Existing law, including, but not limited to, property tax law, the Sales and Use Tax Law, the Personal Income Tax Law, the Corporation Tax Law, the Motor Vehicle Fuel Tax Law, the law governing the taxation of insurers, the Use Fuel Tax Law, and the Diesel Fuel Tax Law provide for tax expenditures, including exemptions, deductions, exclusions, and credits against the taxes imposed by those laws.

This bill would establish in state government the California Tax Expenditure Review Board as an independent advisory body to comprehensively assess major tax expenditures, as defined, and make recommendations to the Legislature. The bill would require the board to be composed of 5 members, as specified, who would serve without compensation.

This bill would request the University of California, through a new or existing research center, to perform a comprehensive assessment of the major tax expenditures and to present a comprehensive, peer-reviewed assessment to the board by July 1, 2021, at a public hearing of the board. The bill, to the extent that the University of California needs access to taxpayer data and information, would require the Franchise Tax Board or the California Department of Tax and Fee Administration to ensure relevant taxpayer data is made available and ensure appropriate levels of data security and protections are in place for transferred and sensitive data. This bill would set forth the scope of the comprehensive assessment, which would include certain specified information, including a brief description of the beneficiaries of the tax expenditure, and would require the board to post the comprehensive assessment on its internet website after receipt. The bill would require the board to make recommendations to the Legislature regarding the major tax expenditures, and to provide a report to the Legislature that compiles all of its recommendations regarding those tax expenditures, after a vote of the members of the board, by January 1, 2022, as specified. The bill would also require the board to submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Governance and Finance, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, and post it on its internet website. The bill would require the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation, after receipt of the report by the Legislature, to hold a joint public hearing on the report by August 15 of the second year of the legislative session.

 VETO  

Bill No: SB 468

Author: Jackson (D), et al.

Amended: 9/3/19

Vote: 27

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/1/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Wiener

NO VOTE RECORDED: Nielsen

SENATE APPROPRIATIONS COMMITTEE: 4-2, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Bates, Jones

SENATE FLOOR: 27-9, 5/28/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NOES: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

NO VOTE RECORDED: Galgiani, Moorlach

SENATE FLOOR: 28-10, 9/11/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NOES: Bates, Caballero, Chang, Dahle, Grove, Jones, Morrell, Nielsen, Stone, Wilk

NO VOTE RECORDED: Borgeas, Moorlach

ASSEMBLY FLOOR: 53-21, 9/10/19 - See last page for vote

SUBJECT: Taxation: tax expenditures: California Tax Expenditure Review Board

SOURCE: California Tax Reform Association

California Teachers Association

DIGEST:

This bill establishes the California Tax Expenditure Review Board (Board) to determine the schedule for comprehensive assessments of major tax expenditures programs to be conducted by a University of California (UC) research center.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions. 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.
2. Requires the Department of Finance (DOF) to annually publish a list of tax expenditures, currently totaling around $65.2 billion per year.
3. Enacts several tax expenditures which contain sunset dates, which set a specific date before which a taxpayer can claim a tax benefit for performing the activity that qualifies for the tax benefit in a certain taxable or calendar year.
4. Directs the Legislative Analyst’s Office (LAO) to analyze specific aspects of new or extended tax expenditure programs, and report to the Legislature, usually one year before its sunset date, such as the Motion Picture Production Credit and the California Competes Tax Credit, among others.
5. Enacts several expenditures that result in the most foregone revenue do not have sunset dates, some of which parallel parts of the Internal Revenue Code.
6. Requires any bill introduced on or after January 1, 2015, that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve (SB 1335, Leno, Chapter 845, Statutes of 2014). The bill must also contain detailed performance indicators for the Legislature to use when measuring whether the tax credit meets its goals, purposes, and objectives.

This bill:

1. Establishes the Board as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature, consisting of five members:
   1. The State Controller, or the Controller’s designee, as Chair,
   2. The Legislative Analyst, or the Legislative Analyst’s designee,
   3. The California State Auditor, or the California State Auditor’s designee,
   4. The Director of DOF, or the Director of DOF’s designee, and
   5. An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and tax expenditures by the California Department of Tax and Fee Administration (CDTFA) and the Franchise Tax Board (FTB).
2. States that members of the Board serve without compensation, but would be reimbursed for necessary traveling and other expenses incurred in performing their duties and responsibilities
3. Permits the Board to create advisory committees that include members of the public.
4. Directs the Board and any advisory committees it establishes to keep official records of all of their proceedings.
5. Requires the Board to meet at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act.
6. Requests the UC Regents through a new or existing research center to conduct comprehensive assessments of major tax expenditures, as defined.
7. Provides that this bill applies to UC only to the extent that the Regents enact a resolution.
8. States that the center must present its comprehensive, peer-reviewed assessment of major tax expenditures to the Board at a public meeting by July 1, 2021.
9. Directs FTB and CDTFA to ensure relevant taxpayer data is made available to UC with appropriate levels of data security and protections.
10. Requires the Board to determine the scope of each comprehensive assessment, which must include, but is not limited to:
    1. A description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declarations of that intent or that legislative intent is otherwise expressed or specified by that act.
    2. A brief description of the beneficiaries of the tax expenditure as provided by state law.
    3. The number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available.
    4. A listing of any comparable federal tax benefit, if any.
    5. A description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency.
    6. The economic, social, environmental, or any other impact of the tax expenditure to the State using metrics UC deems appropriate.
    7. Total General Fund dollars lost due to the tax expenditure,
    8. Options for modifying the tax expenditure to improve its effectiveness or reduce cost to the General Fund.
11. Provides that the Board must post the assessments it receives on its internet site within five business days.
12. States that after the comprehensive assessment has been posted on the Board’s Internet Web site for at least 14 days, and no later than two months from the date the board posts the comprehensive assessment on its internet website, the Board must meet in public for the purposes of voting to make a recommendation to the Legislature regarding the major tax expenditure. Before making a recommendation, the Board must consider input from the public regarding the comprehensive assessment.
13. Provides that the votes of three members is necessary to make a recommendation.
14. States that any recommendation shall be subject to enactment by the Legislature, and that nothing in the measure shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.
15. Requires any recommendation to include:
    1. The extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.
    2. The major tax expenditure's effect on the state’s General Fund.
    3. The major tax expenditure’s economic, social, environmental, or any other impact.
    4. Preferred options for modifying the tax expenditure to improve its effectiveness or to reduce its costs to the General Fund, if these options are identified.
16. Directs the Board to provide a report to the Legislature, as specified, that compiles all of its recommendations regarding major tax expenditures, including any recommendation the Board failed to make for a major tax expenditure in which UC completed a comprehensive assessment, and the reasons for the failure, by January 1, 2022.
17. Requires the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the report by August 15 of the second year of the legislative session when the report is received.
18. Defines “major tax expenditure” as one that meets all of the following criteria:
    1. Does not have a repeal or inoperative date.
    2. Does not include metrics of efficacy reported as a requirement.
    3. For which the annual cost to the state has met or exceed $1 billion over the past 10 years.
    4. Is not one that is specifically excluded by the bill.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee:

1. Ongoing annual costs in the range of $150,000 to $200,000 each year the UC conducts a comprehensive assessment.
2. Possible cost pressures or increased revenues because of recommendations from the Board. While the Board’s recommendations are not binding, they could inspire future legislation that modifies or sunsets existing major tax expenditures.

SUPPORT: (Verified 10/18/19)

California Tax Reform Association (co-source)

California Teachers Association (co-source)

State Controller Betty Yee

Association of California School Administrators

California Association of School Business Officials

California Federation of Teachers

California Professional Firefighters

California Retired Teachers Association

California School Boards Association

California School Employees Association

California State PTA
Coalition for Adequate School Housing

Community College League of California
First Five California

Foothill De Anza Community College District
League of Women Voters California

SEIU California

Small School Districts Association

United Domestic Workers, AFSCME Local 3930

OPPOSITION: (Verified 10/18/19)

Advanced Medical Technology Association

African American Farmers Of California

Airlines for America

American Pistachio Growers

Association of California Life and Health Insurance Companies

Bay Area Council

Biocom

Building Owners and Managers Association of California

California Agricultural Aircraft Association

California Bankers Association

California Business Properties Association

California Business Roundtable

California Cable & Telecommunications Association
California Citrus Mutual

California Cotton Ginners and Growers Association

California Farm Bureau Federation
California Forestry Association

California Hotel & Lodging Association

California Independent Petroleum Association

California League of Food Producers

California Life Sciences Association

California Railroads

California Taxpayers Association

California Trucking Association

Camarillo Chamber of Commerce

Chambers of Commerce Alliance of Ventura and Santa Barbara Counties

Computing Technology Industry Association

Contra Costa Taxpayers Association

Council On State Taxation

Family Business Association of California

Farwest Equipment Dealers Association

International Council of Shopping Centers

Kern County Taxpayers Association

Maersk, Inc.

NAIOP of California

Nisei Farmers League

North Orange County Chamber of Commerce

Orange County Business Council

Orange County Taxpayers Association
Organization for International Investment

Oxnard Chamber of Commerce

Plant California Alliance

Qualcomm

San Gabriel Valley Economic Partnership

Santa Maria Valley Chamber of Commerce

Silicon Valley Leadership Group

Solano County Taxpayers Association

Sutter County Taxpayers Association

TechNet

Valley Industry and Commerce Association

West Coast Lumber & Building Material Association

Western Agricultural Processors Association

Western Growers Association

Western Manufactured Housing Communities Association

Western Plant Health Association

Western States Petroleum Association

Wine Institute

ARGUMENTS IN SUPPORT: According to the California Teachers Association (CTA), “California has spent over $66.6 billion on the top ten most costly tax credits and exemptions in the past decade. The Proposition 98 share of these top credits and exemptions was over $35 billion. During this same decade, California cut $65 billion from school funding to balance the state’s budget during the recession. As debates over tax reform in California have stalled, Legislators have increasingly turned to tax credits to advance policy interests without fully understanding or debating the impact of those tax credits on the state’s General Fund obligations or our system of school finance, Proposition 98. Every dollar of a tax credit to the General Fund that does not generate its cost in new revenue takes approximately 40 cents out of California’s classrooms, representing the share of revenues that would have gone to Proposition 98 from the General Fund. It requires only a simple majority vote in the Legislature to pass a tax expenditure, reducing the amount of taxes collected, yet it takes a 2/3 majority vote to repeal a tax expenditure once created. Care should be taken when creating a revenue-losing measure that would be difficult to undo. CTA believes transparency and accountability are essential to ensure California is receiving its return on investments. Without a regular system of evaluation and metrics used to assess the economic benefits created by both tax credits and exemptions there is no way to identify whether these benefits have actually occurred.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “While we appreciate the stated intent to promote government accountability, we believe this goal can be achieved without creating a new and potentially costly bureaucracy, and by expanding the scope of the study to provide a more comprehensive assessment for the Legislature. This measure would create a bureaucracy that is duplicative of functions currently performed by a number of existing agencies. Every year, the DOF identifies all tax expenditures that cost $5 million or more; estimates the fiscal impact over 5 years; assesses the number of businesses/taxpayers who are affected; and reports many more criteria as required by law. Both the LAO and the State Auditor can initiate studies under their own authority or at the specific direction of the Legislature. In 2013, prompted by questions regarding the state’s Enterprise Zones (EZ), the LAO and DOF each independently analyzed and made recommendations to the Legislature. Upon finding the EZ program to be less effective than others, the Legislature eliminated EZs and replaced them with three other tax incentives. More recently, the State Auditor conducted an assessment of several of the state’s primary tax expenditures and recommended improvements to some, while noting that others appear to be achieving their objects. Moreover, numerous state entities are tasked with review, analysis and reporting for their specific tax expenditures. If different data on tax expenditures is desired, this can be achieved without adding another bureaucracy and costs by the Legislature’s changing of the parameters of existing reports, giving different direction to the LAO or State Auditor, and soliciting stakeholder input as part of legislative hearings. This bill enumerates evaluation factors intended to ascertain the revenue loss to the state, but lacks critical criteria for measuring the revenue gain from tax incentives and their multiplier effects through the economy. To provide a more accurate and comprehensive assessment of state revenue impacts, we suggest that any tax expenditure study incorporate ‘multipliers’ and their effects on the economy. Additionally, we believe it is critical to examine California’s policies in the context of competitiveness with other areas of the country.”

GOVERNOR'S VETO MESSAGE:

I am returning Senate Bill 468 without my signature.

The bill creates the California Tax Expenditure Review Board to comprehensively assess specified major tax expenditures and make recommendations to the Legislature.

I support greater transparency with respect to tax credits, exemptions, and other expenditures and believe these items should be scrutinized periodically to justify their overall cost to the state's revenue base. However, creating a new board to accomplish that goal is unnecessary. The Department of Finance is currently required to publish tax expenditure reports and existing law requires new income tax expenditures to specify goals, performance indicators, and data collection requirements.

ASSEMBLY FLOOR: 53-21, 9/10/19

AYES: Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Eggman, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Cunningham, Daly, Diep, Flora, Fong, Frazier, Gallagher, Kiley, Lackey, Mathis, Mayes, Melendez, Obernolte, Patterson, Salas, Voepel, Waldron

NO VOTE RECORDED: Aguiar-Curry, Cooper, Gipson, Gray, Ramos

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

10/21/19 11:31:59

**** END ****

 UNFINISHED BUSINESS 

Bill No: SB 468

Author: Jackson (D), et al.

Amended: 9/3/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/1/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Wiener

NO VOTE RECORDED: Nielsen

SENATE APPROPRIATIONS COMMITTEE: 4-2, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Bates, Jones

SENATE FLOOR: 27-9, 5/28/19

AYES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NOES: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

NO VOTE RECORDED: Galgiani, Moorlach

ASSEMBLY FLOOR: 53-21, 9/10/19 - See last page for vote

SUBJECT: Taxation: tax expenditures: California Tax Expenditure Review Board

SOURCE: California Tax Reform Association

California Teachers Association

DIGEST:

This bill establishes the California Tax Expenditure Review Board (Board) to determine the schedule for comprehensive assessments of major tax expenditures programs to be conducted by a University of California (UC) research center.

Assembly Amendments (1) substitute a research center at the UC for the Legislative Analyst’s Office (LAO) as the entity responsible for conducting the comprehensive assessments at the direction of the Board, pursuant to a resolution of the UC Board of Regents; (2) make the State Controller the Chair of the Board; (3) remove the requirement that the Board meet by July 1, 2021; (4) exclude the charitable contribution deduction, and income exclusions for proceeds from life insurance policies and annuities, from the definition of major tax expenditure; (5) modify the scope of the assessments; (6) require the UC research center to present its assessments to the Board at a public meeting by July 1, 2021; (7) direct the Franchise Tax Board (FTB) and the California Department of Tax and Fee Administration (CDTFA) to ensure relevant taxpayer data is made available to UC with appropriate levels of data security and protections; (8) provide that board’s report compiling its recommendations to the Legislature need not be submitted each year; instead, all of its recommendations must be submitted by January 1, 2022; (9) sunset its provisions after the required legislative hearing is conducted; and (10) make technical and conforming changes.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions. 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.
2. Requires the Department of Finance (DOF) to annually publish a list of tax expenditures, currently totaling around $65.2 billion per year.
3. Enacts several tax expenditures which contain sunset dates, which set a specific date before which a taxpayer can claim a tax benefit for performing the activity that qualifies for the tax benefit in a certain taxable or calendar year.
4. Directs the LAO to analyze specific aspects of new or extended tax expenditure programs, and report to the Legislature, usually one year before its sunset date, such as the Motion Picture Production Credit and the California Competes Tax Credit, among others.
5. Enacts several expenditures that result in the most foregone revenue do not have sunset dates, some of which parallel parts of the Internal Revenue Code.
6. Requires any bill introduced on or after January 1, 2015, that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve (SB 1335, Leno, Chapter 845, Statutes of 2014). The bill must also contain detailed performance indicators for the Legislature to use when measuring whether the tax credit meets its goals, purposes, and objectives.

This bill:

1. Establishes the Board as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature, consisting of five members:
   1. The State Controller, or the Controller’s designee, as Chair,
   2. The Legislative Analyst, or the Legislative Analyst’s designee,
   3. The California State Auditor, or the California State Auditor’s designee,
   4. The Director of DOF, or the Director of DOF’s designee, and
   5. An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and tax expenditures by the CDTFA and the FTB.
2. States that members of the Board serve without compensation, but would be reimbursed for necessary traveling and other expenses incurred in performing their duties and responsibilities
3. Permits the Board to create advisory committees that include members of the public.
4. Directs the Board and any advisory committees it establishes to keep official records of all of their proceedings.
5. Requires the Board to meet at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act.
6. Requests the UC Regents through a new or existing research center to conduct comprehensive assessments of major tax expenditures, as defined.
7. Provides that this bill applies to UC only to the extent that the Regents enact a resolution.
8. States that the center must present its comprehensive, peer-reviewed assessment of major tax expenditures to the Board at a public meeting by July 1, 2021.
9. Directs FTB and CDTFA to ensure relevant taxpayer data is made available to UC with appropriate levels of data security and protections.
10. Requires the Board to determine the scope of each comprehensive assessment, which must include, but is not limited to:
    1. A description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declarations of that intent or that legislative intent is otherwise expressed or specified by that act.
    2. A brief description of the beneficiaries of the tax expenditure as provided by state law.
    3. The number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available.
    4. A listing of any comparable federal tax benefit, if any.
    5. A description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency.
    6. The economic, social, environmental, or any other impact of the tax expenditure to the State using metrics UC deems appropriate.
    7. Total General Fund dollars lost due to the tax expenditure,
    8. Options for modifying the tax expenditure to improve its effectiveness or reduce cost to the General Fund.
11. Provides that the Board must post the assessments it receives on its internet site within five business days.
12. States that after the comprehensive assessment has been posted on the Board’s internet website for at least 14 days, and no later than two months from the date the board posts the comprehensive assessment on its internet website, the Board must meet in public for the purposes of voting to make a recommendation to the Legislature regarding the major tax expenditure. Before making a recommendation, the Board must consider input from the public regarding the comprehensive assessment.
13. Provides that the votes of three members is necessary to make a recommendation.
14. States that any recommendation shall be subject to enactment by the Legislature, and that nothing in the measure shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.
15. Requires any recommendation to include:
    1. The extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal.
    2. The major tax expenditure's effect on the state’s General Fund.
    3. The major tax expenditure’s economic, social, environmental, or any other impact.
    4. Preferred options for modifying the tax expenditure to improve its effectiveness or to reduce its costs to the General Fund, if these options are identified.
16. Directs the Board to provide a report to the Legislature, as specified, that compiles all of its recommendations regarding major tax expenditures, including any recommendation the Board failed to make for a major tax expenditure in which UC completed a comprehensive assessment, and the reasons for the failure, by January 1, 2022.
17. Requires the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the report by August 15 of the second year of the legislative session when the report is received.
18. Defines “major tax expenditure” as one that meets all of the following criteria:
    1. Does not have a repeal or inoperative date.
    2. Does not include metrics of efficacy reported as a requirement.
    3. For which the annual cost to the state has met or exceed $1 billion over the past 10 years.
    4. Is not one that is specifically excluded by the bill.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Assembly Appropriations Committee:

1. Ongoing annual costs in the range of $150,000 to $200,000 each year the UC conducts a comprehensive assessment.
2. Possible cost pressures or increased revenues because of recommendations from the Board. While the Board’s recommendations are not binding, they could inspire future legislation that modifies or sunsets existing major tax expenditures.

SUPPORT: (Verified 9/10/19)

California Tax Reform Association (co-source)

California Teachers Association (co-source)

State Controller Betty Yee

Association of California School Administrators

California Association of School Business Officials

California Federation of Teachers

California Professional Firefighters

California Retired Teachers Association

California School Boards Association

California School Employees Association

California State PTA
Coalition for Adequate School Housing

Community College League of California
First Five California

Foothill De Anza Community College District
League of Women Voters California

SEIU California

Small School Districts Association

United Domestic Workers, AFSCME Local 3930

OPPOSITION: (Verified 9/10/19)

Advanced Medical Technology Association

African American Farmers Of California

Airlines for America

American Pistachio Growers

Association of California Life and Health Insurance Companies

Bay Area Council

Biocom

Building Owners and Managers Association of California

California Agricultural Aircraft Association

California Bankers Association

California Business Properties Association

California Business Roundtable

California Cable & Telecommunications Association
California Citrus Mutual

California Cotton Ginners and Growers Association

California Farm Bureau Federation
California Forestry Association

California Hotel & Lodging Association

California Independent Petroleum Association

California League of Food Producers

California Life Sciences Association

California Railroads

California Taxpayers Association

California Trucking Association

Camarillo Chamber of Commerce

Chambers of Commerce Alliance of Ventura and Santa Barbara Counties

Computing Technology Industry Association

Contra Costa Taxpayers Association

Council On State Taxation

Family Business Association of California

Farwest Equipment Dealers Association

International Council of Shopping Centers

Kern County Taxpayers Association

Maersk, Inc.

NAIOP of California

Nisei Farmers League

North Orange County Chamber of Commerce

Orange County Business Council

Orange County Taxpayers Association
Organization for International Investment

Oxnard Chamber of Commerce

Plant California Alliance

Qualcomm

San Gabriel Valley Economic Partnership

Santa Maria Valley Chamber of Commerce

Silicon Valley Leadership Group

Solano County Taxpayers Association

Sutter County Taxpayers Association

TechNet

Valley Industry and Commerce Association

West Coast Lumber & Building Material Association

Western Agricultural Processors Association

Western Growers Association

Western Manufactured Housing Communities Association

Western Plant Health Association

Western States Petroleum Association

Wine Institute

ARGUMENTS IN SUPPORT: According to the California Teachers Association (CTA), “California has spent over $66.6 billion on the top ten most costly tax credits and exemptions in the past decade. The Proposition 98 share of these top credits and exemptions was over $35 billion. During this same decade, California cut $65 billion from school funding to balance the state’s budget during the recession. As debates over tax reform in California have stalled, Legislators have increasingly turned to tax credits to advance policy interests without fully understanding or debating the impact of those tax credits on the state’s General Fund obligations or our system of school finance, Proposition 98. Every dollar of a tax credit to the General Fund that does not generate its cost in new revenue takes approximately 40 cents out of California’s classrooms, representing the share of revenues that would have gone to Proposition 98 from the General Fund. It requires only a simple majority vote in the Legislature to pass a tax expenditure, reducing the amount of taxes collected, yet it takes a 2/3 majority vote to repeal a tax expenditure once created. Care should be taken when creating a revenue-losing measure that would be difficult to undo. CTA believes transparency and accountability are essential to ensure California is receiving its return on investments. Without a regular system of evaluation and metrics used to assess the economic benefits created by both tax credits and exemptions there is no way to identify whether these benefits have actually occurred.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “While we appreciate the stated intent to promote government accountability, we believe this goal can be achieved without creating a new and potentially costly bureaucracy, and by expanding the scope of the study to provide a more comprehensive assessment for the Legislature. This measure would create a bureaucracy that is duplicative of functions currently performed by a number of existing agencies. Every year, the DOF identifies all tax expenditures that cost $5 million or more; estimates the fiscal impact over 5 years; assesses the number of businesses/taxpayers who are affected; and reports many more criteria as required by law. Both the LAO and the State Auditor can initiate studies under their own authority or at the specific direction of the Legislature. In 2013, prompted by questions regarding the state’s Enterprise Zones (EZ), the LAO and DOF each independently analyzed and made recommendations to the Legislature. Upon finding the EZ program to be less effective than others, the Legislature eliminated EZs and replaced them with three other tax incentives. More recently, the State Auditor conducted an assessment of several of the state’s primary tax expenditures and recommended improvements to some, while noting that others appear to be achieving their objects. Moreover, numerous state entities are tasked with review, analysis and reporting for their specific tax expenditures. If different data on tax expenditures is desired, this can be achieved without adding another bureaucracy and costs by the Legislature’s changing of the parameters of existing reports, giving different direction to the LAO or State Auditor, and soliciting stakeholder input as part of legislative hearings. This bill enumerates evaluation factors intended to ascertain the revenue loss to the state, but lacks critical criteria for measuring the revenue gain from tax incentives and their multiplier effects through the economy. To provide a more accurate and comprehensive assessment of state revenue impacts, we suggest that any tax expenditure study incorporate ‘multipliers’ and their effects on the economy. Additionally, we believe it is critical to examine California’s policies in the context of competitiveness with other areas of the country.”

ASSEMBLY FLOOR: 53-21, 9/10/19

AYES: Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Burke, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Eggman, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, Maienschein, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Santiago, Smith, Mark Stone, Ting, Weber, Wicks, Wood, Rendon

NOES: Bigelow, Brough, Chen, Choi, Cunningham, Daly, Diep, Flora, Fong, Frazier, Gallagher, Kiley, Lackey, Mathis, Mayes, Melendez, Obernolte, Patterson, Salas, Voepel, Waldron

NO VOTE RECORDED: Aguiar-Curry, Cooper, Gipson, Gray, Ramos

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

9/10/19 22:08:35

**** END ****

SENATE THIRD READING

STR Bill Id:SB 468

Author:(Jackson)

As Amended Ver:September 3, 2019

Majority vote

SUMMARY:

Establishes in state government the California Tax Expenditure Review Board (Review Board) as an independent advisory body to comprehensively assess major tax expenditures, as defined, and make recommendations to the Legislature.

Major Provisions

1. Provides that the Review Board shall be composed of five members who shall serve in an advisory capacity, as follows: a) the Controller, or the Controller's designee; b) the Legislative Analyst, or the Legislative Analyst's designee; c) the California State Auditor, or the California State Auditor's designee; d) the Director of Finance, or the Director of Finance's designee; and, e) an individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and specifically the tax expenditures administered by the California Department of Tax and Fee Administration and the Franchise Tax Board.
2. Defines a "major tax expenditure" as a tax expenditure, as defined in Government Code Section 13305(b), that meets all of the following criteria:
   1. The amount of foregone revenue resulting from the tax expenditure is equal to or greater than $1 billion in total over the previous 10 fiscal years (FYs), and does not contain any of the following, as of January 1, 2020:
      1. A repeal or inoperative date;
      2. A requirement to report any metrics of efficacy;
      3. Is not a sales and use tax exemption pursuant to Revenue and Taxation Code (R&TC) Sections 6353 (gas, electricity, and water), 6359 (food products for human consumption), 6369 (medicine), or 6369.1 (hemodialysis products);
      4. Is not allowed only against personal income tax (PIT) imposed under the PIT Law;
      5. Is not authorized by R&TC Section 23701 et seq. (providing for tax-exempt corporations);
      6. Is not allowed as a deduction under R&TC Section 17201 by conformity to Internal Revenue Code (IRC) Section 170 or R&TC Section 24357 (providing deductions for charitable contributions); or,
      7. Is not excluded as income under the following: i) R&TC Section 17131 by conformity to IRC Section 101, as modified (proceeds of life insurance contracts); ii) R&TC Section 17081 by conformity to IRC Section 72, as modified (annuities); or, iii) R&TC Section 24302 or 24305.
3. Requests that the Regents of the University of California (UC), through a new or existing research center, perform a comprehensive assessment of major tax expenditures consistent with this bill.
4. Requires, by July 1, 2021, the center identified above to present a comprehensive, peer-reviewed assessment of major tax expenditures to the Review Board at a public meeting.
5. Requires the Review Board to meet in public to vote to make a recommendation to the Legislature regarding the major tax expenditure(s).
6. Requires, by January 1, 2022, the Review Board to provide a report to the Legislature compiling all of its recommendations regarding major tax expenditures.
7. Requires, upon receiving the report, the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the report.
8. Sunsets this bill's statutory provisions six months after this joint hearing.

COMMENTS:

This bill seeks to establish a process for the state to systematically review some of its largest tax expenditures. Specifically, this bill would establish in state government a Review Board as an independent advisory body to comprehensively assess "major tax expenditures", as defined, and make recommendations to the Legislature.

According to the Author:

California has nearly 80 tax expenditures. These are provisions in the tax code – including tax credits, tax deductions, sales tax exemptions and income exclusions – that reduce the amount of tax collected in exchange for an intended public policy objective. Many tax expenditures were created decades ago to achieve certain goals and economic benefits such as improving industry competitiveness, influencing taxpayer behavior or spurring economic growth, and have sat on the books for decades without any scrutiny, oversight, or even the necessary data to demonstrate results.

Arguments in Support:

CTA believes transparency and accountability are essential to ensure California is receiving its return on investments. Without a regular system of evaluation and metrics used to assess the economic benefits created by both tax credits and exemptions there is no way to identify whether these benefits have actually occurred.

Arguments in Opposition:

None submitted for most recent version of this bill

FISCAL COMMENTS:

According to the Assembly Appropriations Committee:

1. Ongoing annual General Fund (GF) costs in the range of $150,000 to $200,000 each year the UC conducts a comprehensive assessment.
2. Ongoing annual GF costs of approximately $310,000 to administer the Board.
3. Possible cost pressures or increased revenues because of recommendations from the Review Board. While the Review Board's recommendations are not binding, they could inspire future legislation that modifies or sunsets existing major tax expenditures.

VOTES:

SENATE FLOOR: 27-9-2

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener

NO: Bates, Borgeas, Chang, Grove, Jones, Morrell, Nielsen, Stone, Wilk

ABS, ABST OR NV: Galgiani, Moorlach

ASM REVENUE AND TAXATION: 7-0-4

YES: Burke, Chu, Mullin, Petrie-Norris, Quirk, McCarty, Ting

ABS, ABST OR NV: Brough, Gray, Mayes, Melendez

ASM APPROPRIATIONS: 13-5-0

YES: Gonzalez, Bloom, Bonta, Calderon, Carrillo, Chau, Eggman, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

NO: Bigelow, Brough, Diep, Fong, Obernolte

UPDATED:

VERSION: September 3, 2019

CONSULTANT: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0001775

Date of Hearing: August 21, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 468

Author:(Jackson) – As Amended Ver:July 11, 2019

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

SUMMARY:

This bill creates the California Tax Expenditure Review Board (Review Board) to provide recommendations to the Legislature on tax expenditures following their evaluation by the University of California (UC). Specifically, this bill:

1. Creates the Review Board, an advisory board that will consist of five specified members (designees from the California State Auditor, the Controller, the Legislative Analyst and Department of Finance, and an individual with expertise in the state’s tax administration operations) who will be unpaid except for travel and expense reimbursements.
2. Defines “major tax expenditure” as a tax expenditure that has resulted in revenue loss of $1 billion or more over the previous 10 fiscal years and does not contain a repeal or an inoperative date or any requirement related to efficacy reporting. This bill also excludes certain types of tax expenditures, such as a tax expenditure allowed only against the personal income tax.
3. Requests UC, by July 1, 2021, to present a comprehensive peer-reviewed assessment of major tax expenditures to the Review Board. The bill also defines the scope of the proposed assessment and identifies topics of study, such as the economic, social or any other benefits of the tax expenditure, revenue losses, potential environmental impacts, and a description of the legislative intent.
4. Requires the Review Board to vote on recommendations to the Legislature regarding each major tax expenditure, and the recommendation must include the extent to which the major tax expenditure is cost-effective, its effect on the General Fund, its effect on employment, wages, and the state’s economy, and whether opportunities exist to improve the effectiveness.

FISCAL EFFECT:

1. Ongoing annual costs in the range of $150,000 to $200,000 each year the UC conducts a comprehensive assessment.
2. Possible cost pressures or increased revenues because of recommendations from the Review Board. While the Review Board’s recommendations are not binding, they could inspire future legislation that modifies or sunsets existing major tax expenditures.

COMMENTS:

1. Purpose. According to the author, SB 468 will begin a process to examine tax expenditures to ensure they are achieving their public policy objectives. The author argues this bill will bring transparency and accountability to California’s tax incentives.
2. What tax expenditures are covered? While SB 468 defines the type of tax expenditures subject to review, there is some uncertainty. The Department of Finance notes the following tax expenditures that could be subject to this bill’s provisions: (a) Water’s Edge Election, (b) Research and Development Credit, (c) Subchapter S Corporations reduced tax rate, (d) Employee Stock Ownership Plans, (e) Charitable Contribution Deduction, (f) Exclusion of Investment Income on Life Insurance and Annuity Contracts, and (g) sales tax expenditures for animal life, feed, seeds, plants, fertilizer, drugs, medicines, farm equipment machinery, jet fuel for international flights and custom computer programs.
3. Remaining questions. This bill aims to create a process to review California’s tax expenditures and to validate this review through a vote of a new advisory board. However, there remain some key unresolved issues. Those issues are:
4. Research scope. SB 468 asks UC to look at a wide variety of topics as part of its comprehensive assessment of major tax expenditures. On the one hand, the various research topics provide UC significant leeway in how it may assess each individual tax expenditures. On the other hand, this could lead to a final product that is messy, disjointed and unhelpful to the Review Board. The author may wish to streamline this bill’s research scope to prioritize key areas of study.
5. What does the Review Board vote on? SB 468 requires the Review Board to vote on recommendations for each major tax expenditure following the receipt of UC’s comprehensive assessment. However, UC’s assessment may not align with the topics subject to a Review Board's vote. For example, the Review Board must include, as part of its recommendation, an analysis of the tax expenditure’s impact on employment and wages. However, as noted above, the UC is granted flexibility on what topics to study as part of its analysis of a tax expenditure’s economic impact, and that analysis may not include wages. For each individual tax expenditure, the UC is unlikely to produce an assessment that aligns perfectly with what the Review Board must vote on.

Moreover, SB 468 is unclear on what the Review Board’s recommendation should be. Specifically, the bill requires the “recommendation” to include various analyses of a tax expenditure (which may not be part of the UC assessment), but this reads more as a summary of research and not a formal policy recommendation. If the goal is to have the Review Board make specific recommendations regarding possible reforms or legislative changes, the author may want to amend this bill to provide clarity.

1. Timelines. This bill puts considerable time pressures on the Review Board to make recommendations. Following receipt of UC’s assessment, the Review Board has two months to solicit public feedback and make recommendations. Given that UC is unlikely to provide the Review Board a document perfectly aligned with the Review Board’s requirements, the Review Board will need more time.

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

Date of Hearing: August 21, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 468

Author:(Jackson) – As Amended Ver:July 11, 2019

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

SUMMARY:

This bill creates the California Tax Expenditure Review Board (Review Board) to provide recommendations to the Legislature on tax expenditures following their evaluation by the University of California (UC). Specifically, this bill:

1. Creates the Review Board, an advisory board that will consist of five specified members (designees from the California State Auditor, the Controller, the Legislative Analyst and Department of Finance, and an individual with expertise in the state’s tax administration operations) who will be unpaid except for travel and expense reimbursements.
2. Defines “major tax expenditure” as a tax expenditure that has resulted in revenue loss of $1 billion or more over the previous 10 fiscal years and does not contain a repeal or an inoperative date or any requirement related to efficacy reporting. This bill also excludes certain types of tax expenditures, such as a tax expenditure allowed only against the personal income tax.
3. Requests UC, by July 1, 2021, to present a comprehensive peer-reviewed assessment of major tax expenditures to the Review Board. The bill also defines the scope of the proposed assessment and identifies topics of study, such as the economic, social or any other benefits of the tax expenditure, revenue losses, potential environmental impacts, and a description of the legislative intent.
4. Requires the Review Board to vote on recommendations to the Legislature regarding each major tax expenditure, and the recommendation must include the extent to which the major tax expenditure is cost-effective, its effect on the General Fund, its effect on employment, wages, and the state’s economy, and whether opportunities exist to improve the effectiveness.

FISCAL EFFECT:

1. Ongoing annual costs in the range of $150,000 to $200,000 each year the UC conducts a comprehensive assessment.
2. Possible cost pressures or increased revenues because of recommendations from the Review Board. While the Review Board’s recommendations are not binding, they could inspire future legislation that modifies or sunsets existing major tax expenditures.

COMMENTS:

1. Purpose. According to the author, SB 468 will begin a process to examine tax expenditures to ensure they are achieving their public policy objectives. The author argues this bill will bring transparency and accountability to California’s tax incentives.
2. What tax expenditures are covered? While SB 468 defines the type of tax expenditures subject to review, there is some uncertainty. The Department of Finance notes the following tax expenditures that could be subject to this bill’s provisions: (a) Water’s Edge Election, (b) Research and Development Credit, (c) Subchapter S Corporations reduced tax rate, (d) Employee Stock Ownership Plans, (e) Charitable Contribution Deduction, (f) Exclusion of Investment Income on Life Insurance and Annuity Contracts, and (g) sales tax expenditures for animal life, feed, seeds, plants, fertilizer, drugs, medicines, farm equipment machinery, jet fuel for international flights and custom computer programs.
3. Remaining questions. This bill aims to create a process to review California’s tax expenditures and to validate this review through a vote of a new advisory board. However, there remain some key unresolved issues. Those issues are:
4. Research scope. SB 468 asks UC to look at a wide variety of topics as part of its comprehensive assessment of major tax expenditures. On the one hand, the various research topics provide UC significant leeway in how it may assess each individual tax expenditures. On the other hand, this could lead to a final product that is messy, disjointed and unhelpful to the Review Board. The author may wish to streamline this bill’s research scope to prioritize key areas of study.
5. What does the Review Board vote on? SB 468 requires the Review Board to vote on recommendations for each major tax expenditure following the receipt of UC’s comprehensive assessment. However, UC’s assessment may not align with the topics subject to a Review Board's vote. For example, the Review Board must include, as part of its recommendation, an analysis of the tax expenditure’s impact on employment and wages. However, as noted above, the UC is granted flexibility on what topics to study as part of its analysis of a tax expenditure’s economic impact, and that analysis may not include wages. For each individual tax expenditure, the UC is unlikely to produce an assessment that aligns perfectly with what the Review Board must vote on.

Moreover, SB 468 is unclear on what the Review Board’s recommendation should be. Specifically, the bill requires the “recommendation” to include various analyses of a tax expenditure (which may not be part of the UC assessment), but this reads more as a summary of research and not a formal policy recommendation. If the goal is to have the Review Board make specific recommendations regarding possible reforms or legislative changes, the author may want to amend this bill to provide clarity.

1. Timelines. This bill puts considerable time pressures on the Review Board to make recommendations. Following receipt of UC’s assessment, the Review Board has 14 days to solicit public feedback and make recommendations. Given that UC is unlikely to provide the Review Board a document perfectly aligned with the Review Board’s requirements, the Review Board will need more time.

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

Date of Hearing: July 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 468

Author:(Jackson) – As Amended Ver:May 7, 2019

Majority vote. Fiscal committee.

SENATE VOTE: 27-9

SUBJECT: Taxation: tax expenditures: California Tax Expenditure Review Board

SUMMARY: Establishes in state government the California Tax Expenditure Review Board (Review Board) as an independent advisory body to assess "major tax expenditures" and make recommendations to the Legislature. Specifically, this bill:

1. Provides the following legislative findings and declarations:
   1. California's publicly funded K–14 education systems are dependent on state revenues, including personal, corporate, sales, and use taxes.
   2. The Legislature has consistently advanced tax expenditures, including credits and sales tax exemptions to accomplish market and policy goals. While these expenditures have been put in place with the goal of achieving certain policy objectives, they have the effect of reducing revenue to the General Fund (GF) which, in turn, reduces Proposition 98 funding by approximately 40 cents on each dollar.
   3. Given the fact that Proposition 98 was suspended twice during the past economic downturn and recession, more than 30,000 teachers lost jobs, and millions of California's students faced significant reductions in services, the closure of programs, and increases in class size, it is imperative for the Legislature to ensure that California's dollars are spent efficiently, with transparency and oversight to ensure decisions are intentionally created to provide long-term benefits to California.
   4. The California State Auditor released an audit in 2015 on six of the largest tax expenditures in California and found a lack of oversight or evaluation has resulted in insufficient evidence to determine if some tax credits and exemptions are fulfilling their purpose to provide economic benefit to California.
   5. In 2016, the California State Auditor questioned whether some of California's revenue going toward some tax expenditures is being well spent or if these funds could be better allocated to fulfill the same policy objectives or if improvements can be made to make them more effective.
   6. Tax expenditures have been created to provide an economic benefit to California as well as to create incentives to achieve particular goals and outcomes. It is imperative for California to ensure the billions of dollars allocated to these outcomes are being well spent to justify the reductions in critical education and public policy programs.
2. Establishes in state government the Review Board as an independent advisory body to assess "major tax expenditures" and make recommendations to the Legislature.
3. Provides that the Review Board shall be composed of five members who shall serve in an advisory capacity, as follows:
   1. The Controller, or the Controller's designee;
   2. The Legislative Analyst, or the Legislative Analyst's designee;
   3. The California State Auditor, or the California State Auditor's designee;
   4. The Director of Finance, or the Director of Finance's designee; and,
   5. An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and tax expenditures by the California Department of Tax and Fee Administration and the Franchise Tax Board.
4. Requires the Review Board to elect a chairperson on an annual basis.
5. Requires the Review Board to meet on or before July 1, 2020, and to convene meetings at least twice per year at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act [Government Code (GC) Section 11120 et seq.].
6. Provides that the members of the Review Board shall serve without compensation, but shall be reimbursed for necessary traveling and other expenses incurred in performing their duties and responsibilities.
7. Authorizes the Review Board to establish advisory committees that include members of the public.
8. Requires the Review Board and any advisory committee to keep official records of all of their proceedings.
9. Defines a "major tax expenditure" as a tax expenditure, as defined in GC Section 13305(b), that meets all of the following criteria:
   1. The amount of foregone revenue resulting from the tax expenditure is equal to or greater than $1 billion over the previous 10 fiscal years (FYs), and does not contain any of the following, as of January 1, 2020:
      1. A repeal or inoperative date;
      2. A requirement to report any metrics of efficacy;
      3. Is not a sales and use tax (SUT) exemption pursuant to Revenue and Taxation Code (R&TC) Sections 6353 (gas, electricity, and water), 6359 (food products for human consumption), 6369 (medicine), or 6369.1 (hemodialysis products);
      4. Is not allowed only against personal income tax (PIT) imposed under the PIT Law; and,
      5. Is not authorized by R&TC Section 23701 et seq. (providing for tax-exempt corporations).
10. Requires, by October 1, 2020, and each October 1 thereafter, the Review Board to hold an open and public meeting to consider information provided by the public to determine the schedule for a comprehensive assessment of major tax expenditures to be conducted by the Legislative Analyst's Office (LAO).
11. Requires the Review Board to determine the schedule upon completion of that meeting.
12. Requires, by January 31, 2021, and each January 31 thereafter, the Review Board to meet to determine the schedule for comprehensive assessments of major tax expenditures for that calendar year. Specifically, the Review Board may consider the following criteria when determining the schedule:
    1. GF impact;
    2. The Review Board's assessment of whether modification to or repeal of the major tax expenditure would provide the most positive impacts for the GF with the least negative economic, social, or environmental impacts; and,
    3. The ability for the LAO to complete each comprehensive assessment of the major tax expenditure in a timely fashion.
13. Requires the Review Board to set a deadline date as part of determining the schedule for the LAO to complete its comprehensive assessment of the major tax expenditure or expenditures on a regular schedule. The Review Board can vote to adjust the deadline for reasonable cause.
14. Requires the LAO to complete its comprehensive assessment of the major tax expenditure, and provide it to the Review Board by the deadline date specified in the schedule. Additionally, any other state agency shall assist the LAO with completing its comprehensive assessment of the major tax expenditure to the maximum degree practicable.
15. Requires the Review Board to determine the scope of each comprehensive assessment, which shall include, without limitation, the following, when possible:
    1. A description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declarations of that intent or that legislative intent is otherwise expressed or specified by that act;
    2. A brief description of the beneficiaries of the tax expenditure as provided by state law;
    3. The number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available;
    4. A listing of any comparable federal tax benefit, if any;
    5. A description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency;
    6. The economic, social, or any other benefits of the tax expenditure to the State of California;
    7. Total net GF dollars lost due to the tax expenditure, including what impact the shift in resources has on other GF programs;
    8. Total reduction in the amount of GF proceeds of taxes for purposes of the calculation required by Proposition 98, due to the tax expenditure, including what impact the shift in resources has on educational programs;
    9. Potential environmental impacts, if any, of the tax expenditure;
    10. A longer-term analysis outlining the true beneficiaries versus the intended beneficiaries of the tax expenditure and its impact on the business climate and market conditions; and,
    11. Jobs created by the tax expenditure. Specifically:
        1. Whether the jobs created were short or long term, as well as the average salary and benefits provided for the jobs created; and,
        2. Jobs lost or reduced in areas impacted by the tax expenditure or whether jobs were shifted to other sectors.
    12. Provides that the jobs data described above must include, in the aggregate, demographics on gender, race, ethnicity, and age.
16. Provides that, after receiving the comprehensive assessment from the LAO, the Review Board shall post it on its internet website.
17. Provides that after the comprehensive assessment of the major tax expenditure has been posted on the Review Board's internet website for at least 14 days, and no later than two months from the date the Review Board posts the comprehensive assessment on its internet website, the Review Board must meet in public for the purposes of voting to make a recommendation to the Legislature regarding the major tax expenditure.
18. Provides that the votes of three members are necessary to make a recommendation to the Legislature.
19. Provides that any recommendation shall be subject to enactment by the Legislature.
20. Provides that nothing in this bill shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.
21. Requires the Review Board to consider information provided by the public in response to the comprehensive assessment at the meeting before making the recommendation.
22. Requires the recommendation from the Review Board to the Legislature to include, without limitation, the following:
    1. The extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal;
    2. An analysis of the major tax expenditure's effect on the state's GF;
    3. An analysis of the major tax expenditure's effect on employment, wages, and the state's economy; and,
    4. Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal, and if no such opportunities exist, whether the Legislature should enact legislation to repeal the major tax expenditure.
23. Provides that, by January 1, 2022, and each January 1 thereafter, the Review Board shall provide a report to the Legislature that compiles all of its recommendations regarding major tax expenditures made in the previous calendar year, including any recommendation the Review Board failed to make for a major tax expenditure in which the LAO has completed a comprehensive assessment, and the reasons for the failure.
24. Provides that the Review Board shall also submit the report to the Senate Committee on Budget and Fiscal Review, the Senate Committee on Governance and Finance, the Assembly Committee on Budget, and the Assembly Committee on Revenue and Taxation, and post it on its internet website. The report to the Legislature shall be submitted in compliance with GC Section 9795.
25. Provides that, upon receipt of the report, the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the report by August 15 of the second year of each legislative session.

EXISTING LAW:

1. Requires any bill authorizing a new tax credit to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax credit will achieve;
   2. 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,
   3. 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. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)
2. Requires 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. This report must include each of the following:
   1. A comprehensive list of tax expenditures exceeding $5,000,000 in annual cost;
   2. The statutory authority for each credit, deduction, exclusion, exemption, or any other tax benefit as provided by state law;
      
   3. A description of the legislative intent for each tax expenditure, if the bill adding or amending the expenditure contains legislative findings and declarations of that intent, or that legislative intent is otherwise expressed or specified by that bill;
   4. The sunset date of each credit, deduction, exclusion, exemption, or any other tax benefit as provided by state law, if applicable;
      
   5. A brief description of the beneficiaries of the credit, deduction, exclusion, exemption, or other tax benefit as provided by state law;
   6. An estimate or range of estimates for the state and local revenue loss for the current FY and the two subsequent FYs;
      
   7. For PIT expenditures, the number of taxpayers affected and returns filed, as applicable, for the most recent tax year for which full year data is available;
   8. For corporation tax and SUT expenditures, the number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available;
      
   9. A listing of any comparable federal tax benefit, if any; and,
      
   10. A description of any tax expenditure evaluation or compilation of information completed by any state agency since the last report made. [GC Section 13305(a).]
       
3. Defines a "tax expenditure" as a credit, deduction, exclusion, exemption, or any other tax benefit as provided for by the state.

FISCAL EFFECT: Unknown

COMMENTS:

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

California has nearly 80 tax expenditures. These are provisions in the tax code – including tax credits, tax deductions, sales tax exemptions and income exclusions – that reduce the amount of tax collected in exchange for an intended public policy objective. Many tax expenditures were created decades ago to achieve certain goals and economic benefits such as improving industry competitiveness, influencing taxpayer behavior or spurring economic growth, and have sat on the books for decades without any scrutiny, oversight, or even the necessary data to demonstrate results.

These tax expenditures carry significant costs to the state of California in the same manner as spending programs. They impact the General Fund as well as Proposition 98, the minimum annual funding level for K-12 schools and community colleges. The Department of Finance indicates that by 2020-21, there will be a $506.4 billion loss in revenue to the General Fund since 2008 from tax expenditures. Every dollar of a tax credit that does not generate its cost in new revenue takes approximately 40 cents out of California's classrooms and additionally affects the amount of funding available for critical public services.

Despite their impact on the state's economy, there is no overall mechanism for the review of these expenditures. As the Assembly Revenue and [Taxation] Committee has pointed out, this can result "in tax expenditures remaining a part of the tax code without demonstrating any public benefit." In a 2017 report, "How States Are Improving Tax Incentives for Jobs and Growth," the PEW Charitable Trusts rated California as "trailing" 28 other states in evaluating tax incentives for their effectiveness and benefit to the state.

SB 468 will begin the process of examining California's tax expenditures to evaluate whether they are achieving their goals. This bill chooses among the largest of the tax credits and sales tax exemptions that have no metrics of efficacy associated with them, no sunsetting provision, and result in reductions of tax receipts of greater than $10 billion over 10 years.

The bill creates a nonpartisan Tax Expenditure Review Board, comprised of the State Controller, the Legislative Analyst, the State Auditor, the Director of Finance or their designee, and a designee of the Secretary of the Government Operations agency. In public meetings, the board is required to create a schedule for the Legislative Analyst's Office to analyze each tax expenditure for its effectiveness. After the LAO's analyses are complete and made publicly available the board will hold public hearings to solicit input from stakeholders regarding the LAO report. Finally, the board will vote to make a recommendation to the Legislature regarding whether to maintain, alter or repeal the tax expenditure. The bill also requires a joint public legislative hearing on the LAO report.

This bill is intended to be the beginning of a process whereby California examines all of its tax expenditures to [ensure] they are achieving their public policy objectives and making best use of limited public dollars.

SB 468 will bring transparency and accountability to California's tax incentive process by creating a mechanism for review of some of California's most costly tax expenditures. This will allow the Legislature, prior to deciding whether to renew them, to determine if they are cost-effective, properly designed and effecting their intended public policy objectives.

1. This bill is co-sponsored by the California Teachers Association, which notes the following:

As amended, SB 468 (Jackson) would require tax credits and exemptions without a system for evaluation, a sunset, and costing the state a billion dollars within a ten-year period to be subject to review and evaluation by the California Tax Expenditure Review Board (Board) and the Legislative Analyst's Office. The Board would be comprised of the Controller, the Legislative Analyst, the State Auditor, the Director of Finance, and an individual designated by the Secretary of the Government Operations Agency possessing expertise regarding tax administration and tax expenditures. The Board would set a timeline for review and evaluation of the research the Legislative Analyst's Office would provide and would make a recommendation to the Legislature in a report including whether or not the credit or exemption met its goals, the impact on the General Fund, the impact is has had on California's economy, and whether the credit or exemption is meeting its purpose or if it should be repealed by the Legislature.

1. This bill is supported by the Association of California School Administrators, which notes the following:

The success of California and our thriving economy depends on the success of our education system and a well-prepared and innovative workforce. As debates over tax reform in California have stalled, we have noticed a surge in the number of legislative proposals introduced every year to expand tax credits to advance policy interests without fully understanding or debating the impact of those tax credits on the state's General Fund revenues and on the Proposition 98 minimum guarantee. While some tax credits may be meritorious, most of them appear to provide subsidies to corporations and private businesses that may not translate into long-term economic benefit to California, particularly when weighed against using those funds to more adequately fund our schools.

1. This bill is opposed by the California Taxpayers Association, which notes the following:

While we appreciate the stated intent to promote government accountability, we believe this goal can be achieved without creating a new and potentially costly bureaucracy, through legislative guidance to the LAO and other state agencies, and by expanding the scope of the study to provide a more comprehensive assessment for the Legislature.

[…] This measure would create a bureaucracy that is duplicative of functions currently performed by a number of existing agencies, including the Department of Finance (DOF), the LAO, the State Auditor and others.

For example, SB 468 requires the LAO to annually review tax expenditures and report its findings to the Legislature. This function currently is performed by the DOF. Every year, the DOF identifies all tax expenditures that cost $5 million or more; estimates the fiscal impact over 5 years; assesses the number of businesses/taxpayers who are affected; and reports many more criteria as required by law. The DOF study includes all tax expenditures targeted by SB 468, many similar evaluation criteria/factors enumerated in SB 468 and comparable notification and transmittal requirements.

1. Committee Staff Comments:
   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing 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).
      

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 typically reviewed less frequently than direct expenditures. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. 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 or cost, without a supermajority vote.

• 1. What would this bill do? This bill seeks to establish a process for the state to systematically review some of its largest tax expenditures. Specifically, this bill would establish in state government a Review Board as an independent advisory body to comprehensively assess "major tax expenditures", as defined, and make recommendations to the Legislature. Each year, this Review Board would meet to determine the schedule by which LAO shall conduct a comprehensive assessment of these tax expenditures. The LAO, in turn, would then be required to complete its comprehensive assessment by the deadline specified in this schedule. The Review Board would be responsible for determining the scope of each assessment, and upon receiving the LAO's report, would be required to take a vote to make a formal recommendation to the Legislature on each expenditure reviewed. Finally, the Review Board would submit this report to various legislative committees and, upon receipt, the Senate Committee on Governance and Finance and this Committee would be charged with holding a joint public hearing on the report by August 15 of the second year of each legislative session.
  2. Which tax expenditures are being proposed for review? As a general matter, this bill defines a "major tax expenditure" as one that has resulted in foregone revenues equal to or greater than $1 billion over the previous 10 FYs.^[1] Thus, rather than explicitly identifying the tax expenditures to be reviewed, this bill takes a more mechanical approach and seeks to capture any tax expenditure resulting in significant GF revenue losses, irrespective of its function, design, or purpose.

This bill's mechanical or automated approach would appear to be motivated by an understandable desire to review California's tax expenditures in an even-handed manner, without shielding from examination those "sacred cows" of the tax code that enjoy organized and vocal support. At the same time, however, this bill does specifically exclude certain tax expenditures from assessment. Specifically, this bill would appear to exclude the following:

• • 1. Any tax expenditure with either a sunset date or a requirement to report metrics of efficacy (e.g., the state's film tax credit);
    2. The SUT exemptions for utilities, food, medicine, and hemodialysis products;
    3. Any tax expenditure only allowed under the PIT Law (e.g., the renters' credit); and,
    4. The provisions providing tax-exempt status to certain corporations.

After applying these criteria and exclusions, the LAO notes that only about 10 tax expenditures would be subject to review under this bill. This rather eclectic group, in turn, includes items that most economists and tax experts would recognize as tax expenditures, like the state's research and development (R&D) tax credit and the state's modified conformity to federal like-kind exchange provisions. At the same time, however, the list also reportedly includes tax preference items that some may argue do not fall neatly within the "credit, exemption, and exclusion" framework of most tax expenditures, like the so-called "water's edge" election, which allows unitary multinational corporations the option of computing the income attributable to California on the basis of a water's-edge (i.e., domestic) combined report, as opposed to a worldwide combined report.

The Committee may wish to consider whether this bill's set of criteria and exclusions will result in the review of those tax expenditures that would most benefit from a thorough assessment. For example, while the state may benefit from a detailed review of its R&D tax credit programs, it is not clear whether reviewing the state's conformity to federal law allowing "S" corporations would yield similar benefits.

• 1. Do we need a Review Board? Critics of this bill question the need to establish a new board within state government charged with organizing the review of roughly 10 tax expenditures. To this end, it is certainly within the Legislature's power to directly charge the LAO (or some other entity) with reviewing specified tax expenditures without the involvement of such a board. Proponents, however, assert that establishing a Review Board will ensure a degree of independence and autonomy, and perhaps provide a greater impetus for legislative action.
  2. Determining the scope of each comprehensive assessment: This bill charges the Review Board with determining the scope of each comprehensive assessment, which must include, when possible, an extensive list of items including:
     1. A description of the legislative intent for each tax expenditure;
     2. A brief description of the beneficiaries of the tax expenditure;
     3. The economic, social, or any other benefits of the tax expenditure to the State;
     4. Total GF dollars lost due to the tax expenditure; and,
     5. Jobs created by the tax expenditure. The jobs data, in turn, must include demographics on gender, race, ethnicity, and age.

While this bill provides that these items should be included when possible, Committee staff also suggests amendments making clear that these elements should be included only when reasonably related to the tax expenditure being reviewed. Some tax expenditures are simply not motivated by job creation, and it would be difficult if not impossible to assess the number of jobs created in such circumstances.

• 1. Picking the right reviewers: This bill currently tasks the LAO with reviewing the tax expenditures and reporting findings to the Review Board. While the LAO enjoys a stellar reputation for thoughtful and nonpartisan analysis, it is not clear that the LAO is a proper fit for this task. First, the LAO has only limited resources, which would be significantly impacted by the extra workload necessitated by this bill. Additionally, some have questioned the precedent of having an independent Review Board with Executive Department members directing the work of the LAO, which has traditionally been solely accountable to the Legislature. Finally, the LAO is funded through the Legislature's capped budget, so any additional resources required by the LAO to accomplish its mandate would effectively have to be taken out of the Legislature's budget. For these reasons, the author is suggesting amendments to task the University of California, and not the LAO, with conducting the assessments mandated by this bill.
  2. Additional amendments: The author is proposing the following amendments for adoption by this Committee:
     1. As noted above, the author is proposing amendments to charge the University of California, rather than the LAO, with conducting the assessments of major tax expenditures. University representatives have indicated their confidence in the university's ability to complete an assessment of all major tax expenditures by July 1, 2021. Thus, these amendments would replace the detailed timeline specified in the current bill with a single deadline by which the university shall submit its comprehensive report to the Review Board – July 1, 2021. This, of course, raises the question of whether it therefore makes sense to have the Review Board continue in existence after the completion of this single report. As such, the Committee may wish to consider whether it would be appropriate to include a sunset date for the Review Board, which could be revisited in the future, if the University is charged with conducting additional tax expenditure reviews.
     2. The author is proposing amendments to clarify that a major tax expenditure means one where all revenue losses total $1 billion over the entire 10-year lookback period (rather than $1 billion in losses in each of those FYs).
     3. The author has proposed amendments clarifying that the scope of each expenditure review shall include the prescribed elements only to the extent possible and reasonably related to the major tax expenditure.

REGISTERED SUPPORT / OPPOSITION:

Support

California Tax Reform Association (sponsor)

California Teachers Association (co-sponsor)

Association of California School Administrators

California Association of School Business Officials

California's Coalition for Adequate School Housing

California Federation of Teachers

California Professional Firefighters

California Retired Teachers Association

California School Boards Association

California School Employees Association, AFL-CIO

California State PTA

Community College League of California

Faculty Association of California Community Colleges

Foothill-De Anza Community College District

League of Women Voters of California

SEIU California

Small School Districts' Association

UDW/AFSCME Local 3930

Opposition

Advanced Medical Technology Association

African American Farmers of California

Airlines for America

American Pistachio Growers

Association of California Life and Health Insurance Companies

Bay Area Council

Biocom

Building Owners and Managers Association of California

California Agricultural Aircraft Association

California Bankers Association

California Business Properties Association

California Business Roundtable

California Chamber of Commerce

California Citrus Mutual

California Cotton Ginners and Growers Association

California Farm Bureau Federation

California Forestry Association

California Hotel & Lodging Association

California Independent Petroleum Association

California League of Food Producers

California Life Sciences Association

California Railroads

California Taxpayers Association

California Trucking Association

Camarillo Chamber of Commerce

Chamber of Commerce Alliance of Ventura & Santa Barbara Counties

CompTIA

Contra Costa County Taxpayers Association

Council on State Taxation

Family Business Association of California

Farwest Equipment Dealers Association

International Council of Shopping Centers

Kern County Taxpayers Association

Maersk Inc.

NAIOP of California

National Federation of Independent Business

Nisei Farmers League

North Orange County Chamber

Orange County Business Council

Orange County Taxpayers Association

Oxnard Chamber of Commerce

Plant California Alliance

Qualcomm

San Gabriel Valley Economic Partnership

Santa Maria Valley Chamber of Commerce

Silicon Valley Leadership Group

Solano County Taxpayers Association

Sutter County Taxpayers Association

TechNet

Valley Industry and Commerce Association

West Coast Lumber & Building Material Association

Western Agricultural Processors Association

Western Growers Association

Western Manufactured Housing Communities Association

Western Plant Health Association

Western States Petroleum Association

Wine Institute

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

1. It is not entirely clear to Committee staff whether, to be included, the tax expenditure must have lost $1 billion in revenues in each of the preceding 10 FYs, or whether the tax expenditure must have lost an aggregate total of $1 billion over that entire 10-year period. ↑

 THIRD READING  

Bill No: SB 468

Author: Jackson (D)

Amended: 5/7/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/1/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Wiener

NO VOTE RECORDED: Nielsen

SENATE APPROPRIATIONS COMMITTEE: 4-2, 5/16/19

AYES: Portantino, Bradford, Hill, Wieckowski

NOES: Bates, Jones

SUBJECT: Taxation: tax expenditures: repeal date

SOURCE: California Tax Reform Association

California Teachers Association

DIGEST:

This bill establishes the California Tax Expenditure Review Board to determine the schedule for comprehensive assessments of major tax expenditures programs to be conducted by the Legislative Analyst’s Office.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions. 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.
2. Requires the Department of Finance (DOF) to annually publish a list of tax expenditures, currently totaling around $65.2 billion per year.
3. Enacts several tax expenditures which contain sunset dates, which set a specific date before which a taxpayer can claim a tax benefit for performing the activity that qualifies for the tax benefit in a certain taxable or calendar year.
4. Directs the Legislative Analyst’s Office (LAO) to analyze specific aspects of new or extended tax expenditure programs, and report to the Legislature, usually one year before its sunset date, such as the Motion Picture Production Credit and the California Competes Tax Credit, among others.
5. Enacts several expenditures that result in the most foregone revenue do not have sunset dates, some of which parallel parts of the Internal Revenue Code.
6. Requires any bill introduced on or after January 1, 2015, that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve (SB 1335, Leno, Chapter 845, Statutes of 2014). The bill must also contain detailed performance indicators for the Legislature to use when measuring whether the tax credit meets its goals, purposes, and objectives.

This bill:

1. Establishes the California Tax Expenditure Review Board (Board) as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature, consisting of five members:
   1. The State Controller, or the Controller’s designee,
   2. The Legislative Analyst, or the Legislative Analyst’s designee,
   3. The California State Auditor, or the California State Auditor’s designee,
   4. The Director of DOF, or the Director of DOF’s designee, and
   5. An individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and tax expenditures by the Department of Tax and Fee Administration and the Franchise Tax Board.
2. States that members of the Board serve without compensation, but would be reimbursed for necessary traveling and other expenses incurred in performing their duties and responsibilities
3. Requires the Board to select a chairperson on annual basis.
4. Permits the Board to create advisory committees that include members of the public.
5. Directs the Board and any advisory committees it establishes to keep official records of all of their proceedings.
6. Requires the Board to meet on or before July 1, 2020, and convene meetings at least twice per year at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act.
7. Provides that the Board must hold an open and public meeting for the purposes of considering information provided by the public to determine the schedule for comprehensive assessment of major tax expenditures to be conducted by the LAO by October 1, 2020, and each October 1 thereafter. The Board must determine the schedule upon completion of that meeting.
8. Directs the Board to meet to determine the schedule for comprehensive assessments of major tax expenditures for that calendar year by January 31, 2021, and each January 31 thereafter. The Board must consider the following criteria when determining the schedule:
   1. General Fund impact,
   2. The Board’s assessment of whether modification to or repeal of the major tax expenditure would provide the most positive impacts for the General Fund with the least negative economic, social, or environmental impacts, and
   3. The ability for the LAO to complete each comprehensive assessment of the major tax expenditure in a timely fashion.
9. Requires the Board to set a deadline date as part of determining the schedule for the LAO to complete its comprehensive assessment of the major tax expenditure or expenditures on a regular schedule. The Board can vote to adjust the deadline date for reasonable cause.
10. Provides that the LAO must complete its comprehensive assessment of the major tax expenditure, and provide it to the Board by the deadline date specified in the schedule.
11. Directs any other state agency to assist the LAO with completing its comprehensive assessment of the major tax expenditure to the maximum degree practicable.
12. Requires the Board to determine the scope of each comprehensive assessment, which must include, but is not limited to:
    1. A description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declaration of that intent or that legislative intent is otherwise expressed or specified by that act.
    2. A brief description of the beneficiaries of the tax expenditure as provided by state law.
    3. The number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available.
    4. A listing of any comparable federal tax benefit, if any.
    5. A description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency.
    6. The economic, social, or any other benefits of the tax expenditure to the State.
    7. The net General Fund dollars lost due to the tax expenditure programs (TEPs), including what impact the shift in resources has on other General Fund programs.
    8. The total reduction in the amount of General Fund proceeds of taxes for purposes of the calculation required by subdivision (b) of Section 8 of Article XVI of the California Constitution, known as Proposition 98, due to the tax expenditure, including what impact the shift in resources has on educational programs.
    9. The potential environmental impacts, if any, of the tax expenditure.
    10. A longer-term analysis outlining the true beneficiaries versus intended beneficiaries of the tax expenditure and its impact on the business climate and market conditions.
    11. Information related to the number of jobs the TEP created, as specified.
13. Provides that the Board must post the assessments it receives from the LAO on its internet site.
14. States that after the comprehensive assessment has been posted on the Board’s internet website for at least 14 days, and no later than two months from the date the board posts the comprehensive assessment on its internet website, the Board must in public for the purposes of voting to make a recommendation to the Legislature regarding the major tax expenditure. Before making a recommendation, the Board must consider input from the public regarding the comprehensive assessment.
15. Provides that the votes of three members is necessary to make a recommendation.
16. States that any recommendation shall be subject to enactment by the Legislature, and that noting in the measure shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures.
17. Requires any recommendation to include:
    1. The extent to which the major tax expenditure is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal,
    2. An analysis of the major tax expenditure's effect on the state’s General Fund,
    3. An analysis of the major tax expenditure’s effect on employment, wages, and the state’s economy, and
    4. Whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal. If no such opportunities exist, whether the Legislature should enact legislation to repeal the major tax expenditure.
18. Directs the Board to provide a report to the Legislature, as specified, that compiles all of its recommendations regarding major tax expenditures made in the previous calendar year, including any recommendation the Board failed to make for a major tax expenditure in which the LAO has completed a comprehensive assessment, and the reasons for the failure, by January 1, 2022, and each January 1 thereafter.
19. Requires the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation to hold a joint public hearing on the report by August 15 of the second year of each legislative session upon receipt of the report.
20. Defines “major tax expenditure” as one that meets all of the following criteria:
    1. Does not have a repeal or inoperative date.
    2. Does not include metrics of efficacy reported as a requirement.
    3. For which the annual cost to the state has met or exceed $1 billion over the past 10 years.

Background

Many of California’s most significant tax expenditures contain sunset dates, which serve two functions; however, others do not, some of which parallel parts of the Internal Revenue Code, among others:

• Personal Income Tax (PIT) exclusion for employer pension contributions, which DOF estimates results in $10 billion in foregone revenue in 2019-20.
• PIT exclusion for employer contributions ($8 billion).
• PIT exclusion for social security benefits ($4.3 billion).
• PIT deduction for mortgage interest ($4.1 billion).
• Sales tax exemption for food products ($3.8 billion state/$4.4 billion local).
• PIT exclusion for capital gains for primary place of residence ($3.9 billion).
• PIT deduction for charitable contributions ($3.3 billion).
• PIT basis step-up on inherited property ($2.8 billion).
• Sales tax exemption for prescription drugs ($2.4 billion state/$2.8 billion local).
• Water’s edge election for Corporation Tax purposes ($2.3 billion).
• PIT deduction for real estate, property, and other taxes ($2.3 billion).
• Like-kind exchanges under PIT and Corporation Tax ($1.7 billion).
• Research and Development Credit under PIT and Corporation Tax ($1.6 billion).
• Sales tax exemption for gas, electricity, and water ($1.6 billion state/$1.8 billion local).

The measure’s test to determine whether a tax expenditure meets its definition qualifying for review by the Board appears to apply to five tax expenditures under the Corporation Tax:

• Water’s Edge Election, which allows multinational corporations to make a binding, seven-year election to limit their taxable base to income derived from sources within the United States—which excludes earnings or losses from foreign portions of their business.
• Like-kind exchanges, which allows taxpayers to defer gains and losses from the sale of business or investment property when they exchange it solely for similar, or “like kind,” property.
• The Research and Development (R&D) Credit, which allows corporations to claim a portion of their R&D expenses as a credit, which reduces their tax liability, based on the amount they spent on R&D conducted in California. The Legislature crafted the state credit based on the federal R&D credit, but the state one allows some taxpayers to use a different method for calculating the credit amount.
• Subchapter S election, which provides that corporations with fewer than 100 shareholders can elect Subchapter S status, which allows them to pay tax on corporate income at a reduced rate of 1.5 percent, except for financial institutions, which are subject to a 3.5 percent rate. S corporation shareholders pay personal income taxes on their pro rata share of corporate income.
• Employee Stock Ownership Plans (ESOPs), which allows employers who provide employee stock ownership plans to deduct dividends paid to an ESOP, when those dividends are paid by the ESOP to participants, or are used to retire ESOP debt. Taxpayers can also defer capital gains on the sale of stock to an ESOP if the proceeds are used to acquire a similar type of security.

The measure also applies to three sales and use tax exemptions:

• Animal life, feed, seeds, plants, fertilizer, drugs, and medicines. Sales of animals generally used for human food, as well as the feed and drugs used for those animals, is exempt from sales and use tax. Seeds and plants normally used for human food, and fertilizer for those plants, are similarly exempt from tax.
• Farm equipment and machinery. Sales of farm equipment, machinery, and their parts are mostly exempt from the state share of the sales and use tax rate when sold to qualified persons who produce and harvest agricultural products.
• Fuel sold to common carriers. Sales of fuel and petroleum products to air common carriers for international flights are exempt from tax.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, LAO indicates that it could not perform the workload required by this bill within its existing resources. As noted below, the Office would be required to provide a “comprehensive assessment” of specified TEPs that do not have a sunset date. Its actual costs would depend upon the workload schedule established by the Board, but could reach $1 million annually (General Fund). The LAO’s funding comes the Legislature’s budget, which is capped by Proposition 140 (1990). Thus, to the extent the Legislature provided additional funding to the LAO to perform the duties required by the bill, less resources would be available for the remainder of its budget. The bill would result in known, probably minor costs to the Board for travel reimbursements and to arrange for the meetings prescribed by the bill (General Fund).

SUPPORT: (Verified 5/17/19)

California Tax Reform Association (co-source)

California Teachers Association (co-source)

State Controller Betty Yee

Association of California School Administrators

California Association of School Business Officials

California Federation of Teachers

California Professional Firefighters

California Retired Teachers Association

California School Boards Association

California School Employees Association

California State PTA

Community College League of California

Foothill De Anza Community College District

SEIU California

Small School Districts Association

United Domestic Workers, AFSCME Local 3930

OPPOSITION: (Verified 5/17/19)

Advanced Medical Technology Association

African American Farmers Of California

Airlines for America

American Pistachio Growers

Association of California Life and Health Insurance Companies

Bay Area Council

Biocom

Building Owners and Managers Association of California

California Agricultural Aircraft Association

California Bankers Association

California Business Properties Association

California Business Roundtable

California Cable & Telecommunications Association

California Cotton Ginners And Growers Association

California Farm Bureau Federation

California Hotel & Lodging Association

California Independent Petroleum Association

California League Of Food Producers

California Life Sciences Association

California Railroads

California Taxpayers Association

California Trucking Association

Camarillo Chamber Of Commerce

Chambers Of Commerce Alliance Of Ventura And Santa Barbara Counties

Computing Technology Industry Association

Contra Costa Taxpayers Association

Council On State Taxation

Family Business Association Of California

Farwest Equipment Dealers Association

International Council Of Shopping Centers

Kern County Taxpayers Association

Maersk, Inc.

NAIOP Of California

Nisei Farmers League

North Orange County Chamber Of Commerce

Orange County Business Council

Orange County Taxpayers Association

Oxnard Chamber Of Commerce

Plant California Alliance

Qualcomm

San Gabriel Valley Economic Partnership

Santa Maria Valley Chamber Of Commerce

Silicon Valley Leadership Group

Solano County Taxpayers Association

Sutter County Taxpayers Association

TechNet

Valley Industry And Commerce Association

West Coast Lumber & Building Material Association

Western Agricultural Processors Association

Western Growers Association

Western Manufactured Housing Communities Association

Western Plant Health Association

Western States Petroleum Association

Wine Institute

ARGUMENTS IN SUPPORT: According to the California Teachers Association (CTA), “California has spent over $66.6 billion on the top ten most costly tax credits and exemptions in the past decade. The Proposition 98 share of these top credits and exemptions was over $35 billion. During this same decade, California cut $65 billion from school funding to balance the state’s budget during the recession. As debates over tax reform in California have stalled, Legislators have increasingly turned to tax credits to advance policy interests without fully understanding or debating the impact of those tax credits on the state’s General Fund obligations or our system of school finance, Proposition 98. Every dollar of a tax credit to the General Fund that does not generate its cost in new revenue takes approximately 40 cents out of California’s classrooms, representing the share of revenues that would have gone to Proposition 98 from the General Fund. It requires only a simple majority vote in the Legislature to pass a tax expenditure, reducing the amount of taxes collected, yet it takes a 2/3 majority vote to repeal a tax expenditure once created. Care should be taken when creating a revenue-losing measure that would be difficult to undo. CTA believes transparency and accountability are essential to ensure California is receiving its return on investments. Without a regular system of evaluation and metrics used to assess the economic benefits created by both tax credits and exemptions there is no way to identify whether these benefits have actually occurred.”

ARGUMENTS IN OPPOSITION: According to the California Taxpayers Association, “While we appreciate the stated intent to promote government accountability, we believe this goal can be achieved without creating a new and potentially costly bureaucracy, through legislative guidance to the LAO and other state agencies, and by expanding the scope of the study to provide a more comprehensive assessment for the Legislature. This measure would create a bureaucracy that is duplicative of functions currently performed by a number of existing agencies. Every year, the DOF identifies all tax expenditures that cost $5 million or more; estimates the fiscal impact over 5 years; assesses the number of businesses/taxpayers who are affected; and reports many more criteria as required by law. Both the LAO and the State Auditor can initiate studies under their own authority or at the specific direction of the Legislature. In 2013, prompted by questions regarding the state’s Enterprise Zones (EZ), the LAO and DOF each independently analyzed and made recommendations to the Legislature. Upon finding the EZ program to be less effective than others, the Legislature eliminated EZs and replaced them with three other tax incentives. More recently, the State Auditor conducted an assessment of several of the state’s primary tax expenditures and recommended improvements to some, while noting that others appear to be achieving their objects. Moreover, numerous state entities are tasked with review, analysis and reporting for their specific tax expenditures. If different data on tax expenditures is desired, this can be achieved without adding another bureaucracy and costs by the Legislature’s changing of the parameters of existing reports, giving different direction to the LAO or State Auditor, and soliciting stakeholder input as part of legislative hearings. This bill enumerates evaluation factors intended to ascertain the revenue loss to the state, but lacks critical criteria for measuring the revenue gain from tax incentives and their multiplier effects through the economy. To provide a more accurate and comprehensive assessment of state revenue impacts, we suggest that any tax expenditure study incorporate ‘multipliers’ and their effects on the economy. Additionally, we believe it is critical to examine California’s policies in the context of competitiveness with other areas of the country.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

5/18/19 13:14:22

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 468 (Jackson) - Taxation: tax expenditures: California Tax Expenditure Review Board

Bill Summary:

SB 468 would establish the California Tax Expenditure Review Board (Board) to determine the schedule for comprehensive assessment of major tax expenditures programs (TEPs) to be conducted by the Legislative Analyst’s Office (LAO).

Fiscal Impact:

• The LAO indicates that it could not perform the workload required by this bill within its existing resources. As noted below, the Office would be required to provide a “comprehensive assessment” of specified TEPs that do not have a sunset date. Its actual costs would depend upon the workload schedule established by the Board, but could reach $1 million annually (General Fund). The LAO’s funding comes the Legislature’s budget, which is capped by Proposition 140 (1990). Thus, to the extent the Legislature provided additional funding to the LAO to perform the duties required by the bill, less resources would be available for the remainder of its budget.
• The bill would result in known, probably minor costs to the Board for travel reimbursements and to arrange for the meetings prescribed by the bill (General Fund).

Background:

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 (DOF) is required to publish a list of TEPs (currently totaling several hundred), which currently total $65 billion annually.

Many of the State’s most significant TEPs contain sunset dates, which serve two functions. First, they state that taxpayers can qualify for a specific tax benefit, like a tax credit, by performing the activity that qualifies for the tax benefit through a certain taxable or calendar year. Second, they repeal the section of law authorizing the credit, thereby terminating the legal authority for taxpayers to continue to claim the credit on a return filed for any taxable year, including when a taxpayer carries forward a credit to the current taxable year that was generated in a previous taxable year. For example, in 2013, the Legislature enacted AB 93 (Committee on Budget) and SB 90 (Committee on Budget and Fiscal Review), measures which reformed California’s economic development policies by eliminating enterprise zones and other geographically-targeted economic development areas. In those bills, the Legislature specified that taxpayers could qualify for credits for paying wages to qualified employees in taxable years on or before January 1, 2014, but provided that those sections of law were not repealed until December 1, 2019, which allowed taxpayers to apply carryforwards.

TEPs with sunset dates include, among others:

• The Motion Picture Production Credit, administered by the California Film Commission, which DOF estimates will result in $176 million in foregone revenue in 2019-20. When reauthorizing the credit last year, the Legislature only allowed the Commission to allocate $330 million in credits per year until July 1, 2025, after which further legislative authorization would be necessary for the Film Commission to allocate new credits.
• The California Competes Tax Credit, which DOF estimates will result in $150 million in foregone revenue in 2019-20. When reauthorizing the credit last year, the Legislature only allowed the Committee to allocate credits through 2022-23, after which further legislative authorization would be necessary for new credits to be allocated.
• In 2015, the Legislature allowed qualified taxpayers to claim the New Donated Fresh Fruits or Vegetables Credit, equal to 15 percent of the value of fresh fruits or vegetables donated to California food banks. Current law permits taxpayers to generate the credit through the 2021 taxable year, and repeals the credit on December 1, 2022, after which further legislative authorization would be necessary for taxpayers to claim credits for donations made after the end of taxable year 2021.

Additionally, the Legislature often requires the LAO to analyze specific aspects of new or extended TEPs, and report to the Legislature, usually one year before its sunset date. The Legislature applied these requirements to the Motion Picture Production Credit and the California Competes Tax Credit, among others.

However, many of the state’s TEPs that result in the most foregone revenue do not have sunset dates, some of which parallel parts of the Internal Revenue Code, among others:

• Personal Income Tax (PIT) exclusion for employer pension contributions, which DOF estimates results in $10 billion in foregone revenue in 2019-20.
• PIT exclusion for employer contributions ($8 billion).
• PIT exclusion for social security benefits ($4.3 billion).
• PIT deduction for mortgage interest ($4.1 billion).
• Sales tax exemption for food products ($3.8 billion state/$4.4 billion local).
• PIT exclusion for capital gains for primary place of residence ($3.9 billion).
• PIT deduction for charitable contributions ($3.3 billion).
• PIT basis step-up on inherited property ($2.8 billion).
• Sales tax exemption for prescription drugs ($2.4 billion state/$2.8 billion local).
• Water’s edge election for Corporation Tax purposes ($2.3 billion).
• PIT deduction for real estate, property, and other taxes ($2.3 billion).
• Like-kind exchanges under PIT and Corporation Tax ($1.7 billion).
• Research and Development Credit under PIT and Corporation Tax ($1.6 billion).
• Sales tax exemption for gas, electricity, and water ($1.6 billion state/$1.8 billion local).

In 2014, SB 1335 (Leno) was enacted, which added Section 41 to the Revenue and Taxation Code. This measure intended to apply the same level of review used for government spending programs to TEPs, including tax credits. Section 41 requires any bill introduced on or after January 1, 2015, that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets its goals, purposes, and objectives.

Proposed Law:

This bill would establish the California Tax Expenditure Review Board as an independent advisory body to comprehensively assess major tax expenditures and make recommendations to the Legislature. The board consists of the following five members: (1) the Controller, or the Controller’s designee, (2) the Legislative Analyst, or the Legislative Analyst’s designee, (3) the California State Auditor, or the California State Auditor’s designee, (4) the Director of Finance, or the Director of Finance’s designee, and (5) an individual designated by the Secretary of Government Operations who possesses expertise regarding tax administration and tax expenditures by the California Department of Tax and Fee Administration (CDTFA) and FTB.

The members of the Board would serve without compensation, but would be reimbursed for necessary traveling and other expenses incurred in performing their duties and responsibilities. The bill also would (1) require the Board to elect a chairperson on an annual basis, (2) permit the Board to establish advisory committees that include members of the public, and (3) require the Board and any advisory committees established to keep official records of all of their proceedings.

The bill would require the Board to meet on or before July 1, 2020, and convene meetings at least twice per year at locations easily accessible to the public in accordance with the Bagley-Keene Open Meeting Act.

The bill would define “major tax expenditures” as follows: a tax expenditure as defined in subdivision (b) of Section 13305 of the Government Code, that meets all of the following criteria: do not have a repeal or inoperative date; does not include metrics of efficacy reported as a requirement; and for which the annual cost to the state has met or exceed one billion dollars over the past 10 years (water’s edge election treatment, exclusion of like-kind exchanges, the research and development tax credit, Subchapter S election and employee stock ownership plans and certain sales and use tax exemptions for agriculture.).

By October 1, 2020, and each October 1 thereafter, the Board would be required to hold an open and public meeting for the purposes of considering information provided by the public to determine the schedule for comprehensive assessment of major TEPs to be conducted by the LAO. The Board shall determine the schedule upon completion of that meeting.

By January 31, 2021, and each January 31 thereafter, the Board shall meet to determine the schedule for comprehensive assessments of major tax expenditures for that calendar year. The bill would require the Board to consider the following criteria when determining the schedule: (1) General Fund impact, (2) the Board’s assessment of whether modification to or repeal of the major tax expenditure would provide the most positive impacts for the General Fund with the least negative economic, social, or environmental impacts, and (3) the ability for the LAO to complete each comprehensive assessment of the major tax expenditure in a timely fashion.

The Board would be required to set a deadline date as part of determining the schedule for the LAO to complete its comprehensive assessment of the major tax expenditure or expenditures on a regular schedule. The Board would be permitted to vote to adjust the deadline date for reasonable cause.

The LAO would be required to complete its comprehensive assessment of the major TEP, and provide it to the Board by the deadline date specified in the schedule. Any other state agency shall assist the LAO with completing its comprehensive assessment of the major tax expenditure to the maximum degree practicable.

The Board shall determine the scope of each comprehensive assessment, which shall include, but is not limited to, the following, when possible: (1) a description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declaration of that intent or that legislative intent is otherwise expressed or specified by that act, (2) a brief description of the beneficiaries of the tax expenditure as provided by state law, (3) the number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available, (4) a listing of any comparable federal tax benefit, if any, (5) a description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency, (6) the economic, social, or any other benefits of the tax expenditure to the State, (7) the net General Fund dollars lost due to the TEP, including what impact the shift in resources has on other General Fund programs, (8) the total reduction in the amount of General Fund proceeds of taxes for purposes of the calculation required by subdivision (b) of Section 8 of Article XVI of the California Constitution, known as Proposition 98, due to the tax expenditure, including what impact the shift in resources has on educational programs, (9) the potential environmental impacts, if any, of the TEP, tax expenditure, (10), a longer-term analysis outlining the true beneficiaries versus intended beneficiaries of the tax expenditure and its impact on the business climate and market conditions, and (11) information related to the number of jobs the TEP created, as specified. The Board would be required to post the assessments it receives from the LAO to its internet site.

After the comprehensive assessment of the major TEP has been posted on the Board’s internet website for at least 14 days, and no later than two months from the date the board posts the comprehensive assessment on its internet website, the Board shall meet in public for the purposes of voting to make a recommendation to the Legislature regarding the major tax expenditure. The votes of three members are necessary to make a recommendation to the Legislature. Any recommendation shall be subject to enactment by the Legislature. The bill specifies that nothing in this section shall be construed to preclude the Legislature from taking action independently to amend, sunset, or repeal existing tax expenditures. The Board shall consider information provided by the public in response to the comprehensive assessment at the meeting before making the recommendation, which shall include, but is not limited to, the following: (1) the extent to which the major TEP is a cost-effective use of resources compared to other options to address the same purpose, intent, or goal, (2) an analysis of the major tax expenditure's effect on the state’s General Fund, (3) an analysis of the major tax expenditure’s effect on employment, wages, and the state’s economy, and (4) whether opportunities exist to improve the effectiveness of the major tax expenditure in meeting its purpose, intent, or goal; if no such opportunities exist, whether the Legislature should enact legislation to repeal the major tax expenditure.

By January 1, 2022, and each January 1 thereafter, the Board shall provide a report to the Legislature, as specified, that compiles all of its recommendations regarding major TEPs made in the previous calendar year, including any recommendation the Board failed to make for a major tax expenditure in which the LAO has completed a comprehensive assessment, and the reasons for the failure. Upon receipt of the report the Senate Committee on Governance and Finance and the Assembly Committee on Revenue and Taxation shall hold a joint public hearing on the report by August 15 of the second year of each legislative session.

Staff Comments:

As noted above, the bill would establish the California Tax Expenditure Review Board, which would establish the schedule for the LAO’s review of specified major TEPs. The Board would have five members: the Legislative Analyst, the Controller, the State Auditor, the Director of Finance, and a Government Operations appointee. The Board would be responsible for making recommendations to the Legislature regarding each major TEP, based on the LAO analyses.

LAO indicates that the workload associated with this bill would not absorbable. The amount of additional resources required would depend on the schedule set by the Board. The LAO estimates that it could produce one assessment per year on average with one additional economist, at an annual cost of $180,000 for salary and benefits. If the Board set a higher-paced schedule, additional economists would be required. Moreover, if the board were to set a schedule of three or more assessments per year, LAO indicates that other costs (including mangers’ time to review the reports and administrative support) would no longer be absorbable. The LAO indicates that these additional costs would be roughly $250,000 annually if the board set a schedule of four reports per year.

If the Board were to set a higher-paced schedule that required hiring more than two economists, the LAO indicates that it likely would need to hire a recruiting firm to fill the positions. In addition, if the office needed to hire multiple additional staff to meet the Board’s schedule, the office also likely would need additional office space and computer equipment. These costs would not be absorbable and likely would be in the low tens of thousands of dollars. In sum, for illustrative purposes, if the Board were to set a schedule of four assessments per year, the LAO anticipates that it would require total additional resources of about $1 million annually.

The LAO itself is a part of the Legislature; it is funded from the Legislature’s budget. Specifically, the LAO receives an annual transfer from both the Senate and the Assembly to fund its operations. As noted previously, Proposition 140, approved by the voters in 1990, capped the Legislature’s budget. Since that time, funding for the LAO has accounted for less than 3 percent of the Legislature’s annual budget. Under the requirements of Proposition 140, any additional resources for the LAO would have to come from the Legislature’s budget.

Staff notes that this bill would create an opportunity for the executive branch to affect the LAO’s workload. LAO staff are legislative employees. The office has provided fiscal and policy advice to the Legislature for 78 years. It has a national reputation for its fiscal and programmatic expertise and nonpartisan analyses of the state budget. The office serves as the "eyes and ears" for the Legislature to ensure that the executive branch is implementing legislative policy in a cost efficient and effective manner. As such, LAO staff have a responsibility to help promote the Legislature’s authority and prerogatives. In practice, the LAO’s workload is driven disproportionately by the Legislature (and ballot measures). By placing three representatives (a majority) from the executive branch on the Board, the administration would play a role in setting the LAO’s agenda.

Staff notes an additional instance where the Legislature used its ability to direct the LAO to review TEPs. The Supplemental Report of the 2006-07 Budget Act required the LAO to report to the chairs of the Senate Committee on Revenue and Taxation, the Assembly Committee on Revenue and Taxation, and the Joint Legislative Budget Committee regarding specified TEPs. In this instance, the supplemental report language required the LAO (1) to provide information on newly enacted TEPs from that timeframe, and (2) to review selected existing TEPs for their effectiveness and efficiency. In response to the requirements, the LAO provided (1) summary information on recently enacted TEPs, (2) more extensive reviews of the two most significant newly enacted TEPs (related to housing tax credits and ultra-low sulfur fuel), (3) a review of a Sales and Use Tax TEP related to bunker fuel (as required by a separate statutory provision), and (4) an in-depth review of one of the state’s largest TEPs—the mortgage interest deduction under the personal income tax.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Taxation: tax expenditures: repeal date

Repeals tax expenditures on December 31, 2023, as defined, and requires LAO to study tax expenditures

Background

California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to 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 (DOF) must annually publish a list of tax expenditures, currently totaling around $65.2 billion per year, which can be found on its website.

Many of California’s most significant tax expenditures contain sunset dates, which serve two functions. First, they state that taxpayers can qualify for a specific tax benefit, like a tax credit, by performing the activity that qualifies for the tax benefit through a certain taxable or calendar year. Second, they repeal the section of law authorizing the credit, thereby terminating the legal authority for taxpayers to continue to claim the credit on a return filed for any taxable year, including when a taxpayer carries forward a credit to the current taxable year that was generated in a previous taxable year. For example, in 2013, the Legislature enacted AB 93 (Committee on Budget) and SB 90 (Committee on Budget and Fiscal Review), measures which reformed California’s economic development policies by eliminating enterprise zones and other geographically-targeted economic development areas. In those bills, the Legislature specified that taxpayers could qualify for credits for paying wages to qualified employees in taxable years on or before January 1, 2014, but provided that those sections of law were not repealed until December 1, 2019, which allowed taxpayers to apply carryforwards.

Tax expenditures with sunset dates include, among others:

• The Motion Picture Production Credit, administered by the California Film Commission, which DOF estimates results in $176 million in foregone revenue in 2019-20. When reauthorizing the credit last year, the Legislature only allowed the Commission to allocate $330 million in credits per year until July 1, 2025, after which further legislative authorization would be necessary for the Commission to allocate new credits (SB 855, Committee on Budget and Fiscal Review, 2019).
• The California Competes Tax Credit, administered by the California Competes Tax Credit Committee, which DOF estimates results in $150 million in foregone revenue in 2019-20. When reauthorizing the credit last year, the Legislature only allowed the Committee to allocate credits through the 2022-23 fiscal year, after which further legislative authorization would be necessary for the Committee to allocate new credits (SB 855, Committee on Budget and Fiscal Review, 2019).
• In 2015, the Legislature allowed qualified taxpayers to claim the New Donated Fresh Fruits or Vegetables Credit, equal to 15% of the value of fresh fruits or vegetables donated to California food banks (SB 837, Committee on Budget and Fiscal Review). SB 837 only allows taxpayers to generate the credit through the 2021 taxable year, and repeals the credit on December 1, 2022, after which further legislative authorization would be necessary for taxpayers to claim credits for donations made after the 2021 taxable year ends.

Additionally, the Legislature often requires the Legislative Analyst’s Office (LAO) to analyze specific aspects of new or extended tax expenditure programs, and report to the Legislature, usually one year before its sunset date. The Legislature applied these requirements to the Motion Picture Production Credit and the California Competes Tax Credit, among others.

However, many of the state’s tax expenditures that result in the most foregone revenue do not have sunset dates, some of which parallel parts of the Internal Revenue Code, among others:

• Personal Income Tax (PIT) exclusion for employer pension contributions, which DOF estimates results in $10 billion in foregone revenue in 2019-20.
• PIT exclusion for employer contributions ($8 billion).
• PIT exclusion for social security benefits ($4.3 billion).
• PIT deduction for mortgage interest ($4.1 billion).
• Sales tax exemption for food products ($3.8 billion state/$4.4 billion local).
• PIT exclusion for capital gains for primary place of residence ($3.9 billion).
• PIT deduction for charitable contributions ($3.3 billion).
• PIT basis step-up on inherited property ($2.8 billion).
• Sales tax exemption for prescription drugs ($2.4 billion state/$2.8 billion local).
• Water’s edge election for Corporation Tax purposes ($2.3 billion).
• PIT deduction for real estate, property, and other taxes ($2.3 billion).
• Like-kind exchanges under PIT and Corporation Tax ($1.7 billion).
• Research and Development Credit under PIT and Corporation Tax ($1.6 billion).
• Sales tax exemption for gas, electricity, and water ($1.6 billion state/$1.8 billion local).

In 2014, Governor Brown signed SB 1335 (Leno, 2014), which added Section 41 to the Revenue and Taxation Code. In the hopes of applying the same level of review used for government spending programs to tax expenditure programs, including tax credits, Section 41 requires any bill introduced on or after January 1, 2015, that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets its goals, purposes, and objectives.

Seeking additional legislative review of tax expenditures that contain sunset dates necessary, education and tax reform advocates want to direct the Legislative Analyst’s Office (LAO) to evaluate specified tax expenditures, and repeal any tax expenditure above a certain revenue threshold on December 31, 2022.

Proposed Law

Senate Bill 468 then repeals all tax expenditures on December 31, 2023, defined as:

• A tax expenditure that does not, as of the bill’s effective date, have a repeal or inoperative date,.
• Does not include metrics of efficacy reported as a requirement.
• For which the annual cost to the state has met or exceed one billion dollars over the past 10 years.
• Is not the sales and use tax exemptions for gas, electricity, and water; food products for human consumption; medicines; or hemeodialysis products.
• Is not a tax expenditure allowed against the Personal Income Tax.
• Is not qualification as a tax-exempt entity under the Corporation Tax.

SB 468 requires LAO to conduct an analysis of each tax expenditure, as defined by the bill, and submit a written report to the Legislature before December 1, 2022, which includes:

• A description of the legislative intent for each tax expenditure, if the act adding or amending the expenditure contains legislative findings and declaration of that intent, or that legislative intent is otherwise expressed or specified by that act.
• A brief description of the beneficiaries of the credit, deduction, exclusion, exemption, or other tax benefit as provided by state law.
• The number of returns filed or business entities affected, as applicable, for the most recent tax year for which full year data is available.
• A listing of a comparable federal tax benefit, if any.
• A description of any recent prior tax expenditure evaluation or compilation of information completed by any state agency.
• The economic, social, or any other benefits of the tax expenditure to the State.
• Total net General Fund dollars lost, including what impact the shift in resources had on other General Fund programs.
• Total Proposition 98 dollars lost, including what impact the shift in resources had on educational programs.
• Potential environmental impacts, if any.
• A longer-term analysis outlining the true beneficiaries versus intended beneficiaries of the tax expenditure and its impact on the business climate and market conditions.
• Jobs created by the tax expenditure, including demographics on gender, race, ethnicity, and age, including:
  • Whether the jobs created were short or long term, as well as the average salary and benefits provided for the jobs created, and
  • Jobs lost or reduced in areas impacted by the tax expenditure or whether jobs were shifted to other sectors.

The bill provides that any bill that removes or extends the repeal date of a tax expenditure as defined by the bill must include requirements identical to Section 41 of the Revenue and Taxation Code. The measure also makes legislative findings and declarations supporting its purposes.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “California has nearly 80 tax expenditures. These are provisions in the tax code – including tax credits, tax deductions, sales tax exemptions and income exclusions – that reduce the amount of tax collected in exchange for an intended public policy objective. Many tax expenditures were created decades ago to achieve certain goals and economic benefits such as improving industry competitiveness, influencing taxpayer behavior or spurring economic growth, and have sat on the books for decades without any scrutiny, oversight, or even the necessary data to demonstrate results. These tax expenditures carry significant costs to the state of California in the same manner as spending programs. They impact the General Fund as well as Proposition 98, the minimum annual funding level for K-12 schools and community colleges. The Department of Finance indicates that by 2020-21, there will be a $506.4 billion loss in revenue to the General Fund since 2008 from tax expenditures. Every dollar of a tax credit that does not generate its cost in new revenue takes approximately 40 cents out of California’s classrooms and additionally affects the amount of funding available for critical public services. SB 468 will begin the process of examining some of California’s largest tax expenditures to evaluate whether they are achieving their goals. This bill chooses among the largest of the tax credits and sales tax exemptions that have no metrics of efficacy associated with them, no sunsetting provision, and result in revenue losses of greater than $1 billion each over 10 years. The bill sunsets these provisions in three years and directs the Legislative Analyst’s Office to analyze each for its effectiveness prior to the sunset. It also requires that when and if the expenditures are renewed, the renewal language include the goals of the tax expenditure and metrics for evaluating its effectiveness. SB 468 will bring transparency and accountability to California’s tax incentive process by creating a mechanism for review of some of California’s most costly tax expenditures. This will allow the Legislature, prior to deciding whether to renew them, to determine if they are cost-effective, properly de-signed and effecting their intended public policy objectives.”

2. Certainty. Tax expenditures resemble spending programs in that the Legislature has enacted bills adding law that rewards taxpayers for engaging in certain behavior. Much like other programs, the Legislature would not have created them if they did not think the tool was an effective one for encouraging publicly beneficial activities. However, a tax expenditure, unlike spending programs, does not result in the state sending cash to anyone, except in the case of refundable credits; instead, taxpayers pay less in taxes than what they would have but for the tax expenditure, resulting in less General Fund revenue. Additionally, the Legislature does not reauthorize them in the annual Budget Act. Taxpayers who make use of tax expenditures perform the activity the state wants them to in exchange for the benefit, and plan on the tax

expenditure continuing to exist in law when making decisions, especially those that do not sunset. While tax expenditures that lack sunset dates persist without the level of the review the Legislature applies to spending programs as part of the budget process, taxpayers can count on them when making business decisions. The Committee may wish to consider SB 468’s tradeoff between legislative accountability and taxpayer certainty.

3. Which tax expenditures qualify? The measure’s test to determine whether a tax benefit meets its definition of a tax expenditure, which then triggers its repeal on December 31, 2023 unless otherwise extended, appears to apply to five tax expenditures under the Corporation Tax:

• Water’s Edge Election, which allows multinational corporations to make a binding, seven-year election to limit their taxable base to income derived from sources within the United States—which excludes earnings or losses from foreign portions of their business.
• Like-kind exchanges, which allows taxpayers to defer gains and losses from the sale of business or investment property when they exchange it solely for similar, or “like kind,” property.
• The Research and Development (R&D) Credit, which allows corporations to claim a portion of their R&D expenses as a credit, which reduces their tax liability, based on the amount they spent on R&D conducted in California. The Legislature crafted the state credit based on the federal R&D credit, but the state one allows some taxpayers to use a different method for calculating the credit amount.
• Subchapter S election, which provides that corporations with fewer than 100 shareholders can elect Subchapter S status, which allows them to pay tax on corporate income at a reduced rate of 1.5 percent, except for financial institutions, which are subject to a 3.5 percent rate. S corporation shareholders pay personal income taxes on their pro rata share of corporate income.
• Employee Stock Ownership Plans (ESOPs), which allows employers who provide employee stock ownership plans to deduct dividends paid to an ESOP, when those dividends are paid by the ESOP to participants, or are used to retire ESOP debt. Taxpayers can also defer capital gains on the sale of stock to an ESOP if the proceeds are used to acquire a similar type of security.

The measure also applies to three sales and use tax exemptions:

• Animal life, feed, seeds, plants, fertilizer, drugs, and medicines. Sales of animals generally used for human food, as well as the feed and drugs used for those animals, is exempt from sales and use tax. Seeds and plants normally used for human food, and fertilizer for those plants, are similarly exempt from tax.
• Farm equipment and machinery. Sales of farm equipment, machinery, and their parts are mostly exempt from the state share of the sales and use tax rate when sold to qualified persons who produce and harvest agricultural products.
• Fuel sold to common carriers. Sales of fuel and petroleum products to air common carriers for international flights are exempt from tax.

The measure may also apply to the property tax exemption for computer software. Additionally, taxpayers filing under the personal income tax, such as partnerships and limited liability companies, claim many of the corporation tax expenditures listed above, so the measure’s exclusion of personal income tax expenditures from the definition may also affect the determination of whether a corporation tax expenditure is included in the measure’s provisions.

4. Tax expenditure reviews. In June 2017, the Pew Charitable Trusts issued its report “How, States are Improving Tax Incentives for Jobs and Growth: A National Assessment of Evaluation Practices.” The report made three recommendations for states:

• Make a plan. Lawmakers need to put processes in place to regularly evaluate the results of major tax incentives. Well-designed evaluation plans ensure that the state’s full portfolio of incentives is examined, that nonpartisan staff with relevant expertise are tasked with the analyses, and that the reviews take place on a strategic schedule.
• Measure the impact. High-quality evaluations carefully assess the results of incentives for the state’s budget and economy. To do so, evaluators must estimate the extent to which incentives successfully changed business behavior, as opposed to rewarding what companies would have done anyway.
• Inform policy choices. Lawmakers and executive branch officials should use the findings of evaluations to improve the effectiveness of tax incentives. Policy improvements are more likely when states have a formal process that ensures lawmakers will consider the results—for example, by holding legislative hearings on evaluations.

The report added that 27 states and the District of Columbia have made progress in gathering evidence on the results of their economic development tax incentives in the last five years, and ten of these states are leaders in tax incentive evaluation. California was not included in either set, instead described as “trailing,” because it lacks a regular evaluation schedule. The report adds that as a result, California has studied some tax expenditures in detail, while ignoring others. Additionally, the report praised California for eliminating its enterprise zone program after a series of studies showed that the program was mostly moving jobs in the state without boosting net employment.

In April, 2016, State Auditor Elaine Howle issued “Corporation Tax Expenditures: The State’s Regular Evaluation of Corporate Income Tax Expenditures Would Improve Their Efficiency and Effectiveness” in April 2016. The report concluded that California adopting oversight methods that other states use would improve the effectiveness of its current and future tax expenditures, and provide the Legislature with more information and a better accounting of their effectiveness and impact. The Auditor specifically found that a lack of oversight and information regarding the R&D credit and the minimum franchise tax exemption has resulted in insufficient evidence to determine if they are fulfilling their purposes. The auditor added that three other tax expenditures—the water’s edge election, the low‑income housing credit, and the film and television credit—appear to be achieving their purposes, but improvements would make them more effective. If the Committee does not want to repeal tax expenditures, it could instead create a panel of the state Auditor, the Legislative Analyst, the Department of Finance, and the appropriate tax agency to review some or all tax expenditures on a regular schedule, and report to the Legislature regarding its findings.

5. One-way ratchet. Under Section Three of Article XIIIA of the California Constitution, added by Proposition 13 (1978) and most recently amended by Proposition 26 (2012), the Legislature can only change a state statute that results in any taxpayer paying a higher tax by 2/3 vote of each house. However, like any other form of spending short of a direct appropriation, the Legislature can enact a new tax expenditure by simple majority vote. As a result, the number and fiscal effect of tax expenditures has grown at the cost of General Fund revenue. With the sole exception of the Enterprise Zone program, the state has not affirmatively repealed a tax expenditure in recent years, but has allowed some to sunset.

6. Workload. SB 468 requires LAO to study several aspects of major tax expenditures by December 1, 2022. LAO may have difficulty completing the study at this scope and level of depth with existing resources.

7. Logistics. SB 468 would benefit from clarity in the following areas:

• Specifically providing the taxable year in which a taxpayer no longer qualifies for a tax benefit before its repeal date, would allow taxpayers to make use of tax benefits in place in the taxable year in which they qualified for it. The bill could also specify a taxable year after which taxpayers may not claim the water’s edge election, instead of a general repeal date, to avoid terminating a binding election before its seven-year period has expired.
• Designating the Director of Finance to estimate whether a tax expenditure meets the measure’s definition, and to send a certification to FTB or the California Department of Tax and Fee Administration to remove the tax expenditure from income tax forms and provide instructions to taxpayers, or inform retailers.
• Specify how the Director of Finance will estimate the revenue effect of tax expenditures authorized under the Corporation and Personal Income Taxes for purposes of determining whether the bill repeals it.
• Removing the word “annually” from the definition of tax expenditure.

Support and Opposition

(4/26/19)

Support: Association of California School Administrators; Cailfornia Federation of Teachers; California Association ff School Business Officials (Casbo); California Professional Firefighters; California School Boards Association; California State PTA; California Teachers Association; CalRTA; CASBO; Community College League of California; Foothill De Anza Community College District; SEIU California; SSDA

Opposition: Aclhic; Advanced Medical Technology Association (Advamed); African American Farmers of California; American Pistachio Growers; Association Life and Health Insurance Company; Biocom; Boma California; California Agricultural Aircraft Association; California Bankers Association; California Business Properties Association; California Business Roundtable; California Cable & Telecommunications Association; California Cotton Ginners and Growers Association; California Farm Bureau Federation; California Hotel & Lodging Association; California Independent Petroleum Association (Cipa); California League of Food Producers; California Life Sciences Association; California Railroads; California Retailers Associaiton; California Taxpayers Association; California Trucking Association; Camarillo Chamber of Commerce; Chambers of Commerce Alliance of Ventura And Santa Barbara Counties; CMTA; COCO Tax; Computing Technology Industry Association; Contra Costa Taxpayers Association; Council on State Taxation; Family Business Association of California; Far West Equipment Dealers Association; International Council of Shopping Centers; Kern County Taxpayers Association; Naiop of California; Nisei Farmers League; North Orange County Chamber of Commerce; Orange County Business Council; Orange County Taxpayers Association; Oxnard Chamber of Commerce; Plant California Alliance; Qualcomm, Incorporated.; San Gabriel Valley Economic Partnership; Santa Maria Valley Chamber of Commerce; Silicon Valley Leadership Group; Solano County Taxpayers Association; Sutter County Taxpayers Association; The IT Trade Association; Valley Industry And Commerce Association; West Coast Lumber & Building Material Association; Western Agricultural Processors Association; Western Growers Association; Western Manfactured Housing Communities Association; Western Plant Health Association; Western States Petroleum Association; Wine Institute; WMA

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