with publicly subsidized dollars. SB 1395 will require the Franchise Tax Board to publish the total amount of credits given out in aggregate using the North American Industrial Classification System Codes format (NAICS). The intent of this bill is to ensure fairness and transparency within the California budget. The credits will be published online and in a searchable format with sections for each tax credit. California taxpayers will then know exactly how their tax funds are being used.”

2. Piercing the veil. Financial information is highly sensitive. As a result, federal and state law makes taxpayer information confidential, including the types and amounts of tax credits claimed. State law allows felony prosecution for unlawful inspection and disclosure of confidential taxpayer information to enforce these safeguards, and FTB must notify any taxpayers if criminal charges are filed. SB 1395 pierces the veil of taxpayer confidentiality by requiring FTB to publish a document setting forth the specific names of the taxpayers, and the specific amount each is allowed from California’s tax credit pie. While taxpayer privacy is the cornerstone of a self-assessed income tax system, taxpayer level data would help policymakers assess the specific effects the state’s tax credits has on its largest companies. However, it would do so at the cost of taxpayer confidentiality. The Committee may wish to consider whether directing FTB to report aggregate data by business type using its appropriate North American Industrial Classification System code is a better way of balancing transparency with taxpayer confidentiality. For example, instead of seeing that ABC laboratories claimed $1.2 million in research and development credits in the 2019 taxable year, the report would instead show that all California medical laboratories (NAICS 621511) claimed $22.3 million in research and development credits that year, and testing laboratories (NAICS 541380) claimed $7.8 million.

3. Scope? Currently, SB 1395 applies to all tax credits allowed over $1,000 or more for any of the five preceding taxable years. While this requirement would generate significant amounts of new information, it could produce too much. For example, the current personal exemption credit is $114 for individuals, but $353 for dependents, so a family of five could easily claim more than $1,000 in credits in a year. The measure may compel FTB to include these taxpayers in its report. Instead, the Committee may wish to narrow the measure’s scope by amending SB 1395 to apply to a smaller set of credits, or only to the five tax credits with the most significant impacts on revenue: The Research and Development Credit, the Low-Income Housing Tax Credit, the California Competes Tax Credit, the Television and Motion Picture Production Credit, and the New Advanced Strategic Aircraft Hiring Credit.

4. Timing. SB 1395 currently requires FTB to update the document showing taxpayers and the tax credits they’re allowed within 30 days of the taxpayer being allowed a credit. FTB receives approximately 17 million returns per year. While most taxpayers file returns electronically, many still file manually, requiring FTB to process and scan the returns by hand. As a result, a 30 day window may not be practical given FTB’s current resources and information technology. The Committee may wish to consider instead requiring FTB to report annually by a specified date based on the most recent taxable year for which data is available.

5. Prior legislation. SB 1395 is not the first effort to increase transparency by requiring FTB to disclose specified information. In addition to the top 500 delinquent list, the Legislature considered two other bills in the past:

• AB 2666 (Skinner, 2010): required FTB to compile information on tax expenditures claimed and reported by publicly traded companies, and directed the State Chief Information Officer to publish this information on the Reporting Transparency in Government website. Governor Schwarzenegger vetoed the bill, stating:

To the Members of the California State Assembly:

I am returning Assembly Bill 2666 without my signature. My Administration has consistently supported efforts for greater transparency in government, including the "Reporting Transparency in Government" website. However, this bill inappropriately seeks to publish confidential tax information for no apparent benefit. The Franchise Tax Board and the Department of Finance already publish annual reports detailing all tax expenditures, their cost, their intended benefit and other useful information. The Franchise Tax Board also publishes an annual well-known list that identifies the largest 250 tax delinquencies of individual and business taxpayers. I am unclear as to the need for this bill, other than for the sponsor to continue to provoke and alienate businesses attempting to create jobs and economic recovery in California.

For these reasons, I am unable to sign this bill.

Sincerely,

Arnold Schwarzenegger

• SB x6 19 (Florez, 2010): required FTB to annually compile specified information on corporate tax expenditures claimed by publicly traded companies that receive $20,000 or more in credits. The information would be included on the state Reporting Transparency in Government website in a searchable database and available for download by the public in spreadsheet format. The Senate Appropriations Committee held the measure on its suspense file.

Support and Opposition

(4/20/18)

Support: Unknown.

Opposition: Unknown.

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